The Arabian Gulf is lagging other regions when it comes to embracing fintech but now its countries are formulating strategies to launch hubs of their own, with expat populations and Islamic finance opportunities providing room for growth. 

Gulf fintech race

Fintech is an increasingly important buzzword for the governments of the Arabian Gulf countries. Each of the six states of the Gulf Co-operation Council (GCC) – Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab 

Emirates – have developed or are developing high-level strategies for the development of fintech ecosystems, combining progressive regulations in areas such
as cryptocurrencies, open banking, roboadvisory
and regtech with generous sandbox and accelerator programmes.

With fintech investment slower to take off in the GCC than other global markets, local governments are all hoping to capture a significant slice of the investment that is to come. Saudi-based research firm MENA Research Partners forecasts investment in GCC-based fintech firms will hit $2bn for the 10 years to 2028, compared with just $150m in the previous 10 years.

The size of the opportunity reflects the ambitions of the new ecosystems to cater not just to the Middle East and north Africa region, but to other markets such as Africa and south Asia, taking advantage of the Gulf’s strategic geographic location.

Closer to home, however, the embrace of fintech forms part of governments’ diversification plans to reduce their dependence on oil revenues, following five years of volatile crude prices. Saudi Arabia’s Financial Sector Development Programme, for example, lists “opening the financial services sector to emerging players (i.e. fintechs) to spur innovation and growth” as one of its core objectives.

UAE and Bahrain lead the way

The fintech charge in the GCC region has so far been led by the UAE and Bahrain, with other jurisdictions following close behind. Such a phenomenon comes as little surprise as the UAE has for many years served as the main hub for doing business in the wider Middle East. Bahrain, meanwhile, was one of the first countries to embrace economic diversification in the region, and for many years served as its main banking centre.

Dubai is currently leading the way for fintech in the Gulf on a city basis, ranking 58th in fintech ranking specialists Findexable’s Global Fintech Index 2020, with Bahraini capital Manama coming in next at number 153.

Abu Dhabi Global Market (ADGM) in the UAE was one of the first out of the blocks regionally. The comparatively new financial free zone launched its two-year Regulatory Laboratory fintech sandbox programme in November 2016, helping start-ups develop and test their fintech innovations using a light-touch regulatory model, in collaboration with local players. In its first four rounds, the programme has admitted 32 start-ups out of 83 applicants, with the first companies graduating from the programme in 2019.

Dubai’s financial free zone, the Dubai International Financial Centre (DIFC), was not far behind, launching its FinTech Hive accelerator programme in January 2017. The programme enables tech entrepreneurs to develop, test and modify their innovations within the financial centre in collaboration with local financial institutions. The accelerator has run three three-month programmes since its inception, receiving more than 800 applications, and generating 66 proof-of-concept engagements between banks and start-ups. The programme’s popularity has led FinTech Hive to consider running two programmes in 2020 instead of just the one.

Bahrain followed suit in February 2018 with the launch of the FinTech Bay innovation hub, featuring innovation labs, acceleration programmes, curated activities, educational opportunities and a collaborative platform to source partners, investors, talent and build a regional network. The centre’s sandbox has already attracted 35 companies from 19 countries.

All three programmes are supported by local regulators, offering support and guidance in areas such as crypto payments, roboadvisory and open banking.

The rest of the Gulf region is also gearing up for action. The Saudi Arabian Monetary Authority launched its Fintech Saudi programme in April 2018 as part of the country’s Financial Services Development Programme, to act as a catalyst for the development of the country’s fintech industry.

Kuwait’s central bank unveiled its own fintech regulatory sandbox framework in late 2018 in a bid to build its own local ecosystem, and Oman and Qatar are preparing similar regimes.

Too many centres?

The sheer volume of ecosystem initiatives across the Gulf has inevitably led to concerns about the viability of such schemes. With start-ups free to pick and choose where to base themselves, it is likely that some centres will thrive while others will struggle. For the moment, however, the regional centres remain confident that there is room for several players, given the comparatively underdeveloped state of regional fintech.

“Look at Europe, for example; there’s a lot of technology hubs,” says Khalid Saad, CEO of Bahrain’s FinTech Bay. “Obviously London was a big leader, but you also have hubs in places such as Dublin, Luxembourg, Berlin, Amsterdam and obviously the Nordics. If you look at it from an investment perspective, [the Gulf] accounts for 1% or less of total global investments in fintech, so we are still at the very early stage.”

The centres are particularly bullish about leveraging the Gulf’s favourable geographic position to tap opportunities in regions such as Africa and south Asia, not to mention the wider Middle East. 

“The pie is too much for any one of us to swallow [on our own],” says Wai Lum Kwok, senior executive director for capital markets at ADGM. “When you expand the market to Africa and south Asia, you’re looking at a marketplace worth $8000bn, where 50% of the population are under 25, and so many people are still unbanked. If you consider that demographic trend, what we’re doing now is just serving the tip of the iceberg.”

Local specialities

That said, the local centres are keen to highlight what they see as their competitive advantages in an increasingly crowded marketplace.

“Where I see ADGM having a strong value proposition is our ability to develop progressive regulations very quickly and having the judgement to allow fintechs to develop in a safe environment, allowing them to scale along the way, and putting the rules and regulations in place accordingly,” says Mr Kwok.

“By being close to the fintechs, we know what the regulatory issues are and we’re equipped with the technology, regulatory knowledge and the ability to pass rules and regulations very quickly. I think that is our unique value proposition compared with other hubs.”

Raja Al Mazrouei, FinTech Hive’s executive vice-president, points to the breadth of the financial ecosystem in the DIFC as her centre’s key advantage, despite the relatively high cost of doing business in Dubai. “If you’re a fintech start-up, it may be a bit cheaper to establish yourself somewhere [else], but it is worth setting up in a place such as the DIFC where there’s a comprehensive ecosystem around you,” she says.

“The UAE has a government that is really focused on start-ups and entrepreneurs as being a stimulant for the economy, which is why it has been able to capture most of the opportunities in the region. This is the place where you can capture most of the business.”

Mr Saad, meanwhile, points to the fact that FinTech Bay, unlike its rivals in Dubai and Abu Dhabi, is not situated in a separate free zone. “The key differentiator between Bahrain and the rest of the region is the fact that everything that is happening here is happening onshore,” he says.

“Saudi Arabia is looking also at a national level but it is not at the stage where Bahrain is. I think what really distinguishes us here is the fact that we are small and nimble, we’ve got alignment between different stakeholders, whether on the government or private side, and so this is an ideal test platform to start incubating and ideating and pushing new ideas.”

Sharpening focus

The Gulf’s ecosystems have opened their doors wide to a variety of start-ups developing fintech innovations across a range of sub-segments. Now that the initial excitement has subsided, centres are starting to focus on what works and what does not, and, crucially, where the exact commercial need is.

“It’s very easy for the needs of customers and incumbent financial institutions to get lost in the hype surrounding fintech, whether that’s here in the Gulf or elsewhere in the world,” says Tristan Brandt, an associate partner in Oliver Wyman’s digital, technology and analytics practice in Dubai. “At the recent Fintech Abu Dhabi event in October 2019, there was a lot more focus on what the actual problems to be solved are and what fintechs should be trying to achieve. Sophistication levels are improving and people are learning fast.”

ADGM, for example, admitted eight companies in May 2017 for its first sandbox intake, with only two entities graduating from the two-year programme. “This is to be expected, as in the early experimentation phase you’re learning along the way,” says Mr Kwok.

“Venture capital firms will tell you that 80% of start-ups tend to fail, so this isn’t anything strange to us. For the following batches we expect there’ll be a higher rate of success, as we’ve learnt how to select better entrants and we’ve put in place other support programmes in our ecosystem,” he adds.

The importance of payments

It comes as little surprise that payments has been one of the most popular areas of focus within fintech in the Gulf, in common with much of the rest of the world, with ADGM, FinTech Hive and FinTech Bay all reporting significant activity in the space.

“In the UAE [the payments space] has gained additional traction because 80% of the population are expats who need to remit money back home,” says Mr Kwok.

The two successful graduates of ADGM’s sandbox regime, NOW Money and Pyypl, are both related to payments, and payments firms attract about 30% of overall investment in the Gulf ecosystem.

The importance of payments in the region was highlighted in October 2019, when remittance giant Transferwise announced that it was opening an office in ADGM to use as a springboard for expansion across the region. It said it would launch its first product for the UAE in 2020.

Cryptoassets is an increasingly popular area among the region’s start-ups. “There are more than 10 companies within the cryptoassets space [in FinTech Bay],” says Mr Saad. “That is one area that has started from scratch here; I personally think it is going to continue to grow moving forward.”

ADGM has seen a similar swell of interest, after publishing a regulatory framework on the subject in June 2018. “Since launching the framework we’ve received nine applications [in that area],” says Mr Kwok. “Some applications are for exchanges that allow investors to conduct safe transactions, and also use them for remittances, while others are looking at [customising] cryptocurrencies.”

DIFC’s FinTech Hive has received applications from several start-ups in the regtech and insuretech space, which can provide them with quick wins. “We’ve seen that insuretech and regtech start-ups have been able to capture more business opportunities with insurance companies than with banks,” says Ms Al Mazrouei. “Most of the proof of concepts have come in this area. With banks it is often more complicated.”

Islamic finance is also a growing area for FinTech Hive, accounting for about 10% of the programme’s applications, as it partners with the Dubai Islamic Economy Development Centre to encourage growth in this area. 

“It is an area we definitely want to focus on, as Dubai provides easy access to 80% of the worldwide Muslim population. It’s one of our key areas of focus, although it still has some growing to do,” says Ms Al Mazrouei.

A challenger awaits

Those waiting for Monzo-style digital challenger banks in the region, however, are likely to be disappointed in the short term. For all their talk of the need to embrace the innovative and disruptive opportunities that fintech brings, regulators are largely unwilling to licence new lenders, digital or otherwise.

While the UAE has several ‘digital-only banks’, such as CBD NOW, Liv and Neo, all of these are run by established banks. “Regulators in the region don’t really want to inject risk into the system, and don’t see value in having more banks,” says Mr Brandt. “Indeed, the trend is towards consolidation rather than proliferation.”

Ms Al Mazrouei notes that established local banks that participate in the FinTech Hive programme are often reluctant to work with fintech start-ups whose product propositions are too close to their own. “For fintechs and traditional financial institutions, there is room for both collaboration and competition,” she says.

“With the Fintech Hive model, you have fintechs working with more established partners, so they can say to them: ‘Let’s discuss your challenges, so we can find the solutions and thereby create opportunities for collaboration’,” she adds. “But we’ve also created opportunities for healthy competition. From the applications we received, 30% are focused on business-to-consumer solutions, which are of less interest to banks because they’re in direct competition with them.”

Partly as a response to such a trend, FinTech Hive recently launched its scale-up programme, an accelerator for post series A+ start-ups powered by venture capital firms, family offices, corporate and government funds, private equity firms and investment banks, targeted at disruptive start-ups.

Investor caution

It is not just disruptive fintechs that struggle with funding, however. Ms Al Mazrouei says investors are only gradually warming to the sector. “The investor culture in the region is still quite conservative, so it can take a long time for start-ups to raise funds, during which time they can frequently run out of money,” she adds. “There’s still a cautious investment mindset and culture in the region, but I’m sure it’s going to change.”

Mr Brandt at Oliver Wyman says the investment-worthiness of many start-ups being nurtured in local ecosystems is still not clear. “My concern is the actual problems to be solved [aren’t] necessarily sufficiently valuable enough,” he says.

“Ultimately, with these ventures there needs to be a credible business case – meaning a combination of unmet customer needs, a large enough target population and a viable revenue model.”

While Mr Brandt applauds government efforts to encourage innovation and diversification, he stresses that ecosystems need to be commercially viable to succeed. “Looking more broadly at some of these programmes, their aims include improving financial literacy among the population, and the development of the small and medium-sized enterprise segment to assist with the diversification and growth of the private sector,” he says. “These are worthy objectives on a national level, but that on its own isn’t enough to attract investment if the commercial incentive isn’t there and there isn’t a clear payback.” 

Private sector

So when does the private sector need to take over? As the oldest of the region’s fintech hubs, ADGM has already recognised the need to move away from a regulatory-driven, top-down approach to a situation where the private sector takes more of a lead.

Mr Kwok says: “For the next three to five years, we’re starting to pivot to look at a slightly different strategy. We’ve put in place our building blocks so now we think the private sector is able to create greater support as opposed to a pure top-down approach.” 

The arrival of major global fintech players such as Transferwise is key to the private sector taking a greater lead, providing a boost for the centre’s ecosystem. “With these big players coming in, they are also enablers in their own way. They bring in the other fintech providers that they work with,” says Mr Kwok.

Another major landmark was reached in March 2019 with the launch in Abu Dhabi of Hub71, a new centre for tech companies and start-ups. While funding comes in part from the Abu Dhabi government and local investment vehicle Mubadala Investment Company, the venture is also financed by Microsoft and SoftBank, and has already attracted the international accelerators Techstars and Starburst.  


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