Middle East fintech sector begins to stir

Disruptive technology great news for customers but threatens banks' business

Dubai is aspiring to become the global hub of Islamic finance. Alex Atack for The National
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"Fintech" has been in the news a lot in recent weeks in the UAE and the wider Middle East region.

Last week, the Dubai International Financial Centre’s (DIFC) FinTech Hive announced the selection of the first 11 start-ups that had qualified for its 12-week accelerator programme, which will culminate in the opportunity to pitch their ideas to interested investors in November.


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Abu Dhabi Global Market (ADGM) earlier this month said it was assessing applications from 22 start-ups and innovators for its Regulatory Laboratory (RegLab) sandbox programme, enabling them to develop their ideas in conjunction with local financial services firms in a light-touch regulatory environment.

ADGM, which began marketing itself as a fintech hub from when it first opened its doors in 2016, has announced a series of initiatives in the sector in August, including a collaboration with the Responsible Finance & Investment Foundation on ethical Islamic fintech, and the Fintech Abu Dhabi Innovation Challenge, in collaboration with the accountancy KPMG.


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Bahrain is also bidding to attract fintech start-ups to its shores, with the announcement in June of regulations for the creation of its own "sandbox" programme. Saudi Arabia for its part has declared that fintech will be an integral part of its Vision 2030 plan, aimed at reducing its dependence on oil revenues, with Qatar and Egypt also looking to get on the fintech bandwagon.

There is no shortage of activity in the region it seems. But what actually is fintech? And why are banks, financial service firms and governments in the region and beyond taking it so seriously?

Dubai, United Arab Emirates - January 10, 2017.  HE Essa Kazim ( Governor, Dubai International Financial Centre ) launches Fin Tech Hive at the Dubai International Financial Centre.  ( Jeffrey E Biteng / The National )  Editor's Note;  ID 63855 *** Local Caption ***  JB100117-FinTech09.jpg
Essa Kazim, governor, Dubai International Financial Centre, launches Fin Tech Hive at the Dubai International Financial Centre. Jeffrey E Biteng / The National

From double entry book-keeping to Blockchain ledgers

Fintech is no more than an abbreviation of “financial technology”, while a fintech company is consequentially defined as an entity that looks to use technology to improve financial services for businesses and consumers. Understood thus, fintech is anything but a new phenomenon, encompassing ancient innovations such as fixed weights and measures, double-entry book keeping and the birth of paper currency, leading to more modern innovations including the birth of the international electronic banking system, the rise of credit cards and the introduction of ATMs.

In the first decade of 21st century, fintech innovators utilise cryptocurrencies such as Bitcoin, innovative technologies such as Blockchain, and the worldwide proliferation of smartphones, to both automate and streamline internal processes within banks and financial service firms and to offer innovative new solutions that blur the line between finance and technology.

Simply put, in the words of the Dubai-based venture capital firm Wamda and the regional online payments company Payfort, fintech enables the “faster, cheaper, more convenient or more accessible” delivery of financial services.

Crucially, such services can now be delivered efficiently, securely and more affordably by both established financial services companies, but also by smaller tech firms. To the alarm of big banks, customers are increasingly favouring services offered by the latter.

Contactless cards and robot advisers

Fintech has already transformed services such as trading and investing, lending, payments and personal finance, in ways that you are probably already familiar with. If you have used PayPal to invoice a supplier, paid for a cup coffee with a contactless credit card, or transferred money abroad via your smartphone, you have benefited from fintech.

The technology has revolutionised how we raise money for personal and business projects, as any user of Kickstarter or gofundme will already know. Transferring money abroad has been transformed by the likes of Transferwise, founded in 2011, now the fourth-largest remittance firm in the world.

Fintech has also transformed how we manage and plan our finances; the  “robo investor” Betterment, launched seven years ago, is now the largest independent online financial advisor in the United States, with more than US$10 billion worth of assets under management.

fintech innovators utilise cryptocurrencies such as Bitcoin. Benoit Tessier / Reuters
fintech innovators utilise cryptocurrencies such as Bitcoin. Benoit Tessier / Reuters

Banking on decline

All of this is great news for consumers, with a wide range of financial services available at a far lower cost. For traditional banks, remittance firms and financial advisors, however, the rise of fintech start-ups is nothing less than an existential threat.

Just as telecoms firms saw voice and messaging revenues wiped out by technology start-ups such as Skype and WhatsApp, fast-growing fintech start-ups such as Atom Bank, WorldRemit and Rocket Mortgage risk decimating banks’ revenue streams.

The consultancy and auditing firm EY in its 2016 Global Consumer Banking survey noted that four out of 10 customers reported decreased dependence on their bank as their primary financial services provider, increasingly relying on fintech providers instead.


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A survey of large financial institutions conducted earlier this year by PwC found that nearly 90 per cent feared their business was at risk from new fintech players, who could result in established players losing up to 24 per cent of their revenues in the next three to five years.

Such an impact will not just hurt bottom lines either. Citi forecast last year that fintech start-ups will prompt banks in the US and Europe to shed 1.7 million jobs, or more than 30 per cent of their workforce, by 2025.

Eat or be eaten?

As noted earlier, Bitcoin and Blockchain are hardly the first innovations that banks have had to wrestle with; it’s easy to find predictions of technology dealing a mortal blow to banks from decades ago, only for the financial services sector to adapt to the changes and to thrive.

Once again, the key to survival for the industry’s established names is to work together with the disruptors adopting innovative practices from new fintech start-ups, adapting old business models accordingly.

“I think what we are seeing across the world increasingly is that disruption and collaboration is happening alongside each other,” according to Sushil Saluja, the senior managing director of financial services for Accenture in Europe, the Middle East and North Africa region.

Abu Dhabi Global Market finds new ways to woo fintech start-ups. Mona Al Marzooqi / The National
Abu Dhabi Global Market finds new ways to woo fintech start-ups. Mona Al Marzooqi / The National

Incubate, collaborate, embrace

That desire to collaborate is behind the efforts by the DIFC and ADGM to create fintech ecosystems, where start-ups work with established banks and other financial services firms for each others’ mutual benefit. For the start-ups the arrangement offers an opportunity to learn the ins and outs of doing business from some of the UAE’s largest and most experienced companies.


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For traditional banks and financial services firms meanwhile, advising fintech start-ups helps them to understand both the threats and opportunities to their business models from new disruptive technologies, giving them a greater idea of where to invest in new technologies, often by means of acquiring one of the start-ups they work with.

The involvement of UAE Exchange in the fintech programmes of the fintech programmes of both DIFC and ADGM is a case in point. As the UAE’s largest remittance firm, the company has a lot to lose from the growth of fintech alternatives, unless it can quickly learn lessons from the startups it mentors and adapts accordingly.

The UAE is also hoping that it will be able to tap start-ups that focus on the particular challenges of the Middle East, Africa and South Asia (Menasa), especially tapping the regions’ large unbanked populations.

“There is a change in the way financial services are being availed now and sitting at the heart of Menasa market, DIFC can access the 70 per cent of the unbanked economy of the region,” says Raja Al Mazrouei, the acting executive vice president of the DIFC’s accelerator initiatives.

“This is the opportunity that we are aiming to capture.”

Mena fintechs begin to stir

In spite of efforts to stimulate entrepreneurship across the Middle East, the region has had a slow start when it comes to fintech start-ups. While the global fintech scene has attracted more than $50bn worth of investment since 2010, companies in the Middle East account for just 1 per cent of this figure, according to Accenture.

Nevertheless, fintech activity across the region is gaining momentum. Research from Wamda and Payfort found that the number of start-ups in the field has more than doubled to 105 last year from 46 in 2013. While start-ups have sprung up in 12 countries across the region, the quartet of the UAE, Lebanon, Jordan and Egypt account for 75 per cent of start-up activity, with the UAE the largest source market of them all.


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Payment solutions is the most active area for start-ups in the region, according to Wamda and Payfort, forming the primary focus of half of all new companies. In the lending segment, fintech firms focus on crowdfunding, money circle, peer lending and loan comparison platforms. Some of the regional companies also specialise in international money transfer, wealth management, insurance solutions and blockchain-based services such as cryptocurrencies.

Wamda and Payfort predict that fintech start-ups in the region will attract $50 million worth of funding this year, a testament to sharp increase in investors’ interest in the growing industry.

A high-risk venture

In spite of growing interest in the sector, not all fintech start-ups manage to get seed or growth capital when required, with Payfort and Wamda reporting that 1 in 4 of the region’s start-ups ending in failure.


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Setting up a fintech start-up is still seen as a high-risk proposition for the region’s young professionals, who tend to hail from financial consulting and information technology backgrounds. Nascent fintech start-ups face the hurdle of strenuous regulatory burdens for financial services companies (a situation the light touch approach of ADGM’s fintech sandbox is trying to address), together with the more familiar start-up challenges of hiring and retaining talent to advance their ventures are the other two hurdles they face besides finances.

Wamda and Payfort estimate that around 250 fintech start-ups will be launched by 2020. The failure rate, they say, can be lowered if the governments step in and provide the foundations for growth platforms. An alliance of policymakers, investors, innovative corporations and entrepreneurs, the two firms stress, can place the UAE among Asia’s most promising fintech hubs, while Lebanon, Jordan and Egypt stand good chances to see significant developments in their respective markets.