Complex Made Simple

Exclusive: Is the ME ready for financial disruption with M&A  

On January 30, 2019, ADCB announced they agreed to merge with UNB and Al Hilal Bank, according to a statement. The merger would create an entity with around $113bn in assets.

According to Cass Business School’s Mergers & Acquisitions Research Centre (MARC), following the 2008 financial crisis, an average 38% of annual M&A activity has taken place in ‘non-traditional’ M&A markets (excluding North America, Western Europe, Australia, New Zealand and Japan) (Exhibit 1). In 2018, this fell to 35%.

The UAE had the highest M&A attractiveness index, developed by MARC, with a 26 global position.

“The ADCB merger was great news. There is not many happening in the region. When you have big deals like that, it looks like a lot of consolidation will take place,”  Dr Naaguesh Appadu, Research Fellow in the M&A Research Centre at Cass Business School, London, told AMEinfo in an interview.

“The financial sector has changed dramatically due to changing regulations starting in 2007 in addition to the introduction of fintech,” he adds.

M&A is disruptive just as tech is, so the region needs to be ready.

Measures to reduce disruption

One thing M&As do is reduce the competition, and turn them into allies. Business marriages and acquisitions are strategic but lead to disruption in staffing, such as layoffs.

“But disruption to customers is worth noting because they are used to a certain way of doing business and might feel that the staff they trusted won’t be there for them,” said Appadu.

“Organizations should send emails or communication to reassure the customers that the service they are used to will only get better.”

In reference to the ADCB merger, Appadu said that Al Hilal purposely did not go through a name change.

“As a Sharia bank, they have niche customers and if they change names they could lose a number of their clients,” he said.

M&A keys: Tech investments

Following an M&A deal, there will be some cost synergies, asset restructuring, and redundancies to take care of, but the merger needs to have set aside enough funds to invest in technological aspects. Consolidations should aim at not just growth and grabbing market share but also at being on top of the league in terms of technology so as to derive efficiency and not lag behind, according to Appadu.

“If you don’t consolidate and invest in tech, you will lag behind, if not die, and lagging behind means consumers will migrate to other banks that have evolved and provided the technologies, and efficiencies needed,” Appadu said.

Technology: A double-edged sword

When it comes to financial data, clients’ data security is paramount as part of risk management strategy, and banks usually employ the latest data protection technology and protocols to avoid account fraudulence and costly mishaps.

“However, let’s not forget about AI. It’s happening. I noticed that many bank employees are losing their jobs to machines,” said Appadu.

“Previously at a bank branch, you had a desk with 5 or 6 cashiers. Now I see 2 people directing people on how to use the machine.”

On the other hand, Appadu added that AI, when coupled with risk management, is able to detect unusual activities and alert the bank and customers in time to avoid accounts being compromised.

“Loans, mortgages and other services are today at the touch of a button with technology, and social media is heavily used to promote insurance products, capital market investments, personal loans, private banking, corporate banking, and others. 5-10 years ago this would not be possible.”

Finally, Appadu said that Blockchain is a huge challenge with its P2P format and decentralized operation that could potentially make traditional banking obsolete.

“I’m still cautious about it. It’s coming and it is new. Banks won’t die, but will need to make improvements to adopt, absorb or counter the Blockchain phenomenon,” Appadu concluded.