Digital transformation of a country or region is marked by the dynamic psychograph of the populace in tandem with the growing digital innovations. UAE, among the many other global leaders is on the fast-track to digitization. So when 95% of Dubai’s most important government services are made available on mobile devices under the Smart Government Initiative, it shows that both the people and the innovations are making simultaneous progress in digitization. Digitization has touched major sectors of UAE including government, healthcare, SME and banking.

Financial Volatility at Stake

The last year has seen a decline in oil prices, the primary asset of UAE. Oil prices have been going down  for more than two years, plunging from over $103 for a barrel of crude oil in March 2014 to just $29 in January 2016. This fluctuation has led to financial volatility and increase in risk of liquidation in the banking sector. As per a KPMG report the cost of business kept increasing in the UAE region since 2015 and adversely affected the cost to income ratio. The next couple of years are going to be really tough for the banking sector as the economy faces uncertainty. To tackle this situation UAE is working on a “post-oil era” blueprint with a more diversified economy.

IFRS9 worldwide

One of the biggest challenges of the banking sector is keeping up with the evolving compliances. The next impactful change on banks is the implementation of IFRS 9 worldwide. The new parameters of compliances not only affect risk factors but also significantly impact balance sheets, accounting systems and processes. This will compel the banks to review their capital requirements, reevaluate product mixes and business models. To accommodate this significant accounting development, banks in UAE would need to upgrade their infrastructure and governance accordingly. Implementation of IFRS 9 worldwide will impact credit losses and banks adversely.

The Losing Relevance to Fintechs

FinTechs in UAE are eating away slices of the market with faster services and modern products. According to GCC FinTech Play 2017, by Ernst and Young 57% respondents believe that FinTech will disrupt the banking sector in the UAE in the next 1 to 2 years.  In the same report approximately 70% of the survey participants express that they think that funds transfer services will be the primary target of FinTech. Another 50% of the survey participants said they considered brokerage services to be a high-risk activity.

Between 60% and 75% participants spoke in favor of FinTech innovations stating that they offered better value proposition, in terms of ease of use, cost, speed of service and integration with social media. Another 50% thought the same way in terms of better client experience, throughout the consumer journey.

Trust Factor vs Digital Reality

UAE is among the top countries in the world, with huge smartphone penetration and more than 70 percent social media adoption—according to a 2016 McKinsey report. However, Digital banking hasn’t yet reached its potential in the UAE region. It is still more branch than digital based and human than automation dependent. According to the latest Trust Index from the UAE Banks Federation (UBF), 2016, nearly three-quarters (72 percent) of respondents to a survey described their view of banks as “very positive”, up from 70 percent from the previous year. It also said that the number of customers who said their impression of banks had improved in the past six months was thrice higher than the number of people with a less favorable view.

H.E. Abdul Aziz Al Ghurair, chairman of the UBF has said in this context: “Despite economic uncertainties, this year’s Trust Index indicates that perception about the UAE’s banking sector is healthy and steady.”

Though the overall impact is demanding digital growth to bring in more customers and inspire faith in the financial system with effectiveness according to McKinsey, the Middle East economy has realized only 8.4% of its digital potential. Banks have also been under cyber security threats as well with the instance of Sharjah bank being threatened by a hacker.

So, what’s next?

Understanding and catering to the needs of the digital friendly client, molding operations to accommodate new compliances and attracting investments from customers with interesting products are some of the biggest challenges that the UAE banking sector is dealing with right now. With the fluctuating economy and preexisting threats like cybercrimes, banks are struggling to keep up the trust of customers. However some banks like Emirates NBD, Commercial Bank of Dubai have initiated drastic digital endeavors to provide extra ordinary engaging experiences carving a path for new age banking in UAE.