‘Fintech could reduce GCC banks profitability’
While technological innovation in the financial sector is a global trend, reaching developed and developing economies alike, S&P Global Ratings, the global ratings agency, believes that financial technology (fintech) could reduce the profitability of some business lines of GCC banks and change the way they operate over time.
In a report titled The Future Of Banking: Could Fintech Disrupt Gulf Cooperation Council Banks’ Business Models? , S&P Global Ratings credit analyst Mohamed Damak said, “Technological innovation in the financial sector is a global trend, reaching developed and developing economies alike”.
“While we don’t expect major disruption of lending activity in the GCC – which remains concentrated on the corporate sector and by individual corporate borrowers – we think that fintech could impinge on retail banking, particularly money transfer and foreign-currency exchange. This would push some banks to adjust their operations through increased digitalization, branch network reduction, and staff rationalization,” he added.
The Fintech impact
The report notes, that fintech could disrupt GCC banks’ money transfer operations. Fintech companies, by definition, focus on lowering transfer fees and reducing transfer time. The World Bank estimated, the global average transfer cost at a hefty 7.2 per cent in the third quarter of 2017 (for a transfer of $200, the global weighted average was estimated at 5.5 per cent).
Fintech could also disrupt the payment industry as it would reduce costs for end users (and revenues for service providers) because of the reduction in the number of participants, S&P noted.
The new competitor
“However,” the report continues, “ we don’t expect fintech alone to have a significant influence on our GCC banks ratings in the next two years. That’s because we consider that banks will be able to adapt to their changing operating environment through a combination of collaboration with fintech companies and cost-reduction measures.”
The ratings agency notes that some banks are starting to realize the extent of the threats and opportunities that fintech poses, and are putting in place measures to adjust to the new realities of their operating environment.
“We also believe that regulators in the GCC will continue to protect the financial stability of their banking systems,” it noted, adding, “For the moment, we view fintech as the new competitor on the block, but not yet a game changer for banks’ operations in the GCC.”
“For that reason,” it said, “it’s not yet a negative rating driver over our rating horizon, which typically extends to two years. However, we believe fintech will increasingly become a force to be reckoned with.”
The eventual impact on bank ratings will depend not only on how banks respond to the new competition and the particular vulnerabilities of their business models, but also on the response from authorities and regulators to fintech’s growing clout, S&P noted.