The FinTech sector has matured over the past couple of years and now appears to have entered a new phase of evolution. The perception of the FinTech players have evolved from being a disruptor to a collaborator, which is resulting in accelerating the pace of digitalization, benefiting the industry stakeholders and the customers.

More importantly, the FinTech start-ups have the ability to move swiftly and adapt to develop custom solutions compared to incumbents with legacy systems and processes. As a result, the traditional financial institutions have evolved over the years and have become more accommodative in teaming up with emerging technology companies to gain access to new markets and products, improve efficiencies, or integrate such technological advanced instruments into their business model. This shift in perception is accelerating the pace of digital transformation, which is likely to benefit both the industry stakeholders and the customers.

2018 was a phenomenal year for the FinTech sector as VC backed companies raised around USD 39.6 billion across 1,707 deals globally. The adoption of such emerging technologies has enabled FinTech start-ups to turn into unicorns (company value more than USD 1 billion) on the back of unprecedented growth over the past few years. According to CB insights, Close to 400 companies have turned into unicorns since 2010. In comparison, the FinTech industry in the Middle East remains at a nascent stage, however the pace of technological innovation, especially the GCC, has been growing rapidly over the past few years.

MENA-based FinTech startups have attracted investments worth AED 550 million over the last decade, of which approximately 35% was made in 2017 alone, equating AED 193 million.

Though the momentum of investments has gained traction amid a growing number of players offering niche and differentiated service offerings, there is an approximate funding gap of AED 7.3 billion between the MENA and other emerging markets. This gap is much wider, at AED 36.7 billion, when compared with the global average. Though this implies that the region’s FinTech market is still in an incubation phase, the preparatory landscape is likely to provide suitable ground for the emergence of several FinTech unicorns over the next few years.

For example, payment wallets such as CashU, HalalaH, BitOasis HyperPay, MadfooatCom, are slowly gaining popularity on the back of increasing e-commerce transactions while Crowdfunding (Eureeca, Aflamnah, Durise, and Zoomaal), financial comparison sites (Yallacompare and Souqalmal) and peer-to-peer lending (Beehive) platforms have emerged as a potential 'game-changer' for SMEs financing.

Similarly, regional FinTech firms are also expanding in other lucrative segments such as Islamic finance, remittances, insurance, and online trading while Sarwa, Wahed Invest and Solfeh are exploring the financial advisory services (robo-advisory) segment.

Going forward, the market is likely to witness a surge in FinTech companies, with the number of players expected to double from the current 130 firms over the next three years. As a result, the MENA FinTech industry, currently valued at USD 2 billion, is expected to reach around USD 2.5 billion by 2022.

Recognizing the importance of FinTech companies, regional banks are proactively accelerating the pace of adopting financial technology to reduce costs and improve customer experience. More importantly, the impact of FinTech on profitability has forced banks to accommodate FinTech to assist them in key areas such as customer acquisition and on-boarding, remittances, SME banking, Islamic banking, etc.

While banks such as Emirates NBD, Emirates Islamic Bank and First Abu Dhabi Bank have set up digital strategies to foster innovation and accelerate development of next generation digital services, others such as Bank Al Etihad, the Arab Bank, and Bank Al Ahli have underwritten substantial amounts of capital in FinTech startups as institutional investors. Similarly, UAE-based RAKBANK has teamed up with C3 to launch a payroll card, for both banking and non-banking individuals, which offers low-income workers better remittance rates.

Following the footsteps of First Abu Dhabi Bank, which became the first bank in MENA to introduce real time, cross-border payments on Blockchain through a partnership with US-based Ripple; Saudi British Bank (SABB), National Commercial Bank, Kuwait Finance House and National Bank of Kuwait have entered into a partnership with Ripple to leverage its global Blockchain network for cross border payments.

However, due to a high degree of fragmentation, digital transformation and the adoption of FinTech innovation in a commercially viable manner may not be feasible for a number of small and medium-sized banks. Hence, larger banks are likely to gain market share and pave the way for more consolidation in the long-run within the banking sector.

The regulatory environment within the region has also evolved over the years as industry stakeholders have been quick to realize the importance of fostering such technological advancement that has changed the landscape of the financial service industry. Within the region, the UAE has the most advanced ecosystem, as the government has taken key initiatives by partnering with different agencies, regional banks, and policymakers to support innovation.

These include the Dubai International Financial Centre (DIFC), which oversees a USD 100 million FinTech fund and the region’s first FinTech accelerator - Fintech Hive; and the Abu Dhabi Global Market (ADGM), which developed its RegLab (regulatory laboratory) to help new companies solve regulatory issues. Similarly, several regulatory sandboxes have been launched across the GCC to test and develop innovative FinTech solutions.

The region’s regulatory stance around cryptocurrency and Blockchain technologies has also evolved with the Dubai government planning to launch a cryptocurrency called 'emCash', while the UAE and Saudi Arabia are mulling a joint cryptocurrency, following one of the region’s first licensed crypto-exchanges hosted by Bahrain Fintech Bay.

Blockchain technology is also witnessing a strong uptake in the region, with UAE-based Blockchain startups reportedly raising USD 210 million in Q1 2019, surpassing the US and UK to make it to the top of the world’s top-10 token sale list. The Saudi Arabian Monetary Authority (SAMA) has started using a Blockchain-based remittance system to facilitate transactions between banks in the Kingdom and the UAE. Such innovative solutions and initiatives remain crucial to the growth of the FinTech sector, as they not only widen the scope of offerings and grow the industry organically but also add to the attractiveness of the FinTech market from an investment perspective.

In conclusion, the regional FinTech sector offers exciting opportunities for both the PE/VC firms and financial institutions. The PE/VC firms can partner by deploying funds for expansion and innovation, while banks and financial services industry can provide significant addition to subscriber base within their existing network. Moreover, technological advancements to provide customize solutions will be important for next phase of growth in FinTech sector.

For the region to produce unicorns, the FinTech companies will need to focus on organic and inorganic growth strategies. Although, the regional authorities have been proactive in ensuring favorable regulatory environment, it will have to continue adopting to the rapidly changing FinTech sector to maintain the growth trajectory.

*Any opinions expressed in this article are the author’s own.

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