Technology in the financial services sector in the Gulf States

For the Gulf States IT spend in the financial sector reached nearly a $1b in 2005 and is set to grow by a compound rate of 10 percent through to the end of the outlook period, 2010, rising to US$1.5b, says Parveen Bansal, senior research analyst for the Financial Insights' European Financial Services.

Financial IT spend is the second largest vertical after Infrastructure (transport, communications and utilities), at 15 percent of total spend. The profile of expenditure in 2010 is forecast to be little changed, with the majority of spending on hardware.

High oil prices and massive investments in infrastructure, e-government and the need for economic diversification beyond oil and gas have created high rates of growth in the Gulf States. The demand for easier access to capital to fund projects as well as increased competition and openness as the Gulf States have joined the WTO has led to growing demand for financial services and greater foreign competition. These positive developments have so far outweighed concerns about security and political stability in the region.

Strong growth is driving investment in sophisticated systems to ensure competitiveness as well as improved security, which remains a particular focus of attention after a number of high profile breaches.

Looking forward the key drivers will be regulation, competition and expansion of delivery channels (branches, ATM, mobile and the internet). Financial institutions when investing in IT will place greater emphasis on process integration and optimisation across functions as well as improving all forms of risk management and business analytics.

Addressing the challenge of labour supply will be a key success factor for financial institutions with the more ambitious increasing their proportion of IT activities that are outsourced. Maximising the return on IT investments by overcoming internal cultural barriers will be a defining challenge. The mobile channel in all its forms will be the driving technology in expanding customer services and increasing revenue. Recruiting and retaining world-class technology leadership skills will be critical success factor.

The Gulf States financial services

The Gulf States economy has been driven forwards by high oil prices and an expansion in production; a burgeoning real estate sector and a series of stock market booms and busts. The vibrant economy has allowed Gulf State Governments to invest massively in education, defence and infrastructure. The increased openness following membership of the WTO has further boosted economic activity as competition in all sectors, including Financial Services, has increased. The Banking industry is exhibiting strong growth as the result of expanded operations and a number of new banks entering the region.

Overall IT spending in the Gulf States – Saudi Arabia, the UAE, Bahrain, Kuwait, Oman and Qatar – reached nearly $6b in 2005, representing an impressive year on year growth of 24 percent. Spending on IT by the financial sector (including banking, insurance and other financial services) was just under $1b, only exceeded by infrastructure (telcomms, transport and utilities), which topped $1.2b. Banks were responsible for the majority of the spend in the financial sector at $755m.

The majority of financial sector spending is concentrated on hardware (40 percent), IT services (28 percent) and software (18 percent), which suggests limited exposure to large outsourcing contracts.

Key priorities for Financial Services in the region include the following.

Competition pressures are leading banks to expand their offerings and consolidate to achieve economies of scale. Existing distribution channels are being exploited to sell insurance in partnership with insurance companies.

As the price of connecting to broadband dropping and stronger security measures are implemented, there is expected growth in the penetration of online banking. Illustrating the growing use of the internet is National bank of Dubai's implementation of an online learning solution for the bank's staff across its branch network.

The rise and rise of the ATMs, especially in under-services areas, and investment in the supporting infrastructure both software and hardware remain a key priority. Bank Albilad in Saudi Arabia signed with Wincor Nixdorf to deliver 1,000 ATMs within the next few years.

Contact centres are now firmly established as customer service vehicles and are now being mined for their revenue generating potential within Banks. Much investment is happening in internet broadband infrastructure to enable voice over internet services.

Expanding delivery channels to include the mobile customer via a variety of technologies and presentation mechanisms is an increasing area for competitive advantage. Mobile phone penetration in the Gulf is very high thus presenting a good business case for offering viable mobile commerce and banking solutions. The DIFX plans to introduce trading for brokers on the DIFX market via mobile phones while also distributing DIFX market data via other channels. Early this year the National Bank of Abu Dhabi signed an agreement with Mobile Value Systems (MVS) to launch an m-payments service for customers to make payments and fund transfers using their mobile. Customers would be able to transfer money, download mobile content and pay bills through their mobile phone and within seconds.

The relentless need to conform to regulation continually raises the standards for transparency and security. Compliance while maintaining and innovating customer services is a major challenge.

Emphasis on process, customer and product are slowly taking precedent over narrower functional and divisional considerations. SOA concepts are gaining traction as a means of linking together previously discrete systems.

Underpinning success in all these areas is a robust and comprehensive approach to security, which fundamentally integrates threat and risk assessment.

Ready access to qualified resources to maintain and develop IT solutions is an increasing limiter as spend on IT projects increase and foreign competition grows. Banks are increasingly considering longer-term outsourcing arrangements with strategic suppliers to ensure the supply of IT talent.

The financial sector in the Gulf States is demonstrating sound growth and a strong positive emphasis on IT investments.

Outlook – 2010

Positive growth factors are forecast to continue to outweigh the negative sentiment related to political instability and terrorism and hence investments in IT will continue to grow in line with the general trends in the economy for the rest of the decade.

Spending on IT by the financial sector is forecast to increase to US$1.5b by 2010, increasing at a compound annual rate of 10 percent and to remain the second largest vertical to Infrastructure. Banking will continue to dominate at 80 percent of total spend. Expenditure on hardware will still constitute the highest proportion of spending at 44 percent with IT services taking up 28 percent and software 17 percent of the remaining expenditure.

For higher levels of investment in IT to deliver an acceptable ROI financial services institutions will increasingly focus their attention on ensuring the IT function is properly staffed with the right management and technical resources who understand the business issues and are world class in their application in technology. Greater emphasis will be placed on long term outsourcing arrangements that do not compromise security of competitive advantage.

The internet in its mobile form will increasingly drive customer behaviour and set the standard for channel delivery. The channels are the face of the bank to the consumer, the opportunity during a brief customer interaction to delight, or disappoint, the customer. Financial Insights research points to the fact that the most common underlying reason for channel initiatives is to enhance the customer experience, demonstrating that banks understand the competitive need to provide consistent, high-quality service. Branches will remain an important sales and transaction channel for banks in the Middle East. Investment in the branch will include technologies that improve the customer experience during their visit. While the ATM is an important channel for cash, the introduction of the mobile as a device enabling payments and banking on-the-go will likely overshadow the demand for ATM services in the near future. Within the Gulf States, the there is very high penetration of mobile phones, pair this with the high penetration of credit cards and you get a potentially large market for mobile payments. Mobile payments are an exciting prospective growth area and offer a new payment channel for consumers across all levels of society. Market conditions will determine the applicability of a specific service offering, but it is becoming clear that mobile phones are a powerful platform for growth. In the years ahead, Financial Insights believes mobile payments will become commonplace across the Middle East markets. One of the biggest selling points of mobile payments is the focus on customer convenience. As adoption grows and customers develop trust in mobile payments, users may opt to conduct a wider array of payments via their phone. While initially, small value payments can be offered without the participation of banks, moving beyond small-value payments may lead telcos to partner with financial institutions or other third-party players to utilize their credit and debit networks.

Regulation and security will be positively embraced by the more successful banks as opportunities to improve customer service and innovate rather than as restrictions that limit their ability to respond to the market.

Barring unforeseen regional upheaval due to violent political change or a loss of confidence as the result of increasingly frequent terrorist attacks the region, Finance and IT expenditure is set to continue to grow and mature, rivalling the older more establish foreign institutions for sophistication and innovation.

BIO: Parveen Bansal

Parveen Bansal is a senior research analyst for the Financial Insights' European Financial Services practice which covers banking, brokerage, investments and insurance segments and their underlying technology solutions in Europe.

With many years experience of dealing with the leading technology and systems issues of the day from an executive and general business perspective she is ideally placed to advise clients on a broad range of strategic issues ranging across the retail and wholesale spectrum of the banking industry. She has an in depth understanding of the issues surrounding the evolution of core banking systems, payments, international competition in domestic markets and the multi-channel challenges of the modern marketplace. She also has extensive knowledge of BPO and Systems outsourcing.

She has a Masters (with honors) in Analysis, Design and Management of Information Systems from the London School of Economics and Political Science as well as a Bachelor of Science (Joint Honors) from Kings College London, University of London.