COVID-19: An Opportunity for the Islamic Digital Economy
First published in Islamic Finance News (IFN) Innovation Report 2020 (https://www.islamicfinancenews.com/supplements/ifn-financial-innovation-report-2020)
With countless articles already published about how the world will be changed during and after the pandemic, the challenges that our industry now faces are well documented.
Bitten by COVID-19 like the rest of the world, our $2.4 trillion industry — composed of roughly 1,400 institutions spread across 80 countries — is still searching for a new “normal” within which to respond to the economic chaos.
However, this new normal presents an opportunity to propel the Islamic digital economy forward and close the gap with conventional digital banking.
A Problem Shared
The global lockdown has hit consumer banking hard in all jurisdictions. In Asia, where Islamic finance has a large market share in retail lending and microfinance, and in Africa, where Islamic microfinance has a niche but growing market share, social distancing measures and retail closures have crippled SMEs and lower income classes the most.
The natural adaptability of consumers is not being given a fighting chance as these regions are still largely underserved in regards to digital services, financially excluding a large proportion of the population. Governments and private sectors must acknowledge that ownership of a mobile device is no longer a luxury, but a gateway to a standard of living which is arguably a human right, and actively pursue the penetration of those markets so that the tools are placed into the hands of those who need them the most.
Recent base rate cuts from central banks have squeezed margins, and the added pressure of the pandemic makes the near-zero-rate environment even more difficult. It’s therefore essential for banks to transform their cost base, whilst still delivering value to customers and positive outcomes for employees.
With remote working practices fast becoming a normality, the crisis has highlighted the shortcomings of operating models which rely too heavily on manual procedures. COVID-19 has caught us red-handed; guilty of being too dependent on our cubicles and shared office spaces to get the job done, when in fact, the customer is indifferent, so long as the services they need are omnipresent and available.
An Innovation Revolution
The shock of isolation has triggered an innovation revolution across the world. Organisations have radically shifted their mindsets and opened the doors to change in order to keep up with the rapid shift in consumer behaviour. Even the most stubborn customers, bound to traditional ways of banking, have been forced to adjust their habits.
For banks, new and old, being able to innovate in the face of this will be the single most important driving factor for sustainable growth in the short to medium term. But this doesn’t just mean new products or a lick of paint on the user interface, but a completely transformed business model affecting all aspects of the consumer value chain.
This is where the new entrants have the upper hand. Digital startups uninhibited by decades of legacy technology and bureaucracy, are able to construct scalable solutions at speed.
Governments and regulatory bodies in the GCC and South-East Asia had already acknowledged the need to accelerate innovation prior to the crisis, establishing fintech sandboxes in each jurisdiction to allow players to test their propositions. With 30 successful applicants in the SAMA sandbox alone, all eyes now are on those promising startups setting out to make waves.
A Customer-Centric Mindset
How do we best approach the creation of digital products to deliver our financial services, in such a competitive space? It’s important to first realise the hard truth — a product is an ephemeral solution, hired by the customer to solve a temporary problem, and they may leave as quick as they arrived. Only by truly embracing a customer-centric mindset can competition be sustained. We must be obsessed with putting the customer first, identifying their needs and maximising value in their lives. We’re building products but we’re selling lifestyles.
Even with the slickest new product, new entrants still have significant barriers to overcome, adoption being the most difficult part of bringing a new product to market. The younger millennial customers are notoriously non-committal, with no loyalty to long-standing institutions and numbed by the myriad of disposable services at their fingertips. Their expectations are shaped by interactions outside of the banking industry, and they expect a consistent standard of service.
A ‘Jobs to be Done’ philosophy and limitless curiosity about the context and motivations of the consumer must be adopted at every level of an organisation, from strategy to operations, with a focus on the problem, not the product. This will open the doors to being able to deliver truly personalised services to the customer; services which trigger emotions and summon adoption.
Employees play a major role in achieving customer-centricity. They are also the best channel for communicating positive brand reputation to the rest of the world, directly influencing consumer trust. Championing the needs of the employee should therefore be viewed on par with those of the customer.
The crisis is forcing us to trial decentralised working. Is it time we abandon the notion of a fixed place of work, and formalise virtual contracts and remote working as a permanent fixture? Such arrangements create positive employer-employee relationships, contribute to cost reduction through not having to physically staff office space, and may attract new talent.
A Focus on Trust
Not only do banks need to recalibrate their own purpose and operating models, but they also need to acknowledge that they have an ethical obligation to be part of the wider solution. In doing so, it will improve reputation and enhance the most important thing: consumer trust — which has been waning in the banking industry since the 2008 crisis, and further exacerbated by the current crisis.
People are concerned about their future. To take a truly customer-centric approach during this pandemic, the power of trust — which is fundamental to Islamic economics and ethical banking practice — needs to be harnessed.
At the crossroads of customer-centricity, trust and technology, is distributed ledger technology (DLT). Despite a huge blockchain ICO bubble in 2018 and lots of talk, nothing significant has been achieved in the Islamic finance space with this technology. Abu Dhabi Islamic Bank (ADIB) have recently become the first Islamic bank to successfully execute trade finance distribution transactions using blockchain technology, but until then, the proposition of utilising this technology in the Islamic finance industry has been used for little more than good PR; the tail wagging the dog. Nevertheless, DLT — with its inherent trust and integrity — seems almost tailor-made for our industry.
A Pursuit for Agility
The competitive landscape used to be determined by real estate and branch networks. Now it’s determined by technology capability and marketing budgets. Staying in the game will depend largely on the bank’s agility; being able to innovate and swiftly execute digital transformation to mitigate the damage caused by lack of liquidity and base rate cuts.
New all-digital players, unencumbered by the cost of maintaining and transforming legacy systems, are agile by nature. Incumbents must restructure their cost base in order to become more agile; the complexity of modernising legacy systems being a bank’s biggest obstacle to achieving digital transformation.
To compete with new entrants, incumbents must be smart in their deployment of resources. Low-value generating programs should be shelved in lieu of programs which align with the strategy of trust and a customer-centric model. All systems and processes should be scrutinised with a view to standardise and automate wherever possible, leveraging robotic process automation (RPA) and straight-through processing solutions to create more efficient workflows.
Investments in AI and big data should be pursued as a cornerstone of any customer-centric model; essential tools for providing more accurate observations and predictions about consumer behaviour, enabling players to respond more quickly to rapidly changing market conditions.
A Problem Halved
Now more than ever, in order to deliver truly innovative propositions, penetrate new markets and create scale, it’s important to create mutually beneficial synergistic partnerships. Working together, big tech, fintech, incumbents, governments and regulators will be better placed to create personalised solutions than would ever be possible alone, and will be better placed to provide solutions at every stage of the value chain.
Al Rajhi Bank has just unveiled a strategic partnership with cross-border payments provider Moneygram. In a country with over 11 million foreign nationals and over $30 billion in annual remittances, this move will enable Al Rajhi to offer more options to the customer for transferring money using their digital service channels, made all the more significant now at a time when the recipient developing economies are struggling the most.
STC Bahrain have just announced a partnership with NEC Payments to launch a virtual prepaid Mastercard, complementing the advice from the World Health Organisation (WHO) which encourages the use of online retail and urges the avoidance of cash payment, which has been identified as a contributor to the spread of COVID-19.
With the pandemic contributing to the slowdown of the venture capital markets, life for fintechs will be more difficult. This is an opportunity for banks to capitalise, with attractive partnerships and acquisition possibilities with specialist tech companies, each satisfying the needs of the other. With a vast amount of talent available internationally, banks will have no trouble sourcing highly competent, competitively-priced services and teams who are experienced in working in a decentralised environment, round the clock.
Now is more important than ever to refine the way that partnerships are formed, so that legal and compliance teams can on-board partners quickly without stifling agility. 25-page due diligence questionnaires designed for on-premise solutions should be leaned down for onboarding cloud-based SaaS products, and restrictions by regulators from working with service providers outside of their own jurisdiction need to be relaxed.
We need to create an environment which maximises agility and competition; the conditions required to innovate and scale the Islamic digital economy.
About the Author
Hi I’m Gareth Lewis, Associate Director at Eiger; the leading technology-focussed Sharia’a-compliant commodity provider in the Islamic finance space.
I’d love to find out how Eiger can partner with you and support you in achieving digital success.
To find out more, please get in touch:
gareth.lewis@eigertrading.com
