Fintech is one of the most widely demanded products as people adopt urbanization. In fact, the sector across the region was the number one ranked industry in terms of investment activity.
In Saudi Arabia, the fintech market is continuing to expand at a rapid pace. The country has seen a 37 percent increase in the number of fintech startups entering the market and a $181 million increase in venture capital investments.
In the third quarter of 2021, Saudi Arabia issued licenses to 16 fintech companies, 13 of which work in the field of payments and electronic wallets and three of which work in the insurance and financial industry.
Promising market
Saudi Arabia’s fintech sector has potential given its large market and efforts with Saudi Vision 2030, where Fintech and broader digital transformation are receiving the relevant tools and support to implement it.
The sector in the kingdom is mostly driven by young first-generation entrepreneurs who compete with the country’s top financial institutions in a competitive market.
“Saudi Arabia possesses a competitive advantage over other countries when it comes to Fintech. Last year, we observed a 54 percent growth in transactions, the largest among the UAE and Egypt. Furthermore, we observed a 270 percent rise in funding, which was higher than the UAE Egypt as well. Saudi Arabia now ranks second in the MENA, after the UAE. Therefore, all signs point to a bright future for Saudi venture capital,” said Philip Bahoshy, founder, and CEO of MAGNiTT, a venture data platform serving founders and investors across emerging markets.
Bahoshy noted that 27 fintech companies in Saudi Arabia had received funding so far, up from 7 in 2021, indicating that investors are choosing to invest in the kingdom as well as the MENA region.
According to Bahoshy, this enormous expansion has been driven by the 2030 vision goals and leading programs from the Ministry of Communication and Information Technology (CITC) and the Saudi Venture Capital Company.
“CITC and the Jada Fund of Funds have been key to driving venture capital investments into Saudi Arabian startups, with 139 investments last year alone. They’re soaring to new heights,” he added to TRENDS.
Maher Loubieh, co-founder of Riyadh-based fintech “Hala,” told TRENDS that his company was lucky to be present throughout the early phases of Saudi Arabia’s fintech ecosystem and watch this incredible journey.
“Hala” was founded in 2017 by Esam and Alnahdi, and Maher Loubieh with the aim of digitizing the payment industry.
Their objective is to help small and medium-sized businesses start, run, and develop by providing cutting-edge financial and technology tools. The startup built strong traction in the Saudi market through serving around 30K SMEs and processing more than $200 million monthly.
However, Fintech, according to Loubieh, is still in its “startup” stages in the region, notably in Saudi Arabia, but it has a significant potential to take over the financial sector.
“The main evidence is the moves of giant players such as banks and telecom companies towards having their fintech arms, in addition to successful companies in any other sector (food delivery, logistics, retail).”
“All these companies are eager to start their fintech activities or partner with fintech companies to go to the next stage of their operations,” he said, adding that every mature player in the market today understands that this is the direction of how the banking and financial services sector is going.
The industry’s challenges
Like any new industry, challenges are inevitable, and the success of any player depends on its ability to overcome them in the fastest and most effective way.
The Fintech industry, according to Loubieh, faces more challenges than any other new industry because it is highly regulated and subject to residual risks such as anti-money laundering, fraud, and cyber security.
“These areas require a solid set of skills and considerable budgets, but at the same time, they also present a significant barrier to entry for entrants to sustain.”
Loubieh summarized the major challenges as follows:
- Access to skilled talents, especially in the tech, product, and control functions.,
- The ability of fintech companies to balance to maintain agility and comply with regulatory requirements. To be a successful fintech, you need to create the infrastructure and the ground for talented entrepreneurs and seasoned bankers to work hand in hand and exchange knowledge.
For his part, Bahoshy agrees with Loubieh that the challenges are not Fintech-specific, yet regulations continue to be a major challenge in any business, including fintech.
The fintech industry faces more challenges than any other new industry because it is highly regulated and subject to residual risks such as anti-money laundering, fraud, and cyber security. “These areas require a solid set of skills and considerable budgets, but at the same time, they also present a significant barrier to entry for players to sustain,” says Maher Loubieh, co-founder of Riyadh-based fintech Hala
In addition to the scalability of fintech products, he believes that talent acquisition and talent education and acquiring talent in the fintech field will continue to be a difficulty for companies trying to hire people with that experience.
“For financial services companies to develop inside different regions, they must encounter different central bank regulations, freezing regulations, and financial regulations. These remain the challenges while also providing opportunities to scale,” he added.
Governmental Support
Saudi Arabia aspires to be an innovative fintech hub with a thriving and responsible fintech ecosystem. The country aims to achieve this by supporting the development of the infrastructure required for the fintech industry’s growth, building capabilities and talent required by fintech companies, and supporting fintech entrepreneurs at every stage of their development.
The shift by Saudi Arabia’s central bank, SAMA, to Open Banking is expected to help the fintech sector grow in line with Saudi Vision 2030 and the Financial Sector Development Program.
The plan calls for expanding the digital economy and allowing financial intermediaries to support the private sector growth by opening the financial services industry to new players.
In accordance with this, Loubieh praised the great support from different public sector organizations and the regulators.
For example, the Ministry of Telecom and Information Technology and the SME Authority (Monsha’at) have provided significant support to all tech companies, particularly fintech companies, regarding access to skillset and development programs and exposure to explore expand into new markets.
The Saudi Central Bank (SAMA) has also been at the forefront of support in progressive regulatory frameworks that are not bank-led, allowing fintech startups to innovate independently.
“We expect that government and regulatory agencies will keep on developing other means of support for fintech companies as the sector matures and as more regulatory frameworks emerge. If I had to choose one area to focus on, it would be upskilling talent in order to build a larger talent pool to support fintech growth.” Loubieh remarked.
On the other hand, Bahoshy believes that the government’s role is to ensure companies can operate in a cost-effective environment and, more crucially, support talent movement, whether inside or across regions, without creating obstacles to talent mobility.”
“That, I believe, is where the government can play the most important role in any location, not just Saudi Arabia,” he added.
The sector’s future
Loubieh believes that the fintech sector in Saudi Arabia, within a period of 5 years, would have achieved a high level of maturity in terms of specialization, availability of talents and experience, and regulation.
Additionally, he believes that the hype in the market will start to become a solid reality. The market will achieve in the medium-term a self-cleansing status where we will see some players exit the market (those who were not able to secure their spot and figure out their specialization) while some other players will merge. In contrast, others will be consolidated within more prominent players.