London: Rigidity in banking regulations and relatively higher capital requirements to enter financial services business are limiting the scope and speed of financial innovation and development to fintech in the Middle East, according to ‘Digital Disruption Revisited’, a report by Citigroup.
“Banks in the Middle East have a lot of power and control over regulations on how the financial sector operates, given that most of them are backed by governments and influential stakeholders. It is extremely expensive for new financial service providers to set up and comply with regulations. This limits the number of start-ups tackling this field by creating high entry barriers from both a regulatory as well as an investment perspective. Regulations continue to block the development of the sector,” the report said.
Old, traditional policies that have governed the financial sector today have yet to provide clear rules on new age fintech services, and banks are worried about how these technologies are disrupting their existing lines of business but are slow at adopting these innovations because of internal bureaucracy.
Many banks are partnering with start-ups that provide fintech solutions (e.g. payment gateways, remittance technology savings solutions etc) while other larger banks are allocating capital to explore potential investments in the start-up space.
Regulators, such as Abu Dhabi Global Markets’ regulator ADGM Financial Services Regulatory Authority (FSRA) and Dubai Financial Services Authority (DFSA) are looking to create ‘sandboxes’ to provide start-ups with less regulated environments to test their products more quickly. This could facilitate the improvement of regulations as governments become more familiar with where the world of fintech is heading and the solutions being developed.
Cyber attack targets
The business model for these start-ups has yet to be proven to have sustainable scale cybersecurity in the region. For fintech new entrants this is both a huge opportunity and a sizeable threat. Many traditional financial services have been targeted by cyber attackers. “As cybersecurity solutions become more sophisticated and provide banks and governments with greater protection, then fintech services will be able to flourish. On the other hand, fintech start-ups should have security at the core of their offering in order to provide comfort and reliability to their customers,” the study said.
By relying heavily on regulation and huge distribution networks as the primary means of value creation for the past decades, banks have become used to an environment of limited competition, a mentality that has seeped into every aspect of the industry from culture to business processes. On the other hand, start-ups that are tackling the space understand that in an age where distribution is solved through mobile devices, data is at the centre of all financial transaction and have therefore been built with that core competency in mind. Moreover, bank legacy systems and software limit uses and understanding of data.
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