Despite growing awareness that it could reduce the Middle East’s dependence on oil, financial technology – fintech – is not growing as fast as it could. Indrajit Basu
Although a few start-ups have appeared lately, particularly in the Gulf countries, the financial technology (fintech) sector is struggling in the Middle East and North Africa.
According to a report by FinTech Weekly, a specialist publication covering the sector, less than 0.1% of global fintech investment originates here. MAGNiTT, a start-up evangelist, says only about 5%, or 120, of the 2,400-odd start-ups listed on its MENA database are fintech.
MAGNiTT founder Philip Bahoshy says the region should have produced at least twice that number. The paltry number of start-ups suggests the Middle East is lagging behind its foreign counterparts in developing new business models that could disrupt financial services.
The slow development helps ensure financial services remain expensive, and stymies the region’s stated ambition of developing a knowledge economy in the next few years.
One reason for the slow adoption is lack of dire need. In India, mobile payment companies such as Paytm and Mobikwik have blazed a trail for fintech by helping to provide financial services to a huge unbanked population. China has Alipay, set up by Alibaba to handle online payments. In contrast, the Gulf countries generally do not suffer financial exclusion. Bank penetration is relatively high and residents are, by and large, not poor. But wealth is not the only obstacle. Within the fintech sector, there are high barriers of regulation. Although governments are keen to embrace technology, lawmakers and established institutions baulk at adopting it quickly.
“We found that although the region has the infrastructure and some attributes to nurture the fintech ecosystem, currently it is not a priority for banks and the government to push the initiative,” says Tom Steffens, one of the authors of ‘Developing a FinTech ecosystem in the GCC’, a report by a unit of PwC.
“The fact that fintech has not been pushed sufficiently by governments is the most important reason why fintech did not progress as we expected it to [about two years ago],” he adds.
Industry sources say that the number of regulators with different jurisdictional powers in the region is daunting.
“Only in the UAE, for instance, there are five different regulators, which makes it difficult for start-ups to devise new and innovative business models,” says David Martínez de Lecea, a fintech adviser at consultancy Roland Berger.
De Lecea has first-hand experience of the problems, having co-founded Finerd, a fintech start-up that sought to provide automated investment management to retail clients in the Middle East.
The regulatory environment in the region can certainly seem crowded. In the UAE, the Dubai Financial Services Authority has a good reputation but only has power to operate within the Dubai International Financial Centre (DIFC), a free trade zone. A fintech firm operating outside DIFC would likely fall under the remit of the Securities and Commodities Authority. The recently established Abu Dhabi Global Market has its own regulator, the Financial Services Regulatory Authority. The UAE also has a central bank, with its own regulatory powers, and an Insurance Authority, which regulates the insurance sector.
Of course, each of the other Gulf states has its own regulatory bodies too.
“The fact that the region consists of a group of disparate, factionalised countries with their own sets of laws and cultural issues, [and without] much harmony, makes it difficult to push something out to a larger group of people,” says Chris Thomas, co-founder of Eureeca, an equity crowdfunding platform that has an office in Dubai.
“Operating in each country requires dealing with a new set of laws locally, which is very challenging. There is no free movement of information in terms of people and businesses online, which is what fintech needs. Fintech by its nature uses technology to drive down the cost of doing business, but you can’t do that if every country has its own standards.”
Thomas also says weak payment gateway infrastructure, the burden of know-your-customer (KYC) requirements, anti-money laundering laws that restrict cross-border investment, and a lack of credit bureaus are among other hurdles faced by fintech.
Some of these problems are due to the region lacking membership of the Financial Action Task Force. An intergovernmental body of 37 member countries, the FATF sets standards for combatting money laundering, terrorist financing and other related threats to the integrity of the financial system. Barring Turkey (and Saudi Arabia, which is just an observer), none of the MENA countries are members, which means their financial systems are considered risky by international standards.
The relatively small populations of the Gulf countries are another barrier. Pinaki Aich, vice president of group strategy at the DIFC Authority, which promotes Dubai’s financial centre, says scalability is a key ingredient for fintech development. Fintech works best when it can serve a large market and draw on a large talent pool.
“If you look at countries where technology has taken off well, it has certainly been helped by an abundance of talent,” he says. “In the Middle East, it is not a problem starting with first three [workers], but scaling up from three to 100 is a huge problem. And if you bring people from outside, it is very expensive.”
Labour is not the only thing local entrepreneurs must pay for. Although company set-up costs vary depending on the country, type of business, and whether they are onshore or offshore, it is not unusual to lay out between $5,000 and $10,000 simply for the paperwork needed to begin a business in the Gulf countries. In contrast, it is possible to set up a company in the UK for as little as £10. If a fintech firm’s activities require it to gain a banking licence, the capital requirement can run into millions of dollars.
“It is incredibly expensive to launch a start-up here,” says Nikolas Fotilas, chief executive of InvOrOut, an angel investing platform run from the Middle East.
The challenges can seem immense, says Nour Atrissi, co-founder of Zoomaal, a crowdfunding platform for the Arab world.
“Most fintech entrepreneurs are daunted,” she adds. “They find it really hard to raise money unless there is some traction, and so have to rely on self-funding until the business is somewhat successful.”
And, unfortunately for the MENA region, the types of people who set up fintech start-ups are a footloose bunch. If the conditions are not fertile for starting their businesses, they will simply look elsewhere.
“Fintech is a global play,” says Daniel Diemers, partner at consultancy PwC Strategy&. “One need not necessarily start up in a particular country. Fintech entrepreneurs are generally socially mobile and they go to the destination where they see best chances for their start-up. So, everyone is in competition with everyone, which means that the MENA region too is in a global competition with other destinations.”
Yet, that doesn’t mean that fintech in MENA has no future. Diemers says the region stands out compared with other fintech centres in terms of access to capital and affinity with technology, which is high. Ideally, the MENA region should be a springboard into the Indian subcontinent, Asia, Africa and even eastern Europe.
Of course, supportive government policies could help the sector. But Thomas, of Eureeca, advises entrepreneurs to get on with it. “My message to an entrepreneur is, don’t wait for the governments to do something, incentivise them to do something.”
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