Digital divide

The Middle East’s banking community is being split in two as larger banks leverage information technology while smaller finance houses wrestle with aging legacy systems. As the market matures though, all local financial institutions will need to invest in IT if they are to grow into regional players and challenge their international counterparts.

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By  Greg Wilson Published  July 1, 2003

I|~||~||~|A digital divide is emerging within the region’s banking industry. Larger, local banks are using information technology to support customer service campaigns and distance themselves from their rivals, while smaller institutions are still wrangling with a number of tough technology decisions. In short, they need to work out how to cost effectively build, maintain and evolve an IT infrastructure that allows them to respond to changing external pressures and support customer service initiatives.

“There are a few banks trying to very aggressively emulate [how we’re using] information technology,” says Mohamed Fouz, chief executive officer of MashreqBank’s recently spun off IT department, Mindscape. “But for the smaller banks it is a lot harder for them to invest money in IT infrastructure. The smaller banks are obviously going into the market and they realise that IT is the key to
success, so they are throwing money at the problem,” he adds.

Mounting external pressures will compound the divide between the large and small financial houses. For local banks to trade on capital markets or conduct money transfers they have to adhere to international standards designed to combat fraud, offer comprehensive risk assessment and greater transparency. But for many local banks, this will mean a system upgrade.

“Local banks will find themselves investing in systems to comply with international regulation,” says Basel Tutunji, regional manager, Middle East, SAS Institute. “Initiatives, such as the Basel II Accords, will force local banks to put in place more systems to measure financial performance and regulation,” he adds.
Although the full implications of this international legislation has yet to be felt in the Middle East, it will increase the pressure on the information technology infrastructure to capture more data.

“Greater regulation will mean that [internal] measurement has to become more refined,” says Anthony Hourihan, professor of financial institutions & banking management consultant. “IT systems will have to capture more refined detail to comply with international standards,” he adds.

Heightened security concerns post 9/11 have also pushed many banks to invest heavily in disaster recovery and business continuity plans. Furthermore, as electronic customer channels proliferate, financial institutions have to face up the realities — and expense — of securing online customer data.

||**||II|~||~||~|“[Customer] data is the most important asset of any bank,” says Abdulla Qassem, chief manager IT, Emirates Bank International. “The security of [customer data] is so important that [banks] need to constantly look at it and upgrade their systems,” he adds.
The arrival of international banks on the region’s financial landscape and the ongoing market deregulation drives have forced all local banks to reassess their IT strategy. Furthermore, recent deals, such as Kuwait Finance House’s (KFH) acquisition of 30% of National Bank of Sharjah and Muscat Bank buying AMB Armo Bank in Bahrain are evidence that market consolidation is gaining momentum in the Middle East.

“We’re starting to see the emergence of regional banks, capable of delivering services across the region,” says George Khouri, group managing director, Sybase. “As market deregulation continues, mergers and acquisitions in the local market will be increasingly common,” he adds.

In a rapidly consolidating market, a sound IT infrastructure will be vital. However, risky mergers are not necessarily the only way forward for the region’s smaller banks to survive in a cutthroat financial services market. The challenge facing local banking institutions is not to get larger, but to get better. Core to improving customer service is realising and acting on the strategic value of information technology.

“Banking has lots of examples of unsuccessful mergers… [Mergers] are often a false way of growing the business,” says Hourihan. “Rivals can copy different products, but it’s customer service that is a competitive differentiator. IT is critical in delivering this,” he adds.

The effective use of IT is a great equaliser — enabling the smaller banks to compete against the big players. However, the majority of small and medium sized banks have to shift their mindset, and embrace a customer centric approach to delivering services. Tackling the ‘soft’ management issues involved in IT deployment is a stumbling block that has tripped up international and local banks alike. “It is not enough to buy an IT platform, and nail it on top of a bank — it won’t work. [Financial institutions] must focus its structure, people, processes and culture on the customer,” says Hourihan.

In a bid to get into shape for a greater competitive market, local banks are busying themselves refining their IT infrastructure, while developing and managing the proliferation of customer channels. “[Project work in banks] falls into two categories — one is where the investment is now focused on talking to the customers,” explains Hari Padmanabhan, president of ICICI-InfoTech Middle East. “[Other] banks are still [automating] their internal operations. They are looking at peripheral areas, whether that is treasury management or asset level management,” he adds.

||**||III|~||~||~|Local banks have to strike a balance between maintenance work on the infrastructure and projects to grow the business. According to Haider Salloum, marketing manager, Microsoft South Gulf, as much as 80% of a bank’s IT budget is spent on managing and maintaining systems, while the remainder is invested in new projects.

Statistics gathered on an ITP banking road show in June 2002 endorse Salloum’s view. The majority of IT budget was spent on the core banking applications, the network, ATMs, hardware, storage and security systems, rather than new customer facing channels or customer relationship management
(CRM).

“Local banks need to find a balance in their spending. Too much money is being spent sustaining systems. Banks aren’t spending to meet the challenges of the market,” says Salloum. “Banks should spend at least 30 to 35% on new projects,” he adds.

The need to streamline operations and reduce costs has led some local banks to outsource certain ‘grunt’ infrastructure work. Outsourcing has already gained substantial momentum among European and US banks, while most local financial institutions have spurned the use of third party service providers. However, as competitive pressure mounts, attitudes are starting to change.

“[Outsourcing is] a trend that we see in banks that want to improve levels of service,” comments Padmanabhan. “This is a growing trend, but not every bank is jumping into it. There is still a mixture of inhouse and outsourcing,” he adds.
Emirates Bank International is currently assessing the possibility of increasing its use of third party service providers. “[We look at outsourcing] very positively, but there are a lot of organisations that look at outsourcing [nervously]. They worry about revealing confidential customer data,” says Qassem.

“We are considering outsourcing our data centres, but [there are] issues to be considered. Unfortunately, outsourcing [providers] in this region have not yet reached the mass volume that means they can do it very cost effectively,” he adds.

||**||IV|~||~||~|Qassem predicts that more local banks will be driven to outsourcing to reduce cost and remain competitive. The alternative to joining the outsourcing bandwagon could well be to merge the organisation. “The pressure to invest in IT systems and deliver more electronic channels could drive the [banking] market to consolidate. [Some banks] will have to consolidate with a bigger bank or outsource,” he adds.

Comtrust, the internet infrastructure subsidiary of UAE PTT, Etisalat, has been attempting to win banking customers for its collection of data centre and security solutions. Until recently, the industry segment had resisted the use of third party service providers. However, this is changing, as financial institutions develop business continuity plans and set up disaster recovery sites.

“There is a growing interest in our data centre services,” says Tariq Habib, senior manager, business & technology, Comtrust. “Banks are waking up to these services. They are realising that this provides a cost effective alternative to investing in new applications and hardware,” he adds.

Reducing the operating costs of the IT infrastructure is a competitive necessity. To develop competitive differentiator, a bank must design a corporate information infrastructure to target services at its most profitable customers. At the core of the CRM strategy is the data warehouse, which captures all the customer information, regardless of how a client approaches a bank, and builds a portrait of the customer.

The single view of the customer is key to managing a bank’s multi-channel operation. “Banks collect more customer data than any other industry, but that isn’t necessarily information, it is not telling them anything about the customer,” says Hourihan. “If banks can manage their data they can be more proactive in cross selling to their customers,” he adds.

||**||V|~||~||~|Some local banks have already invested heavily in a single data repository. Emirates Bank International has been working for the last 18 months to integrate its diverse array of IT applications and platforms with a Tibco middleware project. Currently, the bank has connected 90% of its applications through Tibco to create a shared pool of customer data accessible by all its business groups.
“We now transfer data between our different [business] units,” says Qassem. “The middleware runs data between the different points. Behind this there is the data warehouse and management information system. This tells us how cross selling is going,” he adds.

Mindscape has completed a similar project, integrating its applications with its inhouse developed, Gemware.Net middleware layer. The Microsoft.Net based solution enables similar levels of data sharing between applications, creating a single customer view across its various channels.

“All the channels come through the middleware so you have a single customer view on it,” says Mohamed Fouz.

But, aside from the more advanced banks in the region, most of the local financial institutions have yet to put in place a comprehensive customer care infrastructure, such initiatives have been limited to standalone applications rather than a comprehensive CRM architecture.

“The data is there, lying in different systems, but banks have to bring this together. There are some small projects in this areas, but the ethos of using technology effectively is only there in pockets,” comments Padmanabhan.
Going forward, the Middle East’s banks will have no option but to build a comprehensive, customer-centric IT infrastructure if they expect to remain in business. Furthermore, they have to emulate credit card firms, such as American Express, and make intelligent decisions based on a customer’s spending behaviour a banking preferences. ||**||

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