The banking industry is transforming rapidly. An industry that had remained virtually unchanged for centuries has seen exceptional change in just a few years. As digital disruptions continue, the rate of change will only accelerate and, as a result, traditional lenders are digitalizing their operations and seeking opportunities beyond their traditional overbanked markets.
Across the Gulf Cooperation Council (GCC), banks are investing in cross-border opportunities in order to increase their geographical footprint, boost efficiency, spur growth and bolster their bottom line. According to Jan Willem Sudmann, executive vice president and head of international banking, International Banking Group at Mashreq Bank, this move can be attributed to two underlying factors.
The first is the rapid rate of innovation in the sector, which has enabled banks to eke out further efficiencies, as well as driving profitability and growth. This has opened a new window of opportunity in foreign countries, especially in emerging markets.
The second is financial deregulation. As emerging markets lift restrictions on foreign direct investment (FDI), this presents a lucrative opportunity for banks to invest in local lenders. In the United Arab Emirates, for instance, a new law passed in 2018 boosted inward FDI. As a result, total FDI is expected to rise by 20% year-on-year in 2019, according to Ministry of Economy projections.
Sudmann notes that banks across the region are broadening their investor base, in part due to the challenges they face – including low oil prices and slowing economic growth. In fact, Dubai-based Mashreq Bank’s cap on foreign ownership is set at 49%, one of the highest among all UAE lenders.
Expansion into a new market brings both additional revenue for banks and new value to the host market. “It is our belief that today digitalization is one core area that can set a bank apart in a foreign market,” says Sudmann. Expansion adds value to banks as well as markets themselves, which benefit from efficiencies in terms of new technologies, products and management techniques, he adds.
Expansion beyond borders
Mashreq Bank is one of the UAE’s most internationally active financial institutions, with a strong and growing presence across the GCC, Egypt and India; while several other banks are seeking to capitalize on key Asian markets such as Hong Kong, Singapore and Shanghai.
Banks in Asia are also actively looking at cross-border M&A as they strive to improve efficiencies and spur growth. Considering the above, even highly competitive and saturated markets such as India are of immense importance to Mashreq.
For the host country, the entry of a foreign bank opens up new opportunities in terms of rising trade, growing salaries and new jobs. For banks, on the other hand, there is a new market and an option to tap into the potential opportunities – everyone wins.
However, banking challenges remain around expansion into new territories. Rules change from market to market and region to region. For instance, in certain countries the taxation system might be completely transparent and stable, while in others it might be opaque and continue to change depending on the outlook of the government.
“Entering a new market is not a decision that’s taken lightly, it is backed by exhaustive research and deliberation. It is a substantial investment that is driven by various considerations, including benefits stemming from efficiency gains brought about by new technologies, products and management techniques, local legislation, partnering opportunities and the like,” adds Sudmann.
So, what is the big differentiator for any bank expanding into a new market that would help them stand out from the local competition? The answer is simple: customer experience.
Driving growth through digitalization
“One of the keys to success when expanding into a new market lies in a bank’s digital prowess. However, while digitalization is especially relevant when it comes to international endeavours, it is crucial to remember the core reason why we are doing it – and that is to enhance the customer experience and provide a seamless banking journey,” says Sudmann. “This is what sets a bank apart in a foreign market, and not only does it gives them a competitive edge, but also generates additional efficiencies while cutting operational costs.”
The advent of big tech companies and fintechs add another layer of complication to this equation, pushing legacy banks to constantly innovate and improve. While this presents new challenges, it also brings with it opportunities, especially when it comes to fintechs. Banks such as Mashreq recognized this early on and have chosen to collaborate with fintechs rather than compete with them. Overall, this trend is expected to continue thanks to regulatory openness and the rise of fintech enablers.
“New challenger banks are pushing up and targeting young customers who may never have set foot in a physical branch,” adds Sudmann. “This is another factor that legacy banks need to consider in their international expansion strategies – take Mashreq, where today 97% of all our retail banking transactions are done online.”
Digitalization will continue to be the key growth driver for large banks such as Mashreq. As multiple financial institutions continue to expand into new markets, only those who understand the importance of digitalization and its associated customer benefits will thrive both today and tomorrow.