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Coronavirus highlights the need for digital transformation in the financial services sector

Digital EconomyFinanceFinTech

Amid the global spread of COVID-19, whole ecosystems have been forced to evolve more in a matter of weeks than they have in years – perhaps none greater than the financial sector. The global economy has gone into a tailspin, with markets collapsing and indices such as the S&P500 incurring monthly declines measured in double digits. Yet as politicians and central bankers discuss stimulus measures to kickstart the economy, it is easy to forget that financial institutions have another simpler function – ensuring that billions of retail customers can gain access to their cash at a time of unprecedented crisis.

Reduced opening hours and social distancing rules mean only a handful number of customers can access services, and a sector that largely relies on the physical – on cash, on paper processes, on teller transactions – is facing untold challenges. Hidden health risks have also been highlighted, with central banks resorting to quarantining and disinfecting bills to curb the spread of COVID-19. Now, as the virus continues to cause damaging impacts on the global economy, much focus has been placed on how financial institutions can meet customer needs by transforming to digital as they face a crisis that is now entering its fourth month with no clear end in sight. Among the challenges, this rapid need for change presents a clear opportunity for greater collaboration between brick-and-mortar banks and the FinTech sector, which counts agility and innovation among its greatest assets.

FinTech firms offer customers everything from the instant set-up of bank accounts – shunning the traditional paper-based process – to access to cryptocurrencies such as Bitcoin and Ethereum, which are seen as a safe haven averse to traditional market shocks. Meanwhile challenger bank Monzo, which exists entirely in the digital space, allows customers to receive their pay a day early or take out a virtual overdraft – helping to get cash to those who need it most without any physical contact. FinTech offers direct advantages for business clients too, with advanced AI-based screening programmes meaning that loan applications can be cleared faster. Perhaps unsurprisingly, use of these apps is surging. According to a study by financial advisory firm deVere Group, the use of FinTech apps in Europe surged by 72% in just one week at the beginning of the crisis. At the same time, ATM network Link revealed that the use of physical cash in the UK dropped by 50% immediately after the government’s announcement of restrictions on movement.

Yet as FinTech firms innovate, and customers show a clear demand for digitally led products and services, many banks continue to lag behind. According to a June 2019 survey by PwC, 47% of global financial services companies wanted to collaborate with a FinTech firm, but Deloitte research suggests that just 15% of organisations consider themselves to be digital leaders. Now, the sudden shock of Coronavirus on global financial systems has shown that it is high time for banks to take the leap – and there has never been a better time. As well as an increased customer demand, and investment in Gulf-based FinTech startups reportedly set to reach $2 billion over the next 10 years, these fledgling firms are making it easier than ever for traditional institutions to collaborate. In fact, many are offering their services for free to encourage increased uptake during this time of crisis.

Banks need not even produce their own apps – instead, they can collaborate with third-party developers to implement existing solutions for their customers. A prime example of a company enabling such partnerships is open banking firm Tarabut Gateway, which acts as an interface between banks and developers by providing a pipeline of financial data. This allows agile third-party companies to quickly produce apps free of the traditional bureaucratic constraints of larger organisations, allowing the bank to do what it does best and retain control over the data. It is just one of many FinTech startups based in Bahrain, which is home to one of the oldest and most established financial centres in the Gulf region. High quality regulation from a single regulatory authority, the Central Bank of Bahrain, is one of the main reasons why Bahrain was considerably less exposed to the global financial crisis than other financial centres – and is now the driving force behind innovation in the sphere. Now, Bahrain is pushing forward with initiatives including a regulatory sandbox that allows digitally-focused financial institutions from around the world to test and experiment with their banking ideas and solutions. The approach is already paying off, with numerous banks in the Kingdom setting up FinTech units to explore partnerships and harness new technologies within their own customer offerings.

While the spread of COVID-19 has presented enormous challenges for banks, it is also set to accelerate a new wave of FinTech innovation. Being digital will no longer be optional, and the FinTech champions of tomorrow will be determined by the readiness of financial institutions adapt and transform for the next global crisis. The infrastructure exists, the customer demand exists and the legal frameworks exist – at least in Bahrain. Now it is time for banks to come to the table and collaborate in building new digital solutions for a better tomorrow.

Dalal Buhejji

Director Business Development Financial Services - Bahrain EDB