This article first appeared in The Oath, the Middle East Law Journal for Corporates in June 2018.
Rosalind Rayman of The Bench explores recent developments in the UAE’s fast-developing FinTech environment.
Last August I wrote about the future of FinTech in the region following the launch of the Dubai Financial Services Authority’s (DFSA) Innovation Testing Licence (ITL), (established to meet the needs of the financial sector). Since then there has been an explosion of activity in the FinTech space (almost beyond the scale of media coverage of the British Royal wedding), covering a range of topics including Cryptocurrency, Digital Wallet, Artificial Intelligence (AI), Application Programming Interface (APIs), Blockchain and other Smart initiatives. Interest in FinTech continues to grow not only in the region but also globally, with an increase in organic growth, acquisitions and collaborations. This article will focus on developments in the UAE and specifically the experiences of some of the firms enrolled in the DFSA’s ITL programme.
Let’s start with some scene setting.
Current FinTech initiatives: FinTech Hive at DIFC, DFSA ITL, Abu Dhabi Global Market ‘sandbox’, Area 2071, Dubai SME Incubator licence.
On 1st May 2018 Clifford Chance hosted a conference on FinTech in the Middle East, Investments, Collaborations and Benefits (“FinTech Conference”), which marked almost a year since the launch of the DFSA’s ITL programme. The 2017 ITL launch attracted expressions of interest (from all over the world, including UK, US, Singapore, Canada, India and Malaysia), from firms wanting to carry out a range of services including different types of crowdfunding, remittances via Blockchain, Digital Wallet operations to help the unbanked, wealth management solutions and Cryptocurrencies. Two firms so far have been granted an ITL, and six more are being dealt with at present. Once an ITL has been granted, the firm can test their concept as per the conditions in the Regulatory Test Plan (RTP) in or from the DIFC in a controlled manner. For example, the RTP may limit the number or types of clients that the firm can engage with or restrict it from carrying out transactions over a certain monetary threshold. The average duration of an ITL is 9-12 months and, at the end of this period, if the firm has demonstrated that it has met all the requirements of the RTP and meets the full DFSA Authorisation requirements, it will migrate to full Authorisation. Once an ITL has been granted the DFSA will supervise the firm to monitor that it is meeting the conditions of the licence and to understand the development of the business model, product or service.Not all firms involved in FinTech need to be regulated, but for those that do the DFSA provides a special FinTech Team to engage with the firms.
Why apply for an ITL?
The advantages of setting up a business under an ITL were highlighted by the members of the panel discussionat the FinTech Conference. All panel members agreed that appropriate regulation is essential and that operating in a regulated environment is key to attract investment and funding; whilst the established DIFC court system provides comfort to investors and corporate partners in the event of disputes. Testing in a closed environment without being subject to all regulatory requirements (sandbox) is also crucial to allow the firm to move quickly under the watchful eye of the supervisor. Omar Soudodi commented that “time to market is as important as the customer experience”. Neeraj Makin says “Try, fail fast and move on”. It is encouraging to hear Neeraj’s words as fear of failure has long since been one of the biggest challenges facing any new business in this region.
Introducing three ITL players
I recently caught up with three of the successful ITL applicants, Mark Chahwan CEO and co-founder of Sarwa UAE, Siddiq Farid CEO and co-founder of Smart Crowd UAE, and Moussa Beidas CEO and co-founder of Bridg UAE, and it is easy to see how they all got their companies off the ground. They all share the common denominator of immense enthusiasm and incredible energy. As Steve Jobs said “the only way to do great work is to love what you do” and these three guys love what they do. After speaking with them all, I was left inspired; and with some slight tweaks to my age I am ready to sign up to Sarwa and Smart Crowd products.
Sarwa was the first firm to be granted an ITL and for Mark the defining moment started with acceptance to the FinTech Hive at DIFC programme. He describes making the application as “a leap of faith” and he hasn’t looked back since then. Of course, another defining moment has been the launch of the platform. For many young professionals, high fees and complex investment structures prevent them from making investments. Sarwa’s aim is to open up the market to these young professionals, as companies such as Nutmeg and Fountain have done in the UK. Whilst Mark feels that word of mouth will be the best marketing tool for firms such as his, he also believes that more collaboration between the Central Bank and other regulators will help the cause. With further input and funding from the government he feels that global players will be attracted to the UAE.
Smart Crowd was granted an ITL this April and for Siddiq his defining moment was his pitch at GITEX in 2017. Winning the Accenture competition at GITEX secured a place in the FinTech Hive at DIFC programme and since then he also hasn’t looked back. Siddiq sees Dubai as a state where tangible assets are regarded with respect and have appeal across all walks of society. He sees a gap in the market where many young people are unable to get their foot on the property ladder and so like Sarwa, Smart Crowd is meeting market needs. Siddiq sees Dubai itself as a start up and both Dubai and firms coming through the ITL programme will drive the changes required to bring FinTech to the forefront. For Siddiq Blockchain will be instrumental in driving the changes. Whilst the FinTech Hive at DIFCand ITL programmes are the beginning of the journey for these firms, Siddiq would like to see more support from the Venture Capital sector to help them continue the journey. He says “from seed to Series A funding a large amount of capital investment is required, and at pre- revenue stage there are few “Angels” to provide support”. Magnitts Q1 Analytics Report certainly supports this proposition.The sentiment is certainly echoed by Todd O Brien who said at the FinTech Conference “corporates need to provide the sandbox with a few coins in the sand”.
Bridg has been in existence for two and a half years (ITL application is in progress), and Moussa says that “until the Hive programme, it was an uphill struggle in educating the community on FinTech. However, now FinTech is the buzzword and the disruptor” and he welcomes this. Bridg was the first local company to be accepted to the FinTech Hive at DIFC programme and Moussa says that “the programme and ITL process have been instrumental in allowing Bridg to get an audience with potential bank partners”. They have given Bridg the opportunity to white label its product, thus allowing for a more lucrative revenue potential. He believes that being regulated will support productivity. For Moussa the UAE has to date been an importer and he now wants to see it as the exporter with a change in mindset and dynamic. “We are producing the best of the world here”. Like Siddiq, he believes that Bridg and other firms will help to drive changes required in the region to build the ecosystem to support FinTech.
All three of the entrepreneurs are unanimous in their appreciation for the invaluable support and mentoring provided by the DFSA’s FinTech Team. Mark describes the DFSA FinTech Team as “ambassadors as well as sponsors.” The entrepreneurs recognise the importance in regulation/compliance and in building trust early in the journey in order to gain long term trust. As Siddiq says “It’s the right thing to do”. For Mark, regulatory input at an early stage builds credibility. Siddiq describes a natural tension between the firms and the DFSA FinTech Team which is essential in building a new business requiring regulation. “It is natural for the firm to challenge the rules and for the FinTech Team to provide a risk perspective”. Moussa emphasises the importance of the two-way mentoring process and he says “DIFC regulations govern solutions being built for what is needed in the region, whereas other regulatory environments appear to merely be replicating other oversees models”.
What next for the ITL players
Sarwa, Smart Crowd and Bridg will continue working through the ITL programme until full Authorisation and along the way they will be looking at the next level of funding. The DFSA FinTech team will continue to be on hand providing mentoring and support to help the firms establish themselves as regulated compliant entities. In the meantime, Mark is also working with local universities to help educate the next generation on investment and the need to plan early for investment. Smart Crowd have also since won second place at the Smart Dubai Global Blockchain challenge at the Future Block Chain Summit.Keep a watchful eye as there is still more to come from these three inspirational ITL players.
Thoughts from the DFSA
Peter Smith provided me with his thoughts on the ITL journey so far. He says “We have enhanced our understanding of a wide range of new technologies and potential regulatory barriers facing these firms. We have also become more agile in dealing with these firms and have adopted a flexible approach in our contact with them. Initially, we underestimated the work required leading up to the granting of an ITL, but as we progress we are getting faster at responding and dealing with the range of requests”.
Peter Smith, in common with others quoted in this article shares the same view on appropriate regulation. He says “engaging with a Regulator early on in the journey is important. It helps the firm to understand whether their business needs to be regulated and, if regulation is needed, early engagement can help the firm decide on how to address certain challenges, such as how to handle client money. It also allows the firm to start planning for the impact regulation will have on their business”. Appropriate regulation and early engagement with a Regulator certainly has my vote, particularly as any investor’s first steps will be diligence of the firm; which means checking for compliance with regulations and general good corporate governance.
The role of the Regulator and FinTech
The success of FinTech rests on trust in the new environment and a change in human behaviour. Peter Smith told me that “as a regulator, our job is to create a regulatory framework that builds trust and confidence in the financial services sector. This means that where regulation is required a regulator needs to put in place a regime where innovation can flourish but where consumers are also protected”. He also sees the DFSA as having a role to play in educating the public where services/products are unregulated. Going forward, Peter Smith appreciates that some of the DFSA rules and regulations may need to be adapted to accommodate new types of products. The DFSA is currently working on new rules for property crowdfunding, and a new money services regime, and is considering the regulation of Cryptocurrencies.
Peter Smith agrees that global solutions are desirable for the FinTech industry to develop globally. In order to align the DFSA’s FinTech approach with others, the DFSA has entered into cooperation agreements with the Australian, Hong Kong and Malaysian regulators. These agreements allow for the sharing of information on developments in the UAE and to refer innovative businesses licensed in the UAE to the other markets. Regular discussions with other regulators such as the UK’s FCA means that the DFSA can learn from experiences in other markets.
The future ahead for FinTech
With the continuing growth of FinTech, two further programmes are being launched this year by the DIFC’s FinTech Hive at DIFC, which ran its first accelerator programme in August 2017 in partnership with Accenture. This year Accenture will again run a programme from September – November aimed at the start up end of the market with the focus on Islamic finance. Startupbootcamp will then run three programmes over the next three years, the first of which will start in December 2018 focusing on RegTech and InsurTech. The FinTech Hive at DIFC, the DIFC and the DFSA are working closely together to ensure the existence of a cohesive FinTech development cycle in the DIFC. The firms that go through the FinTech Hive programme aiming to carry out financial services will be considered for transition to the DFSA’s ITL programme.
At the FinTech Conference the panel speakers gave their views on the future of FinTech. Sushil Saluja spoke about Islamic finance being set to grow (with Arabic speakers being underserved) and being a prime opportunity for technology and talent to collaborate. From a bank’s perspective, Neeraj Makin spoke of key considerations for financial institutions when looking at partnering with a FinTech. “Essentially if a FinTech can solve a problem for a bank and improve the customer experience or open up a new revenue stream it will attract the bank’s attention”. Todd O Brien referred to the importance of corporates having to move faster and start-ups needing to build structure in order to move slower. He advised FinTechs to “go after the small fish whilst also chasing the big fish”. From Omar Soudodi’s perspective, FinTechs are good at “the last mile” of the banking process and this is a prime opportunity for FinTechs, but it is reliant on Banks making APIs available. With Blockchain and Cryptocurrency on the horizon, he does not see a future for payment gateways; banks will therefore need to reinvent and this is where FinTechs can help them. Further, with the high population of millennials and percentage of smart phone penetration in UAE there are even more opportunities for FinTechs.
Innovation and technology are being supported in the UAE by the work of the DFSA, FinTech Hive and Dubai’s SME incubator licence, as well as the ADGM. The DFSA has also added innovation as a priority to its strategic policies. All of these initiatives support the National Innovation Strategy set out by His Highness Sheikh Mohammed Bin Rashid Al Maktoum, Vice President and Prime Minister of the UAE and Ruler of Dubai, to create an innovation friendly ecosystem. Whilst there is still further work to be done, with the opportunities available, the changes in culture/human behaviour, the enthusiasm of entrepreneurs, and the support of the government and regulators, there is indeed an exciting future ahead for FinTech in the region.
 Information provided by Peter Smith Managing Director Policy and Strategy DFSA
 Panel members: Todd O Brien, Managing Director of Bootcamp, Neeraj Makin, EVP Head of Group Strategy Emirates NBD, Omar Soudodi, Managing Director of Payfort and Sushil Saluja, Senior Managing Director Financial Services Accenture EMEA
 Sarwa is the first hybrid automated investment management platform for young professional in the Middle East, making investing simple and affordable.
 Smart Crowd is a digital platform that allows investors the opportunity to participate in the real estate market with low capital requirements through fractional ownership
 Bridg is a mobile payments platform that enables smartphones to process a transaction regardless of the financial instrument or the connectivity of the device.
 Magnitts Q1 2018 Analytics Report: 47 of 62 deals at the Early Stage (Angel/SEED) (76%), 10 at Series A(16%) and 3 at Series B (5%).