Banks today face competition from an array of fintech startups
Banks today face competition from an array of fintech startups Image Credit: Supplied

What makes a city a sectoral hub? The people, the government and the infrastructure? Or staying ready with all of these when the time is ripe?

For a country that consistently ranks among the best in the World Bank’s Global Ease of Business Index, UAE’s promise of good governance, robust infrastructure, and a range of opportunities for residents and citizens alike positions it uniquely to emerge as an icon of financial technology.

The country’s proclivity to become a fintech hub is no secret. It houses over 50 per cent of the region’s fintech companies, with nearly 39 per cent of the population using fintechs for peer-to-peer money transfer, as per a recent Deloitte report.

The CBUAE has been central to this ambition, taking a quantum leap in governance and technology adoption.

Its regulatory policies for crypto assets are just one among its many actions that signal an open mind to the future of global financial services.

Aamidst all this, the country is yet to attract a substantial portion of the global fintech financing that its contemporaries are laying claim to. FDIs (foreign direct investment) chase free-market innovation, and as anyone familiar with the fintech industry will agree, the creation of a hub warrants the equal growth of every micro-element connected to it.

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Leveling playing field

The UAE possesses an efficient customer onboarding platform, the Emirates ID, which is gradually being extended to become a sort of resident super-card encompassing all public services. The benefits of this platform have been made available to financial institutions at affordable charges (one-time onboarding fee of Dh20,000 and no charges on real-time API calls).

Add to this the widespread acceptance of UAE PASS – the national digital identity, as well as high levels of data infrastructure, data throughput and digital transformation channels across the country, and it is evident the UAE has all the elements to become a fintech hub.

Sighting the finishing line though requires the creation of a unified ecosystem that enables a plug n’ play process for simplified and autonomous connect between financial institutions and consumers.

Need to hurdle past this

As of today, in the UAE, i) most of the existing financial service providers work in silos and are not fully integrated into the ecosystem, and ii) fintechs cannot function independently. There is a valid reason for the UAE to mandate the latter.

The country is an existing hub of global cross-border payments and has a very strong AML/CFT regulation in place. From an operations standpoint, it augurs well for the ecosystem to have banks - and other regulated financial institutions such as exchange houses - provide the necessary back-end support to a standalone fintech.

Although advantageous to an extent, this arrangement comes with its own risks such as a fintech overlooking minute regulatory rulings of larger financial institutions, as well as issues arising from a possible conflict of interest that can potentially impact their market penetration and customer acquisition strategies.

For example, consider a modern fintech that has its entire business model around payroll management.

Unlike banks, a fintech solves one customer pain point at a time. By tapping into a customer’s financial journey right from their point-of-payroll, the company may well be in conflict with one of the many business verticals of the bank it is tied to.

One way out would be for the fintech to “white label” its solution, but this too when presented as an imposition rather than a choice can limit the scope of many a fintech’s ambition to chart its own course.

An opportunity lands up

While it is expected that the CBUAE will soon roll out a unified solution for all players to function seamlessly, it is up to existing stakeholders to do their part in keeping the ground fertile in the interim period, by backing promising entrants. This could be through partnerships with early-stage players, both locally and internationally, whose solutions can help tie up several loose ends of the ecosystem in matters of KYC, transaction speed, and security.

For example, apart from the many promising fintechs testing their offerings in the regulatory sandboxes of ADGM and DIFC, the UAE’s partnership with Israel throws open an array of options around cyber-security, with Israel being the global leader in this sector.

As the payments industry basically necessitates an exchange of sensitive, time-bound data through a third-party service provider - i.e. banks, exchange houses or a digital player - such partnerships if done right can validate the ecosystem’s eagerness to integrate beyond local borders, and help existing players serve the pressing financial needs of customers in a globally validated fashion.

Ultimately, for any existing or new fintech entity to become economically sustainable, the million-dollar question is whether 10 years down the line, they can own the customer or remain just another middleman to the incumbent financial heavyweights.

The UAE’s march towards becoming a global fintech hub will depend on how well it can open up the ecosystem, in response to this question.

- Adeeb Ahamed is Managing Director of LuLu Financial Services.