The digitally connected world has made the consumer the real king. With rapid technological advancement and innovation, the entire focus has shifted toward delivering services to consumers online in a secured way. The financial service industry is witnessing an upheaval with fintech startups gaining stronghold and challenging the traditional business models of established players like banks, stock exchanges and money transfer businesses.
The pace of fintech innovation in the Middle East and North Africa (MENA), especially in the Gulf Cooperation Council (CCC), has been rapid over the past couple of years, primarily on the back of investors’ unmoving confidence in startups. The Middle East has amassed over $100 million in fintech startup funding in the past ten years. As many as 105 fintech startups were launched in 2016 and at least $50 million of funding is expected to them by the end of 2017-18, up from $18 million in 2016-17, according to a report by Wamda Research Lab and Payfort. The figure constitutes a minuscule share of 0.1 percent of a burgeoning industry valued at $867 billion in 2016.
However, with governments moving way from oil toward creating a knowledge-based digital economy, fintech is making inroads into the region at the pace comparable to the West and emerging as one of the world’s most innovative markets. Players such as peer-to-peer lending platform Beehive, challenger bank NOW Money, payments processor PayFort are disrupting the financial services industry with particular focus on consumer-centric payments, ecommerce, banking, insurance and wealth management. Most of them operate through blockchain, a secure platform which ensures privacy, gives data access to select entities in a network and removes the risk of cyber thefts.
“As technology is evolving, customers don’t want to visit bank branches, they expect to conduct their financial transactions on their computer or mobile. And processes are constantly evolving to capture that feedback and the expectations of customers,” says Mohsin Aikal, Head (consumer finance), Noor Bank.
Cryptocurrency growth
Cryptocurrency, or virtual currency, is one disruption that promises money remitters in the Middle East with reduced service costs and is likely to impact the profitability of banks by slashing money transfer fees and commissions, which currently constitutes one-quarter of their revenues.
Bitcoin’s crazy run in December took the cryptocurrency market by storm. The world’s highest-valued cryptoasset started 2017 with $1,000 market value and ended the year at over $15,000, not before a mad rally saw it close to $20,000-mark in a matter of days. Since GCC accounts for a substantial proportion of global remittances, foreign exchange houses are excited about incorporating Bitcoin-enabling technology to cut costs.
According to the World Bank, remittances to the MENA are expected to grow by 4.6 percent to $51 billion in 2017 and by 2.9 percent to $53 billion in 2018. Nearly $102 billion in outward remittances is made by the GCC expatriate population. The global average transfer cost was estimated at a hefty 7.2 percent in the third quarter of 2017 for a transfer of $200. And that’s where fintech could bring costs down. Bitcoin’s value lies in the fact that it removes middle men that heap extra costs on facilitators and customers.
“Fees payable on Bitcoin transactions are around one to three percent. Our customers see it as a cheaper and easier alternative to traditional channels as they don’t have to pay fees at both ends,” says Ola Doudin, CEO, BitOasis, a Dubai-based startup which facilitates Bitcoin transactions across the MENA.
The demand for cryptocurrencies will only increase. TheGCCcoin, the region’s first green cryptocurrency, is being promoted to become a daily mode of payment, even for a cup of coffee! Exchange houses in the GCC are viewing Bitcoin as an important development. UAE Exchange invested in two blockchain-based companies, Loyyal and Bankchain, in 2017 and is in talks with others – a firm statement of its confidence in the nascent technology.
Regulators across the region are nurturing fintech infrastructure.” Hong Kong’s Securities and Futures Commission has signed a pact with the Dubai Financial Services Authority to establish a framework for the two regulators to help each other develop the fintech industry. Abu Dhabi Global Market created the region’s first “regulatory sandbox”, allowing new products to be tested without full regulatory compliance. Bahrain and Qatar also launched its own regulatory sandbox programmes. The Central Bank of UAE has issued regulations relating to stored-value and electronic payments, payment operations, netting and settlement systems in order to facilitate robust adoption of digital payments across the UAE in a secure manner.
Rise of aggregators
As personal loans and easy credit dried up due to liquidity crunch, aggregator or comparison sites like Souqalmal stepped in and changed the personal finance landscape in the region. Aggregator websites allow consumers to make an informed decision by providing comparisons between different financial products such as credit cards, loans, mortgages and investment products.
The comparison platform Souqalmal.com has raised 10 million in a disclosed deal in 2017. KPMG estimates there has been 60 to 80 percent increase annually in the number of financial products being purchased through aggregators in the UAE market.
“People in this region are waking up to the benefits of comparing financial products and beginning to realise that comparison sites really do save them money,” says Umair Hameed, Partner, KPMG’s management consulting business. Comparisons of products are forcing companies to compete more directly on rates and services.
The Gulf region has a long way to go in adoption of comparison sites. In Europe, over half of insurance policies are bought through comparison websites, whereas that number is minimal here. But as the adoption increases, it will give the region’s smaller institutions a level-playing field to compete with big names with focus solely on pricing and better services.
Financial inclusion
A large chunk of the population in the region is unbanked, but they all have the most powerful tool — smartphone. According to the McKinsey Middle East Digitisation Index, the UAE, Qatar, and Bahrain are among the top countries in the world with 100 percent smartphone penetration and there would be 160 million digital users by 2025 who could contribute up to 3.8 percent annually in GDP — amounting to approximately $95 billion.
Fintech can help boost financial inclusion by providing tools and cheaper services to the common man and help in economic diversity and growth across the region. For instance, artificial intelligence allows financial institutions to draw valuable insight from consumers’ data and improve their services. Utilizing data analytics, lenders could soon be calling customers to offer them products more tailored to their needs.
“Fintech has become an innovative way to bridge the divide and provide cheaper services to the unbanked. Instead of following banks’ red-tape, it focuses on improving customer experience by giving them simple solutions. It has the ability to run lean customer-driven businesses and still leverage a bank’s processing, issuing and acceptance systems,” says Moussa Beidas, cofounder of Dubai-based startup Bridg, which allows smartphone-to-smartphone payments by using Bluetooth.
Nearly 90 percent of retail transactions in the Middle East are made in cash and cheque. To become a cashless society, public-private partnerships will be required to create an inclusive economy and drive the socio-economic growth. For instance, in Egypt, Mastercard has successfully managed to digitize salary payments of over 4.6 million government employees and is working with the government on the financial inclusion of 54 million citizens (65 percent of the population) through a digital National ID program.
“Every digital device has the potential to connect more people to formal financial infrastructure by becoming a commerce device. Breakthroughs in technology and innovation are
focused on developing a more inclusive, connected payments landscape,” says Timothy Murphy, Mastercard’s, chief franchise officer.
Abdulaziz Fahad Al Jouf, founder of PayTabs, a Saudi-based payment processing startup, says fintech is growing at a breakneck speed year on year and fast becoming the Middle East’s new oil.
The driver of this phenomenal growth is a burgeoning tech-savvy young population which is not reluctant to see their gadgets turn into commercial touch points. According to the Ericsson Mobility Report, 70 percent of people across the world will be smartphone users by 2020, and Asia, Africa and the Middle East will account for 80 percent of them. This provides a perfect launch pad for new cost-effective fintech solutions and the growth of the sector.