Dubai: Fintech (financial technology) is gaining traction globally and has already arrived in the Middle East and North Africa (Mena).
Financial technology describes tech-enabled products and services that improve traditional financial services. They are faster, cheaper, more convenient or more accessible. In most cases they are developed by start-ups.
In fact, the number of start-ups offering financial services in the region doubled from 46 to 105 in the last three years (2013-15) and the region could see a total of 250 start-ups launch by 2020, according to a study conducted by PayFort and Wamda.
The Arab world was home to 105 fintech start-ups by the end of 2015. While these start-ups span 12 countries, it is notable that they are equally distributed between GCC countries, the Levant and North Africa.
Four out of 12 countries host 73 per cent of all Mena fintech start-ups. These four countries represent Mena’s potential fintech hubs.
Omar Soudodi, Managing Director of PayFort, said that the UAE is the most dynamic hub with a four-year compound annual rate of almost 60 per cent, and payments are the most popular sector, accounting for half of all Mena-based fintech start-ups.
“The rise of fintech in the region is driven by four opportunities — 86 per cent of adults don’t have a bank account, and SME lending stands at half of the global average; at the same time, the volume of eCommerce is set to quadruple over five years, and one in two bank customers is interested in new digital services,” he said.
He said the three main obstacles for fintech start-ups are visibility, customer education, and trust. This is why almost nine in 10 fintech start-ups seek collaborations with corporations, and banks are well positioned to integrate into the growing fintech ecosystem.
Fadi Ghandour, Chairman of Wamda, said that financial services and traditional banking are being challenged by very innovative digital technology start-ups, offering simple, accessible and low-cost mobile solutions.
“The ecosystem in the region, in general, for tech entrepreneurship is happening and it is growing. Saudi Arabia is the biggest market in the region followed by the UAE. Fintech in the next three years is going to be the core of how the trade is going to happen,” he said.
The industry is changing fast but the “core challenges” reported by Mena’s fintech entrepreneurs concern regulations, hiring and retaining talent, as well as raising investments.
“One in four fintech start-ups shut down, and only 10 per cent account for the majority of investment and employees. Taking a closer look, positive dynamics seem to improve all of the three challenges,” he said.
Soudodi said that fintech is poised for greater visibility by 2020. With the payment sector showing early signs of consolidation especially in the GCC region, it can be expected that second wave start-ups enter the game wherever fintech gains a foothold.
The report said that innovation in finance picked up later than it did in media, retail or communication. However, since 2010 thousands of fintech start-ups have raised over $63 billion around the globe.
Fintech was initially associated with three services — lending, capital raising, and payment solutions. Crowdfunding platforms, peer-to-peer lending networks, and payment solutions such as PayPal build on the megatrends of the emerging internet economy: the sharing economy, social networks, and eCommerce.
Soudodi said that fintech start-up creation is happening almost three times faster in the UAE compared to Egypt, which is explaining why they switched their respective positions — Egypt used to host more than one in four Mena fintech start-ups, now this position is held by the UAE.
He said that 2010 marked the beginning of an accelerating fintech creation. Indeed, half of all Mena-based fintech start-ups were founded after 2012. Hence, while the majority of the region’s start-ups are still in their early stage, the industry is poised to witness its second cohort of scale-ups before the end of the decade.
To date, he said that over 20 start-ups from the US, Europe, Australia and elsewhere entered the Arab world. Competing against them is difficult or very difficult for almost two in three surveyed fintech entrepreneur.
However, he said the effect of more competition is not only challenging — there are multiple opportunities and threats for local entrepreneurs.
In 2010, fintech just meant digital payment. Of the few fintech start-ups that existed back then, almost all facilitated payments mainly aiding the eCommerce surge. In 2015, payment showed first signs of consolidation, at least in the GCC market.
Meanwhile, crowdfunding and lending platforms continue to grow especially with a focus on specific geographies or themes.
Towards 2020, Soudodi said that start-ups from the second wave sectors will rise to prominence: they will work in remittances, wealth management, insurance, and probably blockchain-based solutions. Based on growth trends of payment, lending and second wave sectors, it can be expected that one in three fintech start-ups will fall into the second wave sector by 2020.
“With 250 start-ups, the Mena region will still lag behind other regions. For example, Switzerland alone is already home to roughly 200 fintech start-ups today. However, 250 start-ups implies an incredible success for a region that hosted less than 20 fintech start-ups by 2010,” he said.
To ensure this growth, he said that an action plan is needed that unites governments, progressive private sector institutions and investors.