Generative AI could help the Gulf’s traditional banks wrest the competitive advantage back from challenger and neobanks.

While artificial intelligence was already promising profound changes in the traditional banking business model, the latest innovation in the technology—generative AI—portends a multisensory revolution in banking services. Indeed, GenAI, with its ability to collect and interpret financial data on a vast scale, could force some of the Arabian Gulf region’s biggest banks to rethink their already costly digital banking strategies.

GenAI’s insatiable appetite for data offers banks in the Gulf Cooperation Council states the prospect of not only a more intimate relationship with customers, but also improved management processes, such as fraud detection and other important back-office functions. Unsurprisingly, banks that are best able to quickly deploy GenAI are looking forward to a return on their bottom line, despite concerns over the human impact of the new tech.

Banks that integrate and scale GenAI could see a 22% to 30% improvement in productivity over the next three years, Accenture estimated in a February report on AI in banking, and up to 600 basis points in revenue growth, and 300 basis points in return on equity. In the US, the giant management consultant found, 73% of time spent by bank employees has a high potential to be impacted by generative AI, some 39% by automation, and 34% by augmentation.

Whether those figures would apply to GCC financial institutions is unknown; what is clear is that the Gulf’s petrodollar revenue and its governments’ ability to lavish significant sums to gain a position in GenAI, makes GCC banks financially well positioned to adopt the latest innovations and capitalize on market demand.

Boosting that scenario are highly positive consumer attitudes in the region toward innovative technology such as mobile commerce and the rapid take-up of digital banking by GCC institutions’ customers that sped the rollout of AI chatbots in customer service.

Major Gulf banks, including Al Rajhi Bank of Saudi Arabia, Qatar National Bank, and National Bank of Kuwait are already using AI to varying degrees. In the United Arab Emirates, Emirates NBD has partnered with management consultants McKinsey and QuantumBlack—the firm’s AI arm—with the latter reportedly involved in the design and early-stage deployment of generative AI use cases.

But with GenAI chatbots now available based on OpenAI’s ChatGPT and Alphabet’s Bard, workers can engage and use the latest AI iterations as digital assistants, transforming the way in which banks do business. New opportunities to drive customer engagement, such as gamification, also promise to increase customer retention.

Whether through automation or augmentation, Accenture expects dramatic results in the back, middle, and front offices,  predicting 25% of all staff will be impacted by both. The UAE is backing AI at the government level, with the minister for AI—a position created in 2017—noting in February that nine banks and nine other financial institutions are using blockchain solutions.

Evolution Or Revolution?

The UAE, which has its own AI university, has taken another technological leap, launching its own open-source, open-access large language model. The latest version, Falcon 2, offers itself as the Gulf’s answer to Google’s and Meta’s GenAI innovations. Falcon 2’s array of applications, and its developer’s claim that it is the only AI model with vision-to-language capabilities, makes it probable GCC banks will want to evaluate a homegrown variant.

Generative AI’s potential to rescript the business of banking implies almost limitless applications. However, having poured millions if not billions into digital banking, GCC banks may hesitate over another round of technology investment expenditure. And there is also the question whether they are nimble enough.

“Banks have been traditionally product-centric,” says Rajesh Saxena, CEO of Retail and Central Banking at Intellect Design Arena, a fintech designer for financial services. “This approach has made large-scale transformations within banks time-consuming, expensive, and risky, not least because the back-end systems and products are all embedded into a monolithic architecture.”

But if the cost base for GCC banks is similar to their international counterparts’—staff compensation at global banks makes up half the cost-base on average, Moody’s Investors Service estimates—they may wish to accelerate GenAI integration. Regardless of the potential upheaval, Saxena thinks the latest innovations could quickly up banks’ compliance programs, where generative AI’s speed and accuracy could contain reputational exposure to issues such as money laundering, etc.

“AI algorithms analyze vast amounts of data to assess credit risk, detect anomalies, and prevent AML fraud,” Saxena notes. That might be particularly relevant to financial institutions in the UAE. Earlier this year, the Paris-based Financial Action Task Force removed the UAE from its “grey list” for deficiencies in money laundering controls, a move that drew criticism from some anti-money laundering analysts.

Challenger Banks—Still A Challenge?

Many traditional banks’ initial indecisiveness in rolling out AI prompted many analysts to predict that more dynamism of challenger or neobanks could end their dominance. And challenger banks have doubtless upped the stakes, especially in customer service and with product innovations such as Buy Now, Pay Later (BNPL). But the premise that they are displacing traditional banks in the US and Europe is unproven.

So, what about the GCC?

With fintech valuations still high, the likelihood of traditional banks acquiring their upstart rivals is questionable. And venture capital, the main source of funding for many fintechs, is also under pressure. Data from PitchBook shows a downward shift in investor sentiment that might slow further funding rounds. Global deal activity fell to $350 billion last year, from $530 billion in 2022.

In the GCC, a digitally savvy population’s strong focus on user experience has helped neobanks disrupt the status quo for their traditional rivals. Fintechs in the region have benefited not only from innovative technology but from targeting a specific market segment, says Michael Ashley Schulman, partner and CIO at Running Point Capital Advisors.

That leadership could prove temporary, however, and may be just as likely to benefit traditional banks.

“GenAI can quickly make traditional banks more efficient and effective,” says Schulman. “It may threaten challenger banks by eroding competitive advantage more than it helps them; neobanks have been known for innovation for more than a decade, but the digital gap has narrowed and their frontrunner status may slip faster with generative AI.”

So, is that goodbye to further growth for neobanks? Not quite.

Some analysts, including Schulman, speculate the rivals could find a compromise that results in more collaboration. “An uptick in mergers and exploratory partnerships seems inevitable,” he predicts.

In the US and Europe, challenger banks have lost some of their luster with the realization that banking is built on relationships and that retaining customer loyalty necessitates a presence across multiple—often unexciting—business clusters.

Generative AI Comes To Islamic Finance

Setting the GCC apart is its importance as a center for Islamic finance, a market with assets of $4.5 trillion in 2022, according to November’s ICD-LSEG Islamic Finance Development report, the latest date for which figures are available. Bahrain and Dubai are positioning themselves as Islamic finance hubs, and applying generative AI would seem a natural progression that could have global implications for the two tech-centered economies.

One advantage: Falling costs of training could also move Islamic finance toward a wider adoption of GenAI. And while the interpretative characteristics of sharia law make adapting AI to Islamic finance a complex task, AI-driven applications and processes that offer opinions on financial products’ and transactions’ validity and adherence to Islamic finance law could further the GCC’s ambitions as a go-to hub.

That said, the need to address cultural and legal issues could hamper development of a dedicated AI tool, warns Yiannis Antoniou, practice head of Data, Analytics, and AI at consultant Lab49.

“The lack of a cohesive and widely accepted cross-border Islamic finance framework leads to complexity and inefficiencies that make multinational financial institutions’ compliance [obligations] especially difficult,” he says.

Automating work and deriving cost savings are just the beginning of what could be an extraordinary chapter in GCC banking. Yet, the real opportunity lies in harnessing generative AI to fuel growth—assuming the latest innovations do not overwhelm banks and result in a loss of control.

“Banks won’t be able to cordon off generative AI’s impact on their organization in the early days of change,” Accenture’s AI in banking report states. “It touches almost every job in banking.”

Still, with substantial financial resources and a falling cost of training personnel in AI, banks in the GCC have an opportunity to overtake the successes of their maverick fintech rivals.