Innovation And Regulation Setting The Scene For A Fintech Boom
The GCC is primed to become a center for fintech startups, thanks to an evolving regulatory environment, rapid adoption of technologies by incumbent financial services firms, and an increase in investment across the region.
In the GCC, between 25%-50% of adults are under 30, and it has one of the highest mobile and internet penetration rates in the world. In such economies, digitalization becomes essential. This necessitates innovation and plays a fundamental role in evolving the online financial ecosystem.
More importantly, financial services firms become increasingly exposed to higher risks of disruption when they choose to ignore the increasing signals of fintech’s widespread importance. Outdated back-room technology, systems and digital-denial expose companies to unnecessary risk, which can be mitigated through education and targeted investment. More tech-savvy companies have recognized this by diverting resources to ensure that they stay ahead of the curve.
JP Morgan has set the pace, having established a “10% of revenue invested in technology” benchmark. Such a precedent should signal to others that maintaining the pace of innovation trajectories is crucial. Banks and the wider financial sector, including insurance, exchanges, payment processors and specialty finance firms, should only be moving as fast as the slowest runners: clients and customers.
The GCC is perfectly situated to capitalize on this growing requirement for digitalization. With only 7% of banks choosing to develop all technological solutions internally, there is massive potential for growth in the market, with many choosing to integrate the services of fintech companies through partnerships, investments or acting as incubators.
The financial sector can often be defensive when it comes to innovation. Fintech can be viewed as a threat to existing services. But while competition grows with innovation, there are many fintech companies that are not only not seeking to disrupt the incumbents, but actively look to support existing financial services companies. Regional lenders seem to understand this.
Banks in the U.A.E. have secured a leading role in embracing fintech. Emirates NBD launched its Future Lab and announced a commitment to investing around $272 million into the space. Others, such as NBK and RAKBANK, are also making advances, adopting technologies such as Ripple for their e-remittance businesses.
A record-breaking $111.8 billion was invested globally across 2,196 international fintech deals alone in 2018. Bigger deals and consolidation across established practice areas, such as cashless payments and international transactions, have driven international growth. While transactions in 2018 only had a marginal year-on-year increase from 2,165 to 2,196, the capital invested more than double from $50.8 billion to $111.8 billion. Appetite remains steady, but the value of such transactions has increased dramatically. In the Gulf, authorities are stepping up their efforts to support fintech adoption.
Some GCC markets have created a “sandbox” regulatory environment, which supports both new entrants to the market and existing players alike. Dubai supports such innovation through the DIFC’s Fintech Hive, a dedicated area for startups to begin their journey. The newly formed MENA Fintech Association is already looking to expand to include dedicated government lobbying teams and global talent exchange programmes.
The U.A.E. has adopted user-friendly regulatory practices that reward individuals and SMEs for innovation. The Saudi Arabian Monetary Authority has established Fintech Saudi, which aims to support the ecosystem. Bahrain’s Fintech Bay supports growth by helping startups secure capital, guidance and working with regulations.
A regulated environment gives impetus for new entrants to thrive and shape an emerging market segment. For investors, development in the sector will continue to create compelling opportunities.