In the Gulf Cooperation Council (GCC) region and the wider Middle East, the financial services sector is beset by a basket of woes. The cost of onboarding new customers remains punitively high, encouraging many banks to desperately hold on to what they have rather than poach for new business. Automation has yet to become mainstream, leading to escalating costs in back-office processes. Factor in saturated markets, tightening regulatory constraints and younger, more demanding customers, and it is evident that the sector faces a titanic struggle in remaining relevant to customers.
Fintech (financial technology) offers a seemingly obvious answer. The applications offered by global and regional fintech vendors tick a lot of boxes on the financial services industry (FSI) wish-list: practical, scalable, affordable, bespoke.
At the same time, fintech-based startups, such as internet-based payment services, online banks, and cryptocurrency exchanges are already proving that emerging financial tech applications are viable and attractive, especially to a younger audience – and are encroaching on the turf of traditional FSI enterprises.
Fintech is, as a result, attracting support from governments, interest from investors and attention from FSI organizations.
What is fintech?
Fintech is, generally speaking, technology that is applied to financial services or the management of transaction operations in businesses. In the past, fintech was mainly relegated to back-end data centres, but has evolved to include comprehensive transaction processing systems – often embracing emerging tech such as artificial intelligence, blockchain, and robotic process automation – including services delivered over the internet and via the cloud.
According to KPMG’s 2018 Pulse of Fintech report, global fintech investment was around $112 billion last year, more than double the $50.8 billion spent in 2017. The Middle East is keeping pace with other regions, with many countries offering up a host of new fintech firms.
This year, Bloomberg Intelligence ranked the United Arab Emirates top in a list of regional countries with the most fintech startups. It was the UAE’s relaxation of regulatory frameworks that allowed 67 fintech startups to thrive there, according to Ankit Uppal, an associate director at KPMG Lower Gulf. The loosened rules included changes to foreign ownership regulations, long-term visas for selected categories, and removal or reduction in government fees, according to a KPMG analysis.
Elsewhere in the Middle East, Turkey had 44 fintech startups, and Jordan and Lebanon followed, with 30 each.
Governments nurture fintech
“Advancements in technology appear to be radically changing the landscape of the FSI sector, promoting financial inclusion for the unbanked and underserved customer segment,” Uppal said, adding that he expected the regional trend among startups to continue.
Paul Kayrouz, head of fintech, blockchain and emerging technology at PwC Legal, also believes regulatory support has been key in the survival of the region’s fintech companies.
“There are at least six jurisdictions across the Middle East that have adopted specific fintech regulations to assist businesses in the development of various solutions,” he noted, citing several “promising new areas” in fintech that owed their success to incentive-based regulations. Abu Dhabi Global Markets’ spot crypto asset framework, designed to provide government oversight of virtual currency transactions and asset transfers, was one such success story.
Young customers put pressure on banks
As an increasing number of customers in the finance sector are those that have grown up in a digital world – millennials and digital natives – FSI entities find themselves trying to design user experiences that will appeal to a tech-savvy market.
“Inspired by digital interfaces they encounter in their day-to-day lives, [such as] Netflix, Uber and Airbnb, customers have started demanding similar levels of experience from their financial firms,” Uppal said.
PwC’s Kayrouz believes some of the main factors that have accelerated fintech startups’ growth, apart from regulatory support from regional governments, are smoother access to regional and international markets, and access to capital.
“Established FSI companies are also increasingly looking to outsource or acquire fintech startups that are beneficial to their line of business,” Kayrouz said. “By way of example, Emirates NBD launched its own API sandbox for fintech startups, which boasts over 200 APIs and 500 end points.”
FSI companies are increasingly looking for fintech partners so they can integrate their solutions into existing business models. The attractions of such unions include the ability to leverage automation to enhance efficiencies; promoting financial inclusion for underserved sectors of the economy, such as micro, small and medium enterprises; and providing low-cost, user-centric platforms for personalized user experiences.
Fintech has a wide range of applications
As the segment has matured, regional applications for its offerings have followed suit. In a region brimming with expatriate workers, fintech firms have been quick to service the cross-border remittance industry, using blockchain architecture that allows instant, direct transfers without the need for intermediaries or banks, according to Uppal. In the Arab Gulf, home to some of the world’s highest foreign-remittance rates, this will be a boon to millions of overseas workers.
Meanwhile, the regional insurance industry is warming up to “insurtech”, which offers several ways of optimising underwriting standards. “Machine learning and artificial intelligence [can be used] to quote optimal prices; and intelligent automation can streamline and automate claims processes,” Uppal said.
Customized for FSI firms, regional fintech solutions are also leveraging robotic process automation (RPA), already seen in other sectors, to automate laborious back-office tasks and free up resources for more innovative work. Know Your Customer (KYC) regulations are also a natural fit for this type of automation. Built on varying flavors of AI, combined with blockchain, “the peer-to-peer sharing of records based on customer consent, [has led] to the digitizing of KYC,” according to Uppal.
Kayrouz cited applications that cover crypto-asset payment, online crowdfunding, smart contracts and chatbots, as well as AI-based data analytics and cybersecurity.
Rules, lack of awareness may stymie fintech
For firms exploring the adoption of such technologies, the journey is not without its challenges. Simple awareness of options may be lacking, despite the packed events calendar of fintech roadshows and conferences held across the Middle East. And despite the progressive regulatory stance of some governments, fluctuating rules at the regional and international level can stunt adoption of new technologies.
To deal with the vagaries of regulation, “companies need to ensure they have solid controls and governance mechanisms in place for critical [elements] such as customer data handling, consumer protection or liability models,” Uppal said
Meanwhile, for older, more traditional institutions, a lack of openness can prevent the fostering of collaborative cultures that allow API-enabled data exchange.
“For the technology and fintech solutions industry to continue flourishing, it is important that governments and regulators approach technological innovation, especially fintech solutions, with an open mind,” Kayrouz said.
Fintech to change traditional financial services
Ultimately, the regional fintech market is poised to have a big impact on a range of financial services, Uppal said.
“In the Middle East region, fintech has made steady advancements… to address long-standing industry challenges,” he said, “but it has yet to come into full force.”
Uppal urged the continued enabling of fintech ecosystems by governments, to ensure that startups and their solutions continue to grab the attention of FSI innovators. Such commitments already appear to be evident in many quarters. In March this year, the Central Bank of Egypt pledged $58 million for the support of fintech firms. Similar announcements were made by Bahrain’s Economic Development Board in 2018 and the Dubai International Financial Center in 2017.
Kayrouz, added: “Having advised on the legal and regulatory developments in the Middle East region for the past 10 years, and having experienced the developments, I believe it is right for disruption [to continue], and if it continues in the same manner, [the region] has the capacity to become a hub for the global fintech companies of the future.”