This Article was first published in The Oath in July 2017.
Over the last 12 months FinTech has had a lot of media coverage in the Middle East. Whilst not on the scale of the Kardashians or Trump, it is certainly earning its place as a primary focal point of media attention, writes Rosalind Rayman.
On May 24th, the Dubai Financial Services Authority (DFSA) announced the launch of the Innovation Testing Licence for FinTech firms, allowing FinTech firms to apply for a class of financial services licence that will allow development and testing of innovative concepts within the Dubai International Financial Centre (DIFC), without being subject to all regulatory requirements. Peter Smith, managing director of policy and strategy, DFSA[1], describes it as “an initiative which will bring together the next generation of leaders and entrepreneurs to compete and address the growing needs of the region’s financial services industry, using innovative technology solutions.” This latest initiative follows the launch of the FinTech Hive @ DIFC and joins the ranks locally of the Abu Dhabi Global Market ‘sandbox’ (which helps start-ups test their products under less onerous regulations). With these initiatives and the recent opening of Area 2071 by His Highness Sheikh Mohammed Bin Rashid Al Maktoum; the ‘future looks rosy’ for FinTech.
What is FinTech?
Simply put, it is the use of technology within financial services. The main types of FinTech services include peer to peer lending (P2P), crowdfunding, money transfer, mobile payments and trading platforms, together with the development of virtual currencies.
Why all the buzz?
There is a global FinTech revolution taking place, driven by customer demand. According to latest available statistics Venture Capital investment in FinTech companies reached USD13.6 billion globally in 2016.[2] London, New York, Singapore, Silicon Valley, The Netherlands, Germany and Australia have been leading the way in this revolution. Add to that the success stories of AliPay, M-PESA, TransferWise, Nutmeg, Zopa, Atom and Fidor. Peter Smith told me: “We believe FinTech will continue to become more prevalent in our daily lives; there are more and more ways of making electronic payments; and regulators are working hard to provide an environment that supports innovation while protecting financial stability and consumers. What is encouraging is the increasing coordination and collaboration between regulators globally to understand and manage the full impact of this industry.”
Why Middle East interest in FinTech?
Now there is growing interest from the Middle East, particularly with the desire to reduce the dependence on oil, and drive from UAE Government Smart initiatives. Peter Smith explains: “Dubai already has a strong reputation for innovation and for creative use of technology to provide services and to solve problems in society. The development of FinTech fits well with Sheikh Mohammed Bin Rashid Al Maktoum’s National Innovation Strategy to create an innovation friendly ecosystem. Technology is a pivotal part of this strategy, and plays a central role in both the Dubai Plan 2021, to develop the Dubai Economy, and Dubai Smart City.”
The Middle East also can offer the demographics, with a high population of Millennials who are most receptive to technology. You only have to look at the extraordinary level of smartphone penetration in the region to see this. The Gulf Cooperation Council (GCC) has above 70 per cent banking penetration and close to 100 per cent telecom penetration.[3] UAE and Saudi Arabia are the fastest growing GCC markets for online payment transactions with 23 per cent average growth across the region.[4] Saudi Arabia has 58 per cent acceptance for online payments and UAE has 71 per cent.[5]
Philip Bahoshy, founder of MAGNiTT [6] told me that 127 (3.7 per cent) of its 3400 start-ups on its MENA database are FinTechs. This may seem a small percentage, but to give further perspective latest figures show that FinTech companies have more than doubled from 46 to 105[7] between 2013 and 2015. We also have success stories from start-ups in the region, such as PayFort (a payments processor), Beam (a mobile payments app), Beehive (a peer-to-peer lending platform that connects investors with businesses), NOW Money (a remittance platform for the unbanked) and Compareit4me (a money and insurance comparison site).
Are there any regulations around FinTech?
Yes, there are new UAE Regulations on digital payments. The UAE Central Bank has recognised the change in customer needs and the drive towards digital payments and with this in mind they issued the Regulatory Framework for Stored Values and Electronic Payment Systems (Regulations) in January 2017. The aim of the Regulations is to facilitate the increased adoption of secure digital payments by way of a licence and compliance regime. The various licences have minimum capital requirements and applicants must meet experience and expertise criteria. The Regulations also contain further obligations on the Payment Service Provider (PSP), which aim to provide consumer protection.
Within this region consumer trust is paramount to the success of FinTech, and government regulation, such as these recent regulations, can help to build that trust. Use of digital money will reduce dependency on traditional cards and cash based transactions, and PSPs will be able to offer a range of services (such as e-wallets) through different channels which will increase competition. Ultimately the consumer should benefit by having more payment choices and seeing a reduction in costs.
The Regulations address 4 categories of PSPs:
Retail PSP, such as commercial banks
Micropayments PSP, such as telcos offering digital payments to the unbanked
Government PSP
Non-issuing PSP, such as non-deposit taking and non-issuing institutions
The Regulations specifically apply to ‘Stored Value Facilities’, which are defined as non-cash facilities, purchased and used to pay for goods or services.
Certain services are excluded from the Regulations, such as: payment transactions using debit/credit cards and technical service providers. Interestingly, the Regulations prohibit the use of Virtual Currencies and where this leaves BitCoin is unclear.
From January 1, 2017, any entity or individual providing digital payment services in the UAE is required to hold an appropriate license. There is a grace period of one year for entities/individuals already offering such services. Further regulatory instruments are pending and it is anticipated that these will provide more detail on capital requirements, virtual currency and fines etc.
FinTech and Banks
At a panel discussion at the recent FinTech Revolution event in DIFC last month, one of the questions posed was “Is FinTech a threat to the Banks?”. Suvo Sarkar, senior executive VP & group head retail banking and wealth management at Emirates NBD also mentions Banks and FinTech as friends, foes or frenemies in his article in Gulf News in April 2017. Both the panel discussion and Suvo Sarkar agree that FinTech challenges all to be better in delivering the customer experience. The panel put forward that FinTechs can help Banks get a better understanding of the customer and help deliver products to the customer in the most cost-efficient way.
Banks quite often can be restricted by clunky legacy systems, often dating back to the 1970s. Investing in a new system/upgrade is not only a huge expense to a Bank, but also presents huge risks. Hence FinTechs present an opportunity for Banks to take advantage of innovation and compliment their own systems and offer next generation products. Collaborations between FinTechs and Banks can take different forms such as internal labs, as seen in the Emirates NBD Future Lab (which has provided AED500m over three years to support digital innovation), or investing venture capital into a FinTech (the first phase of FinTech Hive @ DIFC already has 140 applicants), or hackathons (Emirates Islamic Bank ran an ‘appathon’ to create the next banking app).
Building an ecosystem
Jay Razzaq, general counsel and head of compliance at Network International[8] told me: “The UAE government has demonstrated strong interest in fostering an innovation culture and has laid the foundation to create a viable ecosystem for start-ups. Funding and regulation are key to growth and development.”
The first step is building the foundations to nurture the talent and innovation and bring them together with funding to help them develop and launch innovative products. The foundations are already in place as seen in Emirates NBD Future Lab, FinTech Hive @ DIFC, the new DFSA Innovation Testing Licence and Abu Dhabi Global Market. Suvo Sarkar also cites “an open-door innovation policy implemented at a bank as being necessary to create the ecosystem. The bank should not only be open to an idea but should be willing to support/mentor the idea through its life cycle.” Let’s also not forget the involvement of the government in the ecosystem. Government initiatives and changes in regulation can drive a faster build of the ecosystem and we have certainly seen an increase in pace following the UAE Government Smart initiatives and Payment Services Regulations.
Challenges for FinTech
One of the biggest challenges facing any new business in the region, including a FinTech, is the culture-based fear of failure. It can stifle innovation. Whilst recent changes in UAE Bankruptcy laws have taken steps to alleviate this fear (by allowing a debtor to seek assistance in reaching reconciliation with its creditors), there still needs to be a cultural shift in attitudes. Individuals need to be able to confidently stand up and tell their stories of failure. How many stories of failure have the likes of Steve Jobs and Richard Branson shared with us before their big success story? Education, government and corporations can still do more to encourage talent and entrepreneurship.
There are a number of regulators in the region with different jurisdictional powers that can be a challenge for any FinTech to navigate. In the UAE alone there are potentially four different financial services regulators: Central Bank, Insurance Authority, Securities and Commodities Authority, and the DFSA (governing business in or from the DIFC). There is also no form of passport licence to springboard from the UAE into other GCC countries and each of the GCC members have their own regulatory bodies. FinTech by its nature uses technology to drive down costs in business, but this becomes a challenge if every country has its own standards. Unlike the European Union, with initiatives such as the Payment Services Directive I and II, FinTechs can be restricted from quickly scaling up and reaching a larger group of consumers. Peter Smith explains: “The challenges for FinTech are universal in nature and relate to its origins and distribution models. The internet is borderless and a business model that uses the internet as a distribution channel faces challenges as it hits national borders with specific jurisdictional requirements in each country.” He adds, however, that things are changing.
Within the world of AML, for example, we are seeing a significant level of standardisation in different jurisdictions and FinTech is now being included as one of the focus areas by international standard setters.[9]
Peter Smith also cites the regulatory gap as a challenge. “Regulations surrounding FinTech operating models are in their infancy and regulators are trying to come up with approaches that balance innovation and consumer protection while keeping the overall system stable. This is a tough balance to deliver considering the variety of business models and risks inherent in these models.” This can be evidenced by existing Central Bank regulations for banking licences and currency exchange licences, still being based on bricks and mortar style banking. Such requirements demand majority ownership by a UAE national, formation of PJSC and large investment capital. Sadly, these requirements can often be seen as obstructive by FinTech start-ups. However, we should bear in mind that not all FinTechs need to be regulated. Regulation is only a factor when financial services are provided.
Then there are company set up costs, which vary from country to country in the region. In the UAE it is common to have to spend USD5,000 or more on the paperwork alone to set up a business. By contrast, a simple company can be incorporated in England on-line for less than £50.
There is also no central database of businesses and information on businesses and individuals in the region. This makes compliance with Know Your Customer regulations a much harder task. In Europe there are central databases that organisations can access to verify, address, passport number, credit references, etc. FinTech is reliant on access to such information to keep the cost down.
The small populations of some GCC members and correspondingly smaller talent pools also present challenges. FinTech works best when it can draw on a large talent pool. You only have to look at the diverse talent pool available in Silicon Valley and London. In the Middle East, it is not a problem when starting small, as seen in the success of Jado Pado, but it becomes a problem when you want to scale up; and when talent is brought in from outside, the project suddenly becomes a lot more expensive.
The Future for FinTech
When asked about the future of FinTech Jay Razzaq said: “There are currently several FinTechs active in key market verticals. While most FinTechs in the region focus on payments and e-wallets, we anticipate an emergence of peer-to-peer lending, roboadvisor, and micro-insurance platforms to cater to the growing need for financing, especially in the SME sector. As e-commerce experiences significant growth in the region, we will also see more entrants here in addition to M&A activity as incumbents seek to partner and collaborate to gain competitive advantage.”
Peter Smith concludes: “FinTech has a strong presence already in the region and financial technology has been around for a long time. Incumbents have been using the technology in an increasing manner to provide better services to consumers but FinTech firms are now able to provide superior end user experience.”
I started from the premise that ‘the future looks rosy’ for FinTechs and my conclusion is that this is still the case, but with the help of some further work to foster the growth of FinTech in the region. We need to embrace failure and learn from it, corporates need to want to change and need to be innovative. Corporates and entrepreneurs don’t have to wait for governments to make changes, they can incentivise the governments to make change. Accelerator programmes in Abu Dhabi, Dubai and Riyadh need to be working together. Change will be faster if it comes from the top down and this means further changes in regulations and harmonisation of laws across the GCC. The unbanked need access to banking facilities (80 per cent of UAE population is unbanked) and this unmet demand is an opportunity for FinTechs. SMEs also need access to loans and again this is an unfulfilled market presenting another opportunity to FinTechs. Corporates, governments and entrepreneurs can work together with technology to improve competition, meet customer needs, strengthen the UAE’s position as a hub for the region and create social change.
[1] Peter Smith joined the DFSA in June 2012, as Head of Policy, to lead the further development of the DFSA’s policy framework. He joined the Executive Committee as Head of Policy and Strategy in early 2015 and was appointed a Managing Director in early 2016. He is responsible for the DFSA’s strategic planning.
[2] Figures provided by Accenture
[3] Figures provided by Accenture
[4] Figures provided by Accenture
[5] Figures provided by Accenture
[6] https://www.magnitt.com/ start up website for entrepreneurs’, investors, corporates and founders in the Middle East
[7] A report released in March on the State of FinTech in the region produced by Payfort and Wamda
[8] Jay Razzaq joined Network International in April 2017 as General Counsel and Head of Compliance
[9] Basel Committee and Financial Action Task force are examples of international standard setters.