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The Battle for Relevance Keynote Address Delivered by His Excellency Dr. Mohammad Y. Al-Hashel, Governor of the Central Bank of Kuwait, at the International Banking Conference Held on September 23, 2019 at the Four Seasons Hotel in Kuwait City - Kuwait

We live in uncertain times.

Amid weakening global governance

and growing trade disputes

Policy space is shrinking and public trust in institutions is falling.

The banking industry is at an inflection point

with new trends emerging

and new challenges to overcome.

The impact of technology is visible in our lives

and on the financial sector.

Banks must be agile and adapt to cater to the changing needs of people

keeping in view the ultimate goal

of achieving sustainable prosperity for all.

It is time to re-examine our role

To navigate through these testing times.

Will we shape our future

or will others shape it for us?

Bismillah-ir-Rahman-ir-Rahim [In the name of Allah, the Most Gracious, the Most Merciful]

Representative of the patron of this conference His Highness the Amir of the State of Kuwait, may Allah protect him,

Your Excellency Sheikh Nasser Sabah Al-Ahmad Al-Jaber Al-Sabah, Acting Prime Minister,

Excellencies, Honorable guests,

Assalam-o-Alaikum wa rahmatullahi wa barakatuh [May the peace, mercy, and blessings of Allah be upon you]

It gives me great pleasure to welcome you today to this conference

I would like to start by expressing my deepest thanks and appreciation

to His Highness the Amir

for his patronage of this conference

and I ask Allah Almighty to bless him with good health

Allow me to extend my utmost thanks to their excellencies the governors of central banks

the speakers, and the attendees, as well as the local banks and telecom companies

My thanks also go to my colleagues at the Central Bank of Kuwait (CBK), who contributed to the organization of this event.

The picture displayed before you shows the fossil of a dinosaur that lived on Earth 150 million years ago.

This dinosaur is unique among its counterparts who all went extinct.

It is called Archaeopteryx, which means ancient feather.

The descendants of this dinosaur were more resilient, able to adapt to severe conditions and survive catastrophes.

Scientists believe that they are the ancestors of todays birds.

In some ways, we can all take lessons from Archaeopteryx to remain relevant, inspiring the title of my address The Battle for Relevance.

Over the past half century, the banking industry has enjoyed exceptional growth.

It has played a critical role in supporting economic growth around the world, despite a few crises in which it was involved

During normal times, one would expect banks to continue operating as they have in the past,

with perhaps a greater focus on product innovation or operational efficiency.

But we are not living in normal times.

Today, the global banking industry is at a major inflection point,

facing several internal and external challenges that are coming together to create a perfect storm

Certainly, the industry will not be able to weather this storm by holding on to the same course it has pursued for decades.

Rather, it must reinvent itself for the future.

I would like to seize this opportunity to share a few thoughts on our vision for the future of the banking industry

by reflecting on three key themes

a brief overview of the major challenges, the future of the banking industry, and the role of stakeholders.

Let me start with a brief discussion on the key challenges that the banking industry faces today

namely the state of the global economy, the revolution in financial technology, and the rapidly evolving needs and expectations of customers.

These three challenges evidently call for thorough reflection.

First, let us look at the global economy where headwinds are intensifying.

The IMF has twice lowered its global growth projections for 2019

to 3.2%, with developed economies expected to grow at a much slower rate of 1.9%.

A key driver of this slowdown is obviously the economic uncertainty

brought about by rising trade disputes, protectionist policies and geopolitical risks.

If these tensions continue, the actual growth rate might be even lower than these projections.

For instance, the Bank of England estimates that a 10% increase in tariffs between the US and its trading partners

could lead to a reduction of 2.5% in US GDP and 1% in global GDP.

Similarly, the Institute of International Finance (IIF) highlights economic policy uncertainty as a key risk to business sentiment.

It estimates that economic policy uncertainty in both the US and China is at a record high that even exceeds 2008 crisis levels.

Its negative impact is undoubtedly being felt in the economic environment and investment climate,

in terms of greater restraint, reduced investments, and lower consumption, as can be seen today.

For example, prominent indices in markets across the globe have declined over the course of one month by an average of around 7% in mid-August.

Another factor linked to the economic outlook is the role of monetary policies.

During the last decade, economic growth has mainly been driven by the use of unconventional monetary policies.

While these policies have supported economic recovery following the global financial crisis by ensuring massive liquidity and a low interest rate environment,

they have led to other costly consequences.

Global debt has in fact ballooned to over $246 trillion, nearly 3 times the global GDP.

While household debt has seen a gradual increase of 3% per annum,

the real growth in debt lies with governments, financial institutions, and corporates.

In particular, government debt has doubled since 2008, from $32 trillion to $67 trillion,

especially with governments in developed economies having borrowed heavily over the past few years.

Likewise, global corporate debt has nearly doubled over the past decade, from $37 trillion to $73 trillion,

even surpassing the increase in government debt.

But contrary to government debt, two-thirds of the growth in corporate debt has come from developing countries.

This poses a serious risk to these economies, especially where the debt is in foreign currencies.

We have also seen the quality of borrowers deteriorate.

Bonds rated BBB- and below now account for half of global corporate bonds, compared to just a quarter in 2007, before the financial crisis.

Over the past two decades, global debt has grown on average by 6% annually.

If these rates continue and global GDP grows by 3.5% per annum as projected

we could see global debt over the next 20 years reaching $780 trillion or 5 times the global GDP.

Clearly, these figures are extremely high, unprecedented, and unsustainable.

Record high debt levels are likely to pose increasing risk of defaults, especially once monetary policy tightening takes course,

potentially hurting the quality of banking assets.

More critically, low and negative interest rates in some of the advanced markets have curtailed banks profits , jeopardizing their longer-term viability

Collectively, these factors have serious implications for financial stability in general and involve significant threats that need to be addressed.

Beyond banking, there is an increasing risk of policy inaction amid weakening global governance.

During the global financial crisis of 2008, leaders in advanced economies joined hands to fend off depression through a well-coordinated and robust policy response.

But, are we going to witness a similar response and coordination in the face of todays challenges,

notably the increasing risk of a looming US recession in the next 12 months, according to the forecasts of the US Federal Reserve?

It is beyond any doubt that these are grave risks that should be considered.

This was an overview of the economic environment and the challenges we are confronted with.

The second challenge is the impact of technology on the banking industry.

Financial technologies are fast-evolving and being adopted at a breathtaking pace.

They are transforming the economic landscape and disrupting many traditional industries along the way.

Digital payments, artificial intelligence, and data analytics are changing the way banks operate and interact with customers.

Today, FinTech firms provide direct financial servicing and are beginning to replace financial institutions.

According to McKinsey, five major banking business segments are particularly at risk:

consumer finance, mortgages, SME finance, payments, and wealth management,

which puts up to 40% of bank revenues at risk within the next five years.

Part of the reason is that FinTech firms can provide access to financial services in a more efficient and cost-effective manner.

For example, some FinTech lenders have up to a 400-basis-point cost advantage over banks.

Also, payment transactions that used to take up to 5 days to process can now be completed in less than 5 seconds for less than one-tenth of the original cost.

However, the real source of concern is not these small firms, but rather the Big Techs,

the likes of Facebook, Amazon, WeChat, and Alibaba

They started competing with banks to provide financial services,

building on a large and captive user base,

low online acquisition costs, and a better understanding of their customers through their analysis of big data.

Moreover, they dont face the same regulations and associated costs that banks do.

Banks could find themselves sidelined by the Big Techs if they fail to actively adopt and fully utilize the available technologies.

To prevent this from happening, banks should not content themselves with the mere automation of processes.

Rather, they will need to go back to basics and revisit the core utility of their institutions in order to come up with solutions at the service of their communities.

The third challenge is the major shift in customer needs and expectations.

Todays customers are different than the customers of yesterday.

They enjoy high levels of digital literacy and expect on-demand services, wherever and whenever they desire.

One of the reasons behind this shift is probably the growing number of millennials.

For instance, in Kuwait, approximately 58% of the population consists of millennials.

And studies show that around 57% of millennials would change their banks for digital platforms,

and 82% of consumers all categories combined including millennials first go online if they are looking to buy a financial service.

In short, banks have no choice but to go digital.

They should draw lessons from other industries that have been through the same transformations.

The recent history of the mobile phone industry is a case in point.

In 1997, 60% of the mobile phone market belonged to the specialist mobile phone producers Nokia, Motorola, and Sony Ericsson.

Today, that same market share has been captured by Samsung, Apple, and Huawei, all of which do not belong to the mobile phone industry.

The incumbent mobile phone companies of the 90s failed to recognize the evolving needs of their customers.

Ultimately, their complacency saw them being pushed to the fringes of a market they once dominated.

Something similar could happen to the banking industry.

Unless it pays attention to and serves the changing needs and aspirations of its customers,

it might be sidelined, especially in the midst of a fierce competition from telecom companies and technology firms.

Take the example of Ant Financial, WeChat Pay, and M-pesa,

which are firms that were launched by technology and telecom companies

All three have enjoyed tremendous growth to become the largest providers of financial services in their respective markets.

By leveraging technology and adopting a customer-centric approach, they have surpassed the largest banks

in their markets, benefiting both themselves and their communities.

They have promoted financial inclusion, which rose in China from 64% to 80%

and from 42% to 82% in Kenya where M-pesa operates a firm established by a university student.

Any of the three major challenges described the difficult economic environment, the growing role of technology, or changing customer expectations

would by itself have been a lot for the industry to address.

But taken together they are leading to a perfect storm that the industry can no longer afford to ignore.

The banking industry should reflect on these challenges and seek to address them.

That said, the banking industry must transform itself.

But for a well-established industry that was shaped over centuries, where should this journey of transformation begin?

I do not pretend to have a conclusive answer to this question.

However, I believe that banks must simultaneously win five battles if they are to survive:

1. the battle for customer loyalty,

2. the battle for value,

3. the battle for efficiency,

4. the battle for resilience, and

5. the battle for talent.

The first of these battles is for customer loyalty.

Banks must decide whether they want to be close to their customers and fulfill their needs

or remain content to be mere account managers whereby someone else owns the relationship with the customer and they would be easily replaceable.

As things stand, the banking industry is surely struggling on this front.

Today, no bank is placed among the top twenty global brands in terms of value.

Even banks which were there a decade ago have since slipped off the list.

After all, banks can no longer take customer loyalty as a given.

A recent study conducted by Accenture found that more than 40% of customers have used digital firms for financial services in the past year.

A good example can be found in South Korea where access to financial services is by no means limited, as financial inclusion stands at 95%.

Nevertheless, Kakao Bank, which was launched in 2017 as a digital bank by the Korean Internet company Kakao Talk,

was able to acquire over 300,000 customers within the first 24 hours of its launch, one million within five days, and six million customers within a year,

equivalent to a third of the number of customers of Shinhan Bank, the largest bank in South Korea.

So, will it be long before Kakao Bank becomes the largest bank in South Korea?

To win the battle for customer loyalty, banks must provide value.

And here lies the second battle.

Banks need to develop their products and services as well as their means of delivery to ensure that customers needs are met.

It is no longer enough to provide e-services.

According to the Accenture study, around half of customers said they wanted relevant advice and product information from their banks.

Banks need to focus on providing long-term value for customers, rather than viewing them as a short-term sales opportunity.

We have already seen the harmful impact of this short-term outlook that led to the subprime-mortgage crisis,

as banks sold mortgages to customers who couldnt afford them.

Banks profits surged in the short term, but everyone suffered in the end; not only customers, the broader economy and community, but also the banks.

To win customers loyalty and provide value, banks must operate in a highly efficient manner.

And this is the third battle.

A critical front in this battle is the leveraging of data.

Banks need to use available data to improve their predictive analysis, not just for operational efficiency and planning,

but also for insights into customer behavior and preferences.

What is particularly surprising to me is that banks, though custodians of vast quantities of customer and transactions data, are not utilizing it effectively.

Banks can also enhance their efficiency through digital means, benefiting both their customers and themselves.

Customers would get better, cost-efficient, and faster services;

and on the other hand, banks would reduce costs by 80 to 90% according to recent studies, saving around $400 billion a year.

By winning the battle for efficiency, banks will not only be able to better engage with customers and achieve higher satisfaction rates, but also curtail operational cost.

The fourth battle - the battle for resilience - is crucial to win the previous battles.

Here again, advanced technologies of data analytics represent a major enabling factor,

as they ensure quick access to information, accurate predictions, in-depth analysis,

and enhanced capacities in risk identification and management, consequently leading to enhanced flexibility and resilience.

It is beyond any doubt that each of these battles requires the mobilization of the right soldiers and commanders.

This brings us to the fifth battle: the battle for talent.

Bank staff will no longer be limited to mostly finance professionals.

Instead, banks should expand their pool of competencies to include artificial intelligence, data analytics, and software developers.

They might even need to recruit psychologists, philosophy majors, and other professionals with diversified skills that can bring in wider and deeper perspectives.

These five battles are fought differently by different companies.

And lessons can be drawn from the experiences of others. Let me share with you three examples.

Kodak was the dominant name in the photography market for over a century.

At its peak, Kodaks share of the photographic film market was over 80% in the U.S. and around 50% globally.

Kodak was making significant profits from the sale and development of camera films and expected this trend to continue.

While the arrival of digital cameras was changing industry dynamics,

Kodak didnt want to risk cannibalizing their own camera films business

and failed to see the potential of new technology and the risk from new competitors.

The irony here is that Kodak was the inventor of the first digital camera in 1975.

It chose instead to stay in its comfort zone, conducting business as usual,

failing to understand the evolving needs of their customers.

That led to its ultimate demise, as Kodak filed for bankruptcy protection in 2012.

Contrast this with Apples launch of the iPad.

Despite the iPads potential to cannibalize its own computer business,

Apple went ahead in order to serve the needs of its customers.

It was not afraid to embrace change, even at the cost of its traditional business and products,

and the iPad proved to be one of Apples most successful products.

Equally critical is to timely identify and act upon valuable opportunities amid shifting market preferences.

Microsoft missed such an opportunity with mobile operating systems,

which Bill Gates termed, in his own words, as his greatest mistake ever.

The greatest mistake ever is whatever mismanagement I engaged in that caused Microsoft not to be what Android is.

Android is the standard non-Apple phone platform.

That was a natural thing for Microsoft to win. It really is winner take all.

If you're there with half as many apps or 90% as many apps, you're on your way to complete doom.

There's room for exactly one non-Apple operating system and what's that worth?

$400 billion that would be transferred from company G to company M."

Esteemed audience,

We have seen how Kodak lost all its battles and ended up filing for bankruptcy protection

and how Microsoft missed the opportunity to capture a massive market,

while Apple deftly waged its battles, which benefited both the firm itself and entire communities.

To sum up, the banking industry has no other option than to win these five battles:

the battle for customer loyalty,

the battle for value,

the battle for efficiency,

the battle for resilience, and

the battle for talent.

Losing any of these battles will have dire consequences on the banking industry.

Ladies and gentlemen,

Allow me to tackle the last theme of my address, the role of stakeholders concerned with enabling the banking industry.

We are ahead of testing times. Banks cannot navigate through these times alone.

They need the support of other stakeholders, namely educational institutions and regulatory authorities.

Educational institutions have the critical role of preparing graduates for future jobs in the banking industry

jobs that are fundamentally different from jobs today.

The World Economic Forum (WEF) estimates that 75 million jobs will be displaced by 2022, while 133 million new roles will emerge.

The question is are we preparing our graduates for disappearing or emerging jobs?

The other key stakeholder in the banking industrys transformative journey is the regulator.

Regulatory authorities need to strike a delicate and difficult balance between protecting consumers and safeguarding financial and monetary stability,

and at the same time providing support and facilitating growth and innovation in the banking industry.

With a view to providing support to the banking industry in its transformation journey, regulatory authorities should focus on three main aspects:

1. promoting innovation 2. enhancing collaboration, and 3. building capacities.

Last year, we launched our FinTech Regulatory Sandbox, enabling our youth to develop innovative software products and services

and test them in a safe space, thus ensuring the safety and soundness of the financial system without stifling innovation.

At the CBK, we are also preparing the infrastructure for a truly digital economy.

We are developing a state-of-the-art infrastructure project, the Kuwait National Payment System,

which will be made up of eight systems that enable FinTech deployment.

Internally, we are re-engineering all regulatory processes with the aim of ensuring further digitization in all supervisory functions, while focusing on SupTech.

In this regard, we are working on initiatives such as the Open Banking Framework and the E-KYC framework.

In terms of collaboration, the CBK is keen on cooperating with regulatory authorities at the local, GCC, Arab, and international levels.

For example, we are working with Arab countries on developing the Arab Payment System,

in addition to the GCC Real Time Gross Settlement System and a GCC-wide cybersecurity framework.

Within Kuwait, we also engage closely with different government and regulatory bodies.

Finally, just like banks, regulatory authorities also need to enhance their capacities.

And the CBK strives towards that end.

Last year, 1353 CBK staff enrolled in 232 specialized training programs.

On this occasion, I am delighted to launch the Kafaa initiative for youth development,

developed by the CBK and Kuwaiti banks under the supervision of the Kuwait Institute of Banking Studies.

Kafaa provides specialized programs aiming at developing the bank industry and supporting its transition.

These include post graduate studies in internationally renowned universities, as well as cyber-security, risk management, and Shariah audit programs, among others.

Inshalla [God willing], this tree will keep on growing.

Moreover, we take pride in the role assumed by the Kuwait Institute of Banking Studies,

which functions under the auspices of the CBK in collaboration with Kuwaiti banks,

offering advanced programs that benefited 4,762 banking staff during the last year alone.

We are also proud that Kuwait hosts and sponsors the IMFs Middle East Centre for Economics and Finance (CEF),

which provides exceptional training for candidates from across the Arab world.

Last year, 1,477 candidates benefited from programs run by the Centre, at a total cost of around $9 million.

In conclusion, it is quite clear that the banking industry can no longer afford to continue conducting business as usual and ignore the issues that I have highlighted.

It must strive to win its five battles.

Regulators and educators should provide an enabling environment to such a transition.

As Einstein said: A new type of thinking is essential if mankind is to survive and move toward greater levels.

Esteemed audience,

The banking industry is undeniably at a crossroads.

There are two paths that it can take.

It can either continue to operate the way it has in the past,

ignoring the many challenges that it faces today

until it loses its dominant position

to a diverse and growing number of competitors,

and is subsequently pushed to the fringes of the industry;

Or it can choose the other path, which

- although fraught with challenges and swarming with competitors -

offers plenty of opportunities.

It requires the industry to reinvent itself in order to become closer to customers,

more efficient, more digitally enabled, and therefore better equipped to address the challenges of the future.

Distinguished guests,

I thank you for having honored us with your presence and look forward to insightful discussions.

Assalam-o-Alaikum wa rahmatullahi wa barakatuh

The Description of الكلمة الافتتاحية للمؤتمر المصرفي العالمي: صياغة المستقبل التي قدمها معالي الدكتور محمد يوسف الهاشل