In the Middle East, banking incumbents recognize the need for digital transformation to improve customer experience, enhance operational efficiency, and stay competitive against new, digital entrants, a new survey conducted by IT business solution provider Comarch found.

The study, which polled nearly 30 decision makers of financial institutions in the Middle East region, revealed that all of the respondents polled acknowledge the necessity for their institutions to undergo digital transformation in the next three years, with 90% of them seeing the next year as critical for making significant decisions and taking radical steps in this area.

Respondents identified increasing competitiveness (70%), addressing difficulties in expanding or managing their current systems (18%) and reducing costs (12%) as the main motivations for digital transformation.

According to Comarch, digital transformation in the Middle East’s banking sector is influenced by several factors. For one, customers are increasingly digital-savvy, expecting seamless experiences and personalized offerings from their banks, a trend which requires banks to monitor and anticipate customer behavior and preferences to meet these expectations.

Supporting this, a 2023 McKinsey Digital Sentiment Survey of consumers in Egypt, Saudi Arabia, and the United Arab Emirates (UAE), revealed that Middle Eastern consumers favor mobile apps as their preferred channel. The three surveyed countries had consumer engagement on apps that was 1.6 times higher than that of the developed markets of Europe and North America, where websites are still dominant.

Another trend outlined in the Comarch report is technological advancements. Innovations such as artificial intelligence (AI), blockchain and cloud computing are creating new possibilities for the banking industry, transforming how organizations operate and interact with customers and promising improved efficiency, security, and customer satisfaction.

AI, in particular, is expected to have a significant impact on the sector. McKinsey estimates that generative AI, a subfield of AI focused on developing algorithms and models capable of generating new text, images, or other media, could improve productivity in core corporate and investment banking (CIB) activities by between 30% to 90% in individual use cases, potentially adding up to about 10% of CIB operating profits in the long run. PwC expects AI to contribute US$38 billion to the financial, professional and administrative services sector in the Middle East and Africa (MEA) by 2030, equivalent to 13.6% of the region’s gross domestic product (GDP).

Challenges to digital transformation

The Comarch study also revealed the main challenges faced by banking incumbents in their digital transformation journeys, with respondents identifying the complexity of the process (65%), its lengthy duration (29%), and the choice of solution and vendor (6%) as the biggest hurdles.

For over 80% of respondents, system replacement is a long process that takes more than a year, with nearly 40% expecting it to take more than two years.

Respondents also pointed out the main issues with their existing systems. They cited the lack of scalability (36%), insufficient security (27%), the absence of application programming interfaces (APIs), and difficulties in expanding their business offerings (18%) as the most troublesome aspects of legacy systems.

Legacy systems in older technology are difficult to modify, integrate, and maintain. They struggle to handle the growing volume and variety of data and transactions required by digital banking. In contrast, modern systems can efficiently manage large and diverse data sets and transactions.

Moreover, outdated technology makes it harder for banks to comply with the evolving, complex regulations. It also exposes banks to more operational, cyber, and reputational risks, as older technology is more vulnerable to failures, breaches, and attacks. These risks can result in financial losses, legal penalties, and customer distrust.

Additionally, legacy technology often lacks modern interfaces and APIs. An API is a set of rules and protocols that allow applications to communicate with each other, and defines how data is being exchanged between systems, using requests and responses. The absence of APIs limits a bank’s ability to extend its system for new offerings and collaborations with fintech companies.

Finally, legacy systems hamper the customer experience as they limit the functionality and convenience of banking services. This is particularly critical as today’s customers are expected fast, easy, and personalized banking solutions.

In the Middle East, the urgency of digital transformation is further being exacerbated by the advent of digital challenger banks. As of September 2023, about 38 digital banking offerings were available across the region, data released by C-Innovation, a French fintech-focused research firm, show. The figure implies that 13 new neobanking solutions had been launched between 2021 and mid-2023, and suggests a growth rate of 52% for the sector. These neobanks were serving around 32 million customers, up 28% from 2021’s 25 million customer pool.

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