How FinTech can foster financial inclusion as our preference for cash wanes

There is potential for change in areas ranging from payments, banking, investing and insurance

Financial free zones such as DIFC have aided the expansion of the regional FinTech sector through regulatory sandboxes and accelerators. Photo: Sarah Dea / The National

Is cash dead? Not yet. The majority of people in most countries – roughly 75 per cent of the world’s population – still conduct most transactions with cash.

Nonetheless, a massive transition to digital payments is under way. According to a recent survey by management consultancy McKinsey, 58 per cent of Middle East consumers strongly prefer digital payment methods, while only 10 per cent strongly prefer cash.

Cash can be inconvenient and, as most of our activities move online, it’s not always an option. The Covid-19 pandemic caused a one-off shift of certain purchases online and this change cannot be undone.

In fact, online sales in the Middle East and North Africa region are expected to triple to $28.5 billion by 2022 from $8.3bn in 2017, according to research by Bain & Company.

The world is establishing a new normal and FinTech is well positioned to enable and benefit from the transition.

Defining the FinTech investment opportunity

In the Middle East, one out of every four investment deals this year was in the FinTech sector, accounting for roughly a third of all the funding raised ($2.1bn in 220 deals), according to a report by consultancy RedSeer.

The Middle East’s financial technology landscape has become the most well funded due to a favourable regulatory framework, the research found.

Financial free zones such as the Abu Dhabi Global Market and Dubai International Financial Centre have aided the expansion of the regional FinTech sector through regulatory sandboxes, accelerators and events.

Globally, over the past 18 months, the FinTech investment opportunity has grown immensely. Many large technology companies have been investing in and acquiring businesses with niche capabilities in financial technology.

Global FinTech funding hit a record high of $33.7bn in the second quarter of 2021, up 191 per cent from a year earlier, and accounted for 22 per cent of total global venture capital funding, according to a report by CB Insights.

Where are the opportunities?

Payments, banking, lending, trading, investing and insurance are just a few important service sectors with significant and growing market value.

In 2018, for example, worldwide payments totalled about $200 trillion, while electronic transactions amounted to approximately $40tn. However, estimates show that global payment volume will increase 30 per cent by 2030 to around $260tn, with electronic transactions accounting for $90tn, a whopping 125 per cent increase.

Contactless payments

As the financial services industry evolves, new business models such as contactless payments are generating significant growth. After the pandemic, several new technologies have accelerated, with consumers increasingly turning to payment methods such as electronic payments for e-commerce and contactless in-store payments for reasons of safety, necessity and convenience.

Serving the unbanked who have mobile phones is a massive opportunity for companies offering text- or app-based banking services

Steven Rees,
head of investments for Mena, J.P. Morgan

For example, in Saudi Arabia, point-of-sale contactless card transactions increased 10 per cent per month, while payments via pass-through card-based wallets are up 18 per cent each month, according to McKinsey.

How FinTech fosters financial inclusion

Estimates suggest that about 1.7 billion adults worldwide are “unbanked” (not served by a bank or similar financial institution) – that’s a little more than 20 per cent of the global population.

Within that demographic, about two-thirds have a mobile phone. Serving the unbanked who have mobile phones is a massive opportunity for companies offering text- or app-based banking services.

The UAE has the highest financial inclusion rate at 46 per cent, followed by Bahrain at 39 per cent and Saudi Arabia at 31 per cent, according to the MENA Financial inclusion Report 2020.

As countries in the region bolster their technological infrastructure, digital banking can improve access to financial services and facilitate financial inclusion across the population.

Increasing adoption of InsurTech

InsurTech is also poised for significant growth as start-ups continue to disrupt this sector and traditional insurers rapidly adopt technologies.

While current consumer adoption of InsurTech stands at 8 per cent, the intent to use the service in the future is at 48 per cent, according to a report by RedSeer.

More FinTech disruption on the way

Digital transformation has already altered the financial service industries, but more disruption is on the way.

FinTech is expected to produce $500bn in revenue in 2030 from $150bn in 2018. New entrants and quick-to-adapt incumbents are among the FinTech companies that could win significant market share in areas ranging from payments, investing and insurance, among others.

However, it is essential to acknowledge that digital finance comes with its own set of concerns, including regulatory complexities and issues such as data security and privacy. Still, it could be rewarding to navigate the risks of this rapidly growing industry.

Steven Rees is head of investments for the Middle East and North Africa at JP Morgan Private Bank