The retail banking business faced significant challenges in recent years, especially in 2021. The development of technology that runs too fast shifts the customer behavior of the banking industry and leads to a high demand of digital banking. Initially, the banking industry, including Islamic banks, still had more time to adapt to digitalization. However, the COVID-19 pandemic has forced people to isolate themselves, keep a distance from others and limit mobility, encouraging the banking industry to implement digitalization ahead of its initial schedule.
Moreover, the increase in the population of the millennials and Gen Z who are now at productive ages and are more technological-savvy also challenges the structure of the banking industry. The increase in the percentages of such strategic markets initiates the establishment of new banks, either called digital banks or neobanks. This phenomenon challenges the status quo and forces traditional banks to digitalize as soon as possible.
While bigger banks may have no difficulties adapting to digitalization, smaller banks, especially those with a retail banking business model, perhaps will be in difficulty as they do not have enough capital and funding to support the technological changes. Thus, 2022 could be sending a red alert that could be evident of what Bill Gates once said in 1994: “Banking is necessary, banks are not.”
Review of 2021
However, other than digitalization, Islamic banks have their own problems. In spite of having positive growth, Islamic banks in many countries have declining growth compared with one or two decades ago. According to the Islamic Financial Services Board Financial Stability Report 2021, the Islamic banking segment’s performance grew by 4.3% in 2020, compared with 12.4% in 2019. It is not merely due to the pandemic, as in some countries, the market share of Islamic banking is stuck at a certain level with difficulties to grow even before the pandemic started.
Islamic banks, therefore, should revisit their strategic positioning and explore more niche areas based on their specific characteristics. In fact, many stakeholders of Islamic banks still cannot see the difference between Islamic and conventional banks. Moreover, as conventional banks can also have Islamic windows, there is no value creation that fully-fledged Islamic banks can offer, as being Shariah compliant has not become a differentiation. Therefore, 2022 is a decisive year for Islamic banks, particularly those who focus their services in the retail banking sector. They should be able to catch on with the changing trends in the retail banking industry, while at the same time introduce new products and services that cannot be offered by conventional banks.
Preview of 2022
There are some trends that may change the retail banking industry which need to be anticipated by Islamic retail banking in 2022. First, there would be more retail banks utilizing artificial intelligence (AI). AI is not only used to assist banks in identifying opportunities, promoting innovation, as well as supporting decision-making and communication strategies, but is also used to facilitate customers in getting better advice and solutions for their financial needs.
Second, there is the use of application programming interfaces (APIs) to promote an open banking business model. This facilitates further collaboration of banks with other financial service providers to fulfill customers’ needs. Such a business model, however, increases the complexities of banking services which would need the attention of banking regulators and supervisors.
The next trend is that more banks and financial institutions will use automation using internet of things (IOT), robotic process automation (RPA) and digital process automation (DPA). These technologies make banking and financial services become more convenient to customers, therefore banks that cannot adjust to the technological developments will be left behind. Other than the aforementioned trends, the need for other technologies such as cloud computing, blockchain, as well as cybersecurity will also be growing in 2022.
Conclusion
Islamic banks should move faster to revolutionize their Islamic retail banking services. The positive side of Industry 4.0 is that every institution could have the same starting line. Every bank is still looking for the most suitable business model for itself and for its customers. Therefore, time is essential for Islamic retail banks to benefit from the first-mover advantage.
Bigger Islamic banks with a huge amount of funding should digitalize most aspects of their retail banking services. IoT, RPA and DPA should be incorporated into their new business model in order to anticipate the shifting behavior of existing customers and to attract new customers. Banks should enhance their transaction banking services too, as these types of services are highly sought-after by customers nowadays.
To promote the specificities of Islamic finance, Islamic retail banks can use AI to screen for high-quality customers, especially those who are worthy of receiving Mudarabah financing. Islamic retail banks should adopt blockchain too in order to strengthen their risk mitigation. Such financing can be offered directly to investors using an investment account platform in order to promote more specific products and services that cannot be offered by conventional banks.
On the other hand, smaller Islamic retail banks should find alternative ways to sustain their business. They can adopt an open banking model and find partners to develop their specific business ecosystem in order to grab and maintain specific markets. In this scenario, the adoption of shared APIs is inevitable.
There is always a way for Islamic retail banks to adapt to the changing landscape of the banking industry. Islamic retail banks should equip themselves with the necessary skills, knowledge and infrastructures. Failing to do so may result in a declining trend of Islamic banks. Or even worse, erase the hard work that we have done for the last few decades.
Dr Ronald Rulindo is the founder of BBS-Islamic Business Development Corporation and a lecturer of the Islamic Business Program, Faculty of Economic and Business, University of Indonesia. He can be contacted at [email protected]