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The new dawn: How the rise of fintech is transforming the Middle East

The last few years have seen a sharp increase in the number of fintech startups establishing a presence in the region, which many put down to the benefits of its location and private investment appeal. How will this growth cement the Middle East’s position as a fintech hub for years to come? 

Like the vast majority of industries in 2018, the banking and finance sector is having to undergo a revolution of its own to stay relevant in the digital age. We’ve seen numerous examples in the last decade of how technology – or lack of, in some cases, is capable of trouncing some of the world’s most notable brands, acting as a cautionary tale for those not prepared to ride the digital wave going forward.

For traditional banks, the advent of financial technology – or fintech for short, is transforming the delivery of financial services worldwide – and banks in the Middle East are keen to stay apace with this change. According to “The Case for an Innovation Hub to Facilitate MEASA Financial Inclusion” report by Oliver Wyman, the UAE is ideally positioned to serve as the “beating heart” of a regional innovation hub in facilitating the development of digitally enabled financial solutions across the Middle East.

But it could be argued that fintech is not a new phenomenon – simply one that has gained significant traction in recent years as digital transformation becomes a priority for a number of sectors. What are the reasons behind this?

“We’ve seen a fundamental shift in the way that businesses and their customers use technology as the basis of their interactions in recent years. Fintechs have enabled the use of technology as a commercial channel for business, while providing access to digital channels for consumers in personal finance,” says Sirish Kumar, co-founder and CEO of Telr. “Fintech’s focus, tech-centricity, and smaller size has allowed them to stay nimble and relevant. Larger, more traditional financial services institutions are unable to replicate this.”

However, it goes without saying that a number of banks will see areas of their business increasingly affected – be it for better or worse, by fintechs. But while a common debate asks whether fintechs will replace traditional banks in the future, Kumar disagrees.

“It’s a deeply symbiotic relationship,” he says. “Fintechs wouldn’t be able to function without partnering with banks in one form or another. Fintech partnerships will be able to provide banks with the ability to provide for their clients beyond geographical borders, while reducing the costs of servicing. CIOs and technology leaders of forward-thinking banks in the region have clearly articulated the need for these partnerships and are already moving forward in this regard.”

While most of us may consider withdrawing money from an ATM or stepping into a local branch to carry out a banking transaction as second nature, 1.7 billion adults worldwide have no access to financial services. For many, that means not having access to small loans or credit lines, having nowhere to securely save your money, and having no reliable method of receiving or making payments.

In the Middle East and North Africa, a staggering 86 percent of adults do not have a bank account, according to research by Wamda and Payfort in the State of Fintech 2017 report. This creates a huge opportunity for fintechs to create innovative financial solutions to bridge the gap between the banked and unbanked – particularly in the UAE, where the nation boasts the world’s highest smartphone penetration levels.

“UAE banks only target between 25 and 30 percent of country’s population, and while a large segment of the nation’s population is made up of low income workers, many of those who are unbanked are actually millennials and housewives – for the simple reason that their fathers and/or husbands are banked and manage the family finances,” says Paolo Gagliadi, CEO, Trriple. “As a result, we’re working hard on our roadmap to ensure that we can provide for this segment in the future with our mobile wallet solutions. It’s an interesting subsector, and one I can really observe. My son can’t conceive the thought of engaging with any service without the use of his smartphone.”

But before fintech solutions can really take a firm grasp of the financial services market in this part of the world, there is still much to be done in terms of legislation and appropriate regulations. According to the Wamda report, 85 percent of fintech entrepreneurs said they would relocate for better regulations – so when will the Middle East react?

“We have a very close relationship with the UAE’s Central Bank in Abu Dhabi, and they’re the first to admit that we need improved regulations,” says Gagliadi.

He adds that when it comes to legislating the use of mobile wallet solutions in particular, there are a number of aspects that need to change in this region. “Enabling consumers to withdraw money from their mobile wallet is a service that is currently unavailable in the UAE, and one that the Central Bank is working to put into place in the near future,” he says. “In addition, there needs to be an increase in the limit that can be stored on a mobile wallet and spent on a monthly basis. Regulatory authorities in the UAE also need to establish financial licences specifically for fintechs.”

However, Gagliadi is confident that we can expect these changes sooner rather than later. “Authorities here are smart and wise, and I’m positive that this will be done within the next two years,” he says. Gagliadi also believes that it won’t just be regulations that disrupt the financial services sector going forward, and pinpoints the impact of Blockchain, chatbots and artificial intelligence as playing a significant role in transforming the industry in years to come.

“Blockchain is an unstoppable wave that’s coming, and it will bring with it a number of benefits across verticals – from efficiency, speed, cost and security to the end-user,” he says. “No matter where you fit in the ecosystem – even if you’re selling apples, it will become imperative for you to be aware of and understand the Blockchain.”

This will only become more crucial as the number of fintech startups in the MENA region continues to increase. Between 2013 and 2015, the number more than doubled from 46 to 105, and the region is expected to see a total of 250 fintech startups launch by the year 2020, according to the Wamda report.

For those looking to establish themselves in the region, Craig Moore, CEO and founder of peer-to-peer finance platform – Beehive, believes that a strong understanding of the local market’s regulation, legal and third-party ecosystem is “pertinent” in any nascent fintech startups’ bid to succeed.

“Build a mentor network with established, regional fintech leaders, and make sure your funding plans account for delays, seasonality and future regulatory costs,” he says.

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