The revenue of the FinTech industry in the Middle East, North Africa and Pakistan (Menap) is set to surge to between $3.5 billion and $4.5 billion by 2025, up from $1.5 billion in 2022, amid strong economic growth and a robust banking sector.
The industry's share of financial services revenue could jump from less than 1 per cent to between 2 per cent and 2.5 per cent by 2025, according to research by global consultancy McKinsey.
Over time, that FinTech penetration is expected to reach 3 per cent to 4 per cent of the region’s financial services revenue pools, roughly in line with the global benchmark.
“Overall, the region’s positive macroeconomic outlook and the consistently strong performance of its financial services industry provide favourable conditions for the FinTech sector’s continued growth,” McKinsey said.
“FinTech innovators could play an increasingly significant role in the way consumers and businesses in [the] Menap [region] conduct daily transactions and build wealth for the future.”
Since the onset of the Covid-19 pandemic, people have turned to online banking services and other contactless technology to transfer money and pay for e-commerce transactions, boosting the FinTech sector.
FinTech start-ups led in both funding and the number of deals in the Middle East, Africa, Pakistan and Turkey region last year, according to data from Magnitt. The sector’s funding hit $2.25 billion across 351 deals in 2022.
In the UAE, the business and finance centre of the Middle East, FinTech is among the sectors that could help the country achieve its aim of posting another year of 7 per cent economic growth in 2023, Minister of Economy Abdulla bin Touq said earlier this month.
Despite the mixed outlook for the global economy – which is battling high levels of inflation and new funding constraints on the global FinTech sector amid higher interest rates – the Menap financial services sector is “well positioned” to continue its strong performance, McKinsey said.
This is thanks to strong economic growth fundamentals in the region, where year-on-year gross domestic product growth for 2023 is projected to be between 2 per cent and 5 per cent, McKinsey said.
The continued growth of the region’s banking sector will also boost the FinTech sector.
The revenue of the Menap banking sector could grow by about 7 per cent annually over the next three years, according to analysis of data from McKinsey’s Global Banking Pools.
Looking ahead, the FinTech sector’s value and impact will continue to grow, the report said.
Its market valuation is expected to increase to more than $15 billion by as early as 2025, from an estimated $8 billion in 2022, assuming a stable valuation-to-revenue multiple for the sector.
Considering the number of fast-growing start-ups in the Menap region with valuations of about $150 million, as well as several already exceeding $250 million in market value, McKinsey expects the entry of four to six new FinTech unicorns – or companies with a valuation of more than $1 billion – by 2025, in addition to the three that already exist in the region, it said.
However, for the region’s FinTech sector to realise its full potential, it needs a “solid foundation for growth and value creation” across the Menap financial services markets, the report said.
That entails sufficient capital, regulatory and market harmonisation, technical and leadership talent, as well as strategic partnerships to increase value.
In terms of capital injection, the region's FinTech sector, which comprises about 800 funded start-ups, will need new funding of about $5 billion to $7 billion over the next three years, according to McKinsey.
Attracting the level of funding available to peers in other regions would help Menap FinTech start-ups to hire top talent, reach new segments in existing markets and expand to adjacent markets.
As start-ups mature and begin to secure late-stage funding, they will need larger minimum investments to sustain growth across the region.
“FinTechs not only must attract more investors with deeper pockets, but [they] also need to increase the share of funds coming from local and regional investors,” McKinsey said.
“This is particularly important for firms offering credit products in markets with volatile currencies, such as Egypt and Pakistan, because they face large currency risks associated with raising US dollar-denominated venture debt.”
In terms of talent acquisition, FinTech companies must include more women in leadership positions, the consultancy said.
In the Mena region, only 9 per cent of start-ups have at least one woman on the executive team, compared with 42 per cent of start-ups in the US.