Advisory: ‘GCC must invest more in FinTech’

A new study shows the potential of investing in the financial technology (FinTech) sector.

More investment in financial technology is required to improve the overall experience of the customers in the GCC, says an advisory firm.

Financial technology (FinTech) “ecosystems” in the United States and Europe have proven to stimulate technological innovation that is necessary to develop efficient financial markets and systems and improve the overall customer experience.  Although many of the necessary design elements exist in the GCC to develop a vibrant FinTech ecosystem, relatively little investment has been made in this sector to date, and that could and should change, according to a study by management consultancy Strategy& (formerly Booz & Co.).

The study estimates that the global investment in FinTech sector has jumped three-fold between 2008 and 2014, reaching $3 billion, and is expected to double again by 2018, and may even hit $8bn.

To establish and nurture a healthy FinTech ecosystem in the GCC, a sustained collaboration is necessary between three key players, which include governments, financial institutions and entrepreneurs – with each participant clearly understanding its role as well as the benefits it stands to gain from involvement.

Daniel Diemers, Partner with Strategy& in Dubai, says: “In the GCC, FinTech ecosystems are yet to take effect, and therefore, the role of governments is more critical than it is in established markets. GCC governments must enforce policies and regulatory environment that will ease the development of the FinTech ecosystem.  This will eventually lead the economy to attract great talent, boost entrepreneurial and business activities, and most importantly improve the country’s overall competitiveness.”

The Strategy& study identifies four critical elements that support the development of a FinTech ecosystem:

First, a conducive business environment and access to markets is essential. This means availability and affordability of skilled labor, quality infrastructure, facilities, equipment, technologies and utilities is important. Also, a high degree of integration and synergies among key players is vital for the smooth functioning of a FinTech ecosystem.

The second element is the involvement of the government and the regulatory support offered. Governments can influence many aspects of the ecosystem, including easing business regulations and keeping the taxes and fees low.

Jean Salamat, a manager with Strategy& in Dubai says: “The role of the government is critical in the establishment of an ecosystem and one that expects them to wear many hats in the process. This often requires the government bodies to act as a regulator, set policies, provide necessary infrastructure/services/land, set standards and invest in services to support the ecosystem.

“The level of their involvement would essentially depend on the maturity of the ecosystem. For instance, in the less-mature FinTech environments such as Saudi Arabia and Jordan, government should be involved across the entire ecosystem.”

The third element that is important in the development of a FinTech ecosystem is access to capital. Ecosystems are usually funded through four main sources, which include governments, venture capital funds and private equity shops, incubators and accelerators.

The last key element is the involvement of financial experts who can be instrumental in structuring the ownership of the ecosystem, providing advisory services to entrepreneurs, and offering counsel on legal and regulatory measures. These experts can support entrepreneurs and financial services players and enhance the overall attractiveness of the ecosystem.

Potential for FinTech in the GCC

Currently, FinTech ecosystems are not well established in the GCC and still face obstacles to development. However, despite the challenges, the critical success factors for FinTech ecosystems definitely exist in the GCC, and it is a matter of gathering the appropriate resources and forming a sturdy base for the ecosystem to blossom in.

The study highlights these success factors as (i) GCC’s ability to attract regional and international talent given its cosmopolitan nature and the presence of international enterprises;  (ii) the strong position of the government in the economic development of the GCC aid towards easing the set-up and organization of the FinTech ecosystems at an early stage; (iii) the government-driven funding programs, venture capitalists, and local financial services players can provide early-stage funding for FinTech start-ups; (iv) the  various government bodies and international and local financial institutions can provide the needed advisory, due diligence, and lobbying services to seed the ecosystem set-up.

Abdulkader Lamaa, principal with Strategy& in Abu Dhabi, says: “A consensus is emerging that nurturing these ecosystems is beneficial for the region. Indeed, there are already some success stories in the GCC, particularly in the UAE, where incubators and innovation hubs are supporting the creation and growth of local digital enterprises. The UAE Academy for example, aims to stimulate enterprise in the country by increasing awareness of entrepreneurship. FinTech start-ups, government backing, and support programs are creating pockets of innovation in the UAE.”

To capitalize on this potential, the study suggests that the governments and financial institutions need to take aligned steps to nurture a FinTech ecosystem. For instance the governments should take an active role in estimating the financial benefits of establishing an ecosystem, developing strategies, developing operating model, selecting financial institutions to partner with and setting a zone of development for an innovation hub.

Whereas, the financial service players should be involved in developing a FinTech business case, understanding the financial risks and opportunities, defining a financial structure, identifying the business needs of those in the hub and coordinating with the governments.

“A FinTech ecosystem is about more than matching promising ideas to financing. It is about generating innovative ideas through the interplay of the four design elements of the FinTech ecosystem and the involvement of multiple stakeholders, including the media, disruptive non-bank players, universities, software and infrastructure providers, and venture capitalists. GCC governments, particularly the UAE’s, can build on these advances to encourage a region-wide FinTech ecosystem by connecting a multitude of different stakeholders to support innovation. If the region can rise to this challenge, the rewards for the financial industry and the broader regional economy could be significant,” concludes Dr. Diemers.