Retail banking product development and structuring
The banking industry in the UAE has undergone some significant changes in 2016. Despite the challenging environment and intense competition, the outlook for the UAE banking system remains stable supported by the recent stability in oil prices, leading to a revival in economic activity, and the growth in UAE’s non-oil economy.
Nevertheless, banks and financial institutions are under immense pressure to boost their returns. At the forefront of this pressure is declining Net Interest Margin (“NIM”) which is driven by high cost of funds and intense competition in the sector.
With the decline in low-cost government and government-related deposits, as a result of lower oil prices, banks have been forced to raise funds through costlier channels, resulting in additional pressure on their margins. As the cost of funds for banks has been increasing, the compression in margins is expected to continue in 2017. Given the rising intensity of competition in the sector, passing on this cost to the customers would prove difficult. In this stormy environment, it is crucial for banks and financial institutions to re-consider their strategic direction in relation to product offering and identify new pockets of demand to increase profitability.
Despite the high number of market participants offering retail banking services in the UAE, there is very limited differentiation in product offering, particularly with mortgages. Currently, most players are offering “plain vanilla” products where differentiation is primarily through rates. This forces them to adopt aggressive sales tactics and promotions on existing products. However, this is not an effective solution, as it further decreases their profitability and increases their customer acquisition cost.
Differentiation through rates alone is not a sustainable proposition, especially with the increasing number of digital aggregators and comparison engines which makes rates offered on different products easily comparable and transparent for customers online.
All of these factors further push retail banking products, set at uncompetitive rates, away from customers. This raises a very important point, how else can banks and financial institutions differentiate their retail product offering?
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