What does the future of banking look like, and will we still need physical branches five or 20 years from now? Will there be room for relationship managers? In part two of our interview with Fernando Morillo (LinkedIn), the group head of retail banking at Mashreq, he dives into these questions and more — including where he sees open finance and AI playing a role in managing bank-client relationships, and the bank’s strategy for its different markets.

A quick refresher about Fernando: He has been with Mashreq for nearly three years, and is in charge of everything from the retail experience through digital propositions Mashreq Neo and NEOBiz. A tech nerd at heart, Fernando’s thoughts on what he viewed as a “boring” industry — banking — completely changed when the internet came along. Before working at Mashreq, he had a run at McKinsey & Co, where he was focused on banking, ins., retail, and digital across Europe, the Middle East, Africa, and the United States.

If you haven’t read part one of our interview, he discusses everything from how AI will impact jobs in the banking industry to the transformation of chatbots and the embeddedness of software into everything a bank does.

We spoke over the course of multiple days in Cairo and Dubai. Edited excerpts of our conversation follow.

KEY TAKEAWAYS from part 2:

• Banks have one big edge over fintechs: Scale. He’s not losing sleep over fintech startups, saying some may hit escape velocity, but others will run into the wall — and others, still, will become service providers to larger institutions.
• Where will you speak with a human? Go to a branch? When the regulator or the complexity of a transaction demands it. When you want to (if you're HNW). Or if you’re a corporate client with a complex transaction.
• Open finance has the potential to transform bank-client relationships, giving clients a more comprehensive insight into their finances and banks the knowledge they need to provide better advice and become more embedded in clients’ decisions.

E: Where does the competition between established banks and non-bank financial institutions shake out? There’s an extent to which our region — the GCC in particular — is overbanked. And with the end of the era of free money, it seems there could be an opportunity for people with larger balance sheets, deeper pockets, longer-term views, maybe less shareholder pressure to make a play.

FM: Yes, and all of that comes as we have these disruptive technologies starting to make a difference in the industry. I think there’s an opportunity for disruption across industries, not only banking.

In banking and finance, we operate in regulated markets. That’s certainly going to have an impact on how much change or consolidation will take place. But incumbents will face a lot of disruption unless they adapt, change their behavior, and operate with the nimbleness of software houses.

What clients want from you is effectively software solutions applied to personal finance and their interactions with digital ecosystems. If you are not the supplier of those solutions, it will be increasingly difficult for you to be competitive, and that will trigger consolidation.

E: So will we see incumbents replaced by new market entrants?

FM: Frankly, I don’t think it will be a massive disruption — there’s enough space for everyone. There are incumbents who will survive — the ones who adapt, who understand their clients, and serve them digitally.

And not all of the new entrants — the fintech players and neobanks — will thrive. There’s a bit too much hype about fintech players right now, if you ask me.

The reality is that only a handful of fintech players will reach a critical threshold with a sufficiently differentiated product. There is a lot of space in the middle for fintechs that can provide banks with services and solutions that banks are not naturally positioned to build.

Mashreq recognizes the critical role fintechs play in reshaping the financial landscape and we’re committed to collaborating with these entities to bring cutting-edge solutions to our customers.

E: So the future for fintechs is to become service providers to banks?

FM: As software houses, fintechs have a ruthless focus on solving a client’s single, specific problem. Banks, on the other hand, offer specific solutions to a very broad array of problems. So it's very difficult to have the perfect solution for each of our problems in the way we service our clients, and that’s where working with fintechs can be very helpful.

It's not a binary situation. We'll see some banks thriving, others having to be integrated into larger institutions. We'll see some fintechs that will go straight to clients and become direct competitors of banks. And we’ll see some fintechs that will be fantastic providers of solutions to banks and to other fintechs.

And, of course, we’ll see many fintechs that will not make the cut. Think about it: At the beginning of the 20th century, there were several hundred automobile producers in the United States. How many are there today? Eight? Ten?

And in the meantime, there is so much banks can learn from how nimble fintech players are. At Mashreq we have units that work across functions in an agile way. Scrum masters in a bank… .Who’d have thought that was possible a few years ago?

E: How can banks know enough about the totality of your finances to make good recommendations in an AI world?

FM: That’s where open finance comes in — an emerging set of standards that will allow you to get an integrated view of your financial position regardless of where you are or what you’re doing. You can see how much money you have, how much money you owe, how much money you should save in order to manage your life financially. That's how banks will become part of your life in use cases that transcend the product, and actually tell you whether it is financially sound for you to make that transaction or not.

And that’s the direction of travel. Big data is already there. AI is getting there. And now, open finance is being established in many countries — it’s a data structure and series of pipes that will allow people to share their financial data from one institution to another. I’m very excited about the new use cases that it will make possible.

Think about how easy it will make going shopping for a loan, for example, if you can get data on five different banks and see their tailored offers, all in a single portal.

E: What is the role of the physical branch in this world? Will there be branches 5 years from now? 20?

FM: Branches are the apotheosis of the universal banking approach, where all segments go and interact with their finances — a one-stop physical shop that’s still a big part of the banking system worldwide.

We’re moving in the other direction at Mashreq — in the UAE, we’ve cut our branch network by 85%. It’s been a deliberate move driven by client demand. People don’t want to go to a physical place and wait in line to do something they can do online.

For instance, Mashreq NEO in the UAE is a true reflection of this approach — a full-service, branchless bank proposition that provides best-in-class customer experience. Mashreq NEO was the first in the UAE to provide access to international markets for investments, including foreign equities, gold trading and foreign currency accounts. It is the largest digital proposition in the region that offers a full suite of banking products, both transactional and discretionary services and investment products.

But I think we’ll still see a need for physical branches in a handful of types of situations. The first involves complexity, where it is too difficult for a client to sort out a solution by themselves. The second is regulatory — some things still need to be done in person. And the third is more high-value interactions in which what I call ‘the tail of complexity’ requires an interaction with a human. This often cannot be a video call or a phone call but a conversation that has to take place across several interactions with data and an exchange of ideas.

Even as AI becomes more able to read human intent and emotion — and it’s getting there — other situations will simply be better managed face-to-face by a human, who understands the needs of the person sitting across from them at a human level.

At Mashreq we are expanding our touch points (exploring newer channels) across the UAE offering more enhanced services to our customers. And branches will continue to play an important role, albeit a different one.

We see the branches evolving to serve the changing needs of customers, specifically those who require deeper personal engagement and advisory services such as purchasing a home, financing a business or discussing legacy decisions.

E: How often will I speak with my relationship manager in the future?

FM: Part of the answer depends on whether you’re a small or large business, whether you’re a private banking client or other. More and more, you’re going to get good access to data and sound advice over your device. And you’re going to be able to click in the app to bring your RM into the conversation through chat or video in the digital space.

And then if it’s more complex, perhaps you’ll want to see the RM in an office, or the RM will come to you.

Think of it this way: If it’s tweaking your portfolio, you’ll probably do that 90% or more of the time in the app. Maybe you’ll tap to call in your RM if you have an additional question, but the AI will be great at portfolio construction.

Where you’ll want a face-to-face interaction isn’t when you’re gently rebalancing a portfolio, but when you feel that you need to completely burn it down and start from scratch because you worry you may have gotten the allocation completely wrong.

E: What about at the corporate banking end of the scale?

FM: Corporate or wholesale is really outside of my purview, but I would expect you’ll see AI tools being used by bank relationship managers, risk teams, and the like to ensure they better serve their corporate clients. But robo-advisors for large corporates really don’t seem to be in the pipeline now. Mashreq made substantial progress with the introduction of new digital platforms in its investment banking sector, contributing to enhanced operational efficiency and client servicing. It’s additive.

E: How does your strategy on digitization differ in, say, Egypt or Pakistan versus the UAE?

FM: They’re really different propositions, even if they’re all moving in the same direction.

In Egypt or Pakistan, it’s about digitizing the country’s financial system and driving financial inclusion at large — bringing more people and SMEs into the system is what’s going to move the needle for the industry and for society. It’s not the time yet to come up with advanced, super-niche products.

In a developed economy like the UAE, the foundations for digital are already in place. So the next big thing is digitizing wealth management and providing clients with more advanced products and services that give them the tools they need to manage their finances in the long run.

And in the case of SMEs in the UAE, it's more about digitization of loans and bringing down the cost of lending. And that will roll out to less-developed economies as they mature.

E: What’s driving growth for you folks? Your full-year results were fantastic.

FM: In the case of the UAE, the country has had a phenomenal few years. We’ve benefitted from great management of Covid, the recovery in oil prices, and from the simple fact that the UAE is a great place to live. That’s made it a global hub for business and sparked a property boom. And as a bank, we are growing with that — it’s not just us at Mashreq but the sector as a whole. And, of course, the interest rate environment is great for banks because it provides a tailwind.

In parallel, the bank has a truly entrepreneurial culture, so we’ve really gone for growth — growing our assets, our liabilities, our services. And as we’ve done so, our risk management approach has been just right.

Our culture of innovation and obsession with client experiences and digital have allowed us to outperform the market. It's this obsession with coming up with something cool and good for the market that creates the numbers.

And let’s not forget our greatest asset — our people, who are instrumental in our ability to deliver a superb customer experience and develop award-winning products and services.

E: And in Egypt?

FM: Our operation is much smaller in retail in Egypt. For the most part, we are a corporate bank there, but we see huge potential for growth in the mass market. I think we can play a fantastic role in driving financial inclusion, which is going to be a massive catalyst of growth in the country in the long term. With 110 mn people, the opportunity is immense.

We want to be the ones who gave the middle-aged entrepreneurs of tomorrow their first accounts, their first credit cards, their first loans. We want to look back in 10 years’ time and say we did our bit on that front.

E: What’s the biggest surprise more than two years into your time with Mashreq?

FM: The quality of the people — Mashreq has always been known as a business that can choose and develop great talent, but now that I’ve been here, it’s amazing to see how deep that runs.

And maybe we’ve been a bit too successful on that front [laughs]. Because what happens is that people come here, develop as professionals, and then others in the market start poaching talent…

I think the other big thing — on the personal front — has been re-learning that everything is possible and can be done in a very agile way without compromising on risks. Coming from very large institutions, this gets beaten out of you, and Mashreq is amazing: It has no fear of trying new things, and it balances that off with a very careful approach to risk management. You can see that in our non-performing loan ratio, which is less than half the industry average.

Mashreq is careful about risk, but it leaves the door open to try new things and new technologies in business.

Your limits in business are internal — they’re in you. It’s all about your attitude toward what’s possible, and that’s something I’ve rediscovered at Mashreq. This amazing entrepreneurial culture where you are in a meeting and someone says something that sounds ridiculous, but then you figure out how to make it real. This comes from the top, this culture of “you need to try anything that provides an amazing client experience, even if it sounds crazy — just look for ways to minimize risk as you do”.

Here, we’re asked to dream and come up with things that challenge the status quo. It’s very refreshing, and it’s something I have had to relearn since coming here.