There are a variety of digital initiatives underway across MENAT that have the potential to transform the finance landscape in the region. Although many countries in MENAT are expressing interest in digitisation, there are a few that stand out in terms of practical steps:
Egypt is prominent in MENAT in relation to mobile payments, with over 8 million1 active mobile wallets in the country. The government has been highly active in supporting the evolution of mobile payments and the associated transparency for a variety of reasons, but one of the most important is the need to cut down on black market payments.
Faster payment systems are growing in number globally, and are an integral part of automating payments and increasing payment flow transparency. In MENAT, UAE and Bahrain have been the first movers. All banks in the UAE are required to accept and process transactions through the UAE Funds Transfer System (UAEFTS) system with no transaction value limit specified. In Bahrain, the Fawry+ near real time payment service, which was initiated at the request of the central bank, has also gone live. From a corporate treasury perspective, these faster payment systems can shorten the working capital cycle and reduce working capital requirements. In addition, many new faster payment systems also incorporate larger free form text capacity that can be used for information such as invoice numbers covered by the payment, thereby also potentially improving reconciliation rates.
In some cases, government entities have been leading digitisation by practical example. Sharjah, the third largest of the UAE's emirates, is a case in point. Sharjah Finance Department is the government entity responsible for most of the country's public sector finances. In partnership with HSBC, it has recently revolutionised its treasury processes by adopting digital transaction banking products and a cloud-based treasury management system, to achieve automation and centralisation.
HSBC provided business process analysis as well as technical consulting to build a comprehensive bespoke solution. Extensive collaboration with the project team from SFD and HSBC resulted in an innovative solution combining many products and services utilising leading edge technology. The partnership on this implementation gained global recognition at the 2018 Adam Smith awards winning ‘Best in Class Treasury Solution’. You can read more about the deal here.
One of HSBC's most important roles has been in supporting clients making the transition from paper to digital payments and processes and the above example is just one of many where we have worked with government related entities (GREs) on such critical automation projects. A critical part of this role is the bank's digital integration team, which provides local language support from specialists who are formally certified in key technologies, such as SWIFT and major treasury management platforms. Clients, not just limited to GREs, therefore have access to global best practice and technical expertise to smooth their path to digital transformation.
HSBC has been responsive to the pace of digital innovation in both MENAT and globally. The bank has invested heavily in its digital platforms, especially its corporate banking platform HSBCnet. For example, HSBC was the first bank to launch facial recognition as an ID mechanism on the HSBCnet mobile app.
MENAT has high and growing mobile penetration - 50% of the internet banking user base actively making Mobile a key part of their working life in the first six months of 2018 versus 40% in 2017. Customers have embraced mobile channels for banking, appreciating its ease of use and convenience. HSBC has over 4,000 corporate clients actively using mobile to access their accounts in the region. In the first six months of the year, 23 thousand payments were authorised via the HSBCnet Mobile platform with the value of $1.6 billion USD dollars, 24% ahead of the 2017 equivalent period within the MENAT region.
HSBC is also committed to maximising clients' mobile digital receivables opportunities in the region. The first tangible proof of this will come in the very near future when the bank's flagship mobile collections proposition goes live in Egypt, which will make high volume automated accounts receivable and reconciliation immediately available to corporate and government treasuries.
Financial technology companies ('fintechs') have been attracting growing interest globally, because of their potential to innovate rapidly, often by leveraging the infrastructure of banks such as HSBC through partnerships. Some governments in MENAT have been quick to recognise the opportunity fintechs represent. As a result, one interesting development has been the emergence of regulatory sandboxes and fintech incubators in Abu Dhabi, Dubai, Saudi Arabia and Bahrain. The sandboxes provide a framework and process that supports the development of the fintech industry in a controlled manner3. Fintechs have been quick to appreciate the opportunity: a year after going live, Bahrain's sandbox had nine approved entities up and running and over 300 applications have been made to FinTech Hive at the Dubai International Financial Centre, of which HSBC is a sponsor.
Fintechs are driving a broad range of digital projects, but two prominent fintech subsectors of late have been blockchain (often, but not always, in conjunction with cryptocurrencies) and artificial intelligence (AI). Among many others, entities such as Ripple and Ethereum that use blockchain are already active in the region, often in close collaboration with central banks. For example, the Saudi central bank signed a deal in February 2018 with Ripple to help banks in the kingdom settle payments using blockchain software3. AI has various applications in finance, ranging from fraud detection, to facial recognition, to forecasting. While much of AI's application to date has been on the bank side, rather than corporate treasury, banks such as HSBC have been working with clients to help them take advantage of its potential. In MENAT, this potential is considerable: PwC predicts that AI will contribute a gain of USD38bn to the financial sector in the region by 20304.
A further interesting development in the role of fintechs has been the recent expansion of the type of partnerships they are building. Previously, most fintech partnerships have been with governments or banks, but a growing number of fintech/corporate relationships have now started to emerge and thrive across the region.
Coupling these various fintech initiatives with the mobile wallets, faster payments and upgraded banking platforms mentioned earlier, and it seems clear that MENAT is making substantive progress towards the digital transformation of treasury and finance.
Nevertheless, for that progress to develop real momentum, more entities will need to make the transition to digital processes. The Sharjah Finance Department is just one example of important government entities and corporations in the region that have taken this step and are already reaping the benefits, but others are still holding back. In some cases, this digital reticence is caused by simply comparing immediate payments costs - such as the bank fees associated with issuing a cheque versus issuing a digital payment.
The problem with this narrow approach is that it completely overlooks all the ancillary costs and risks of paper payments/processes. For instance, the manual submission of paper payments is extremely inefficient and often involves multiple stages and personnel. First, the payment form has to be completed manually, then physically authorised by signature, then someone typically has to take it to the bank for physical submission. The delays, risks and costs associated with this laborious process are clearly undesirable.
By contrast, a properly structured digital payment process involves a small fraction of this effort and cost, as well as minimising the operational risks. Furthermore, as a business grows, paper payment costs also increase commensurately, whereas with digital payments they do not. Treasuries that switch to digital payments and processes also gain from being able to redeploy personnel to more value-added roles, such as business development and strategy.
While the digital payment infrastructure may still be incomplete in some MENAT countries, in others it already rivals the quality of that in markets that have long since become largely digital. Coupling this with the high level of fintech innovation in these more digitally developed MENAT countries means that there are no real practical obstacles to adopting digital technology and processes in treasury. When one also takes into account the real costs and risks of the paper alternative and the availability of specialised transition support from banks such as HSBC...
2Within them, fintechs can: "test innovative products, services, business models and delivery mechanisms without immediately incurring all the normal regulatory and financial consequences of engaging in the activity in question ." https://www.cbb.gov.bh/assets/Whitepapers/Regulatory_Sandbox_Framework.pdf