Monday 17, July 2017 by Nabilah Annuar

Leveraging fintech opportunities in the Middle East

Bana Akkad Azhari, Head of Sales & Relationship Management MENA and the CIS, Treasury Services EMEA at BNY Mellon, discusses the potential of fintech to transform the financial landscape in the Middle East, and how banks are helping to drive opportunities in the region.

Fintech investment is soaring. In 2016, global figures nearly doubled to $23.3 billion, from $12 billion in 2014. Yet, Europe and North America still account for a staggering majority of global fintech investment—$15 billion combined—with the Middle East laying claim to only 0.1 per cent. Nevertheless, movement is afoot. Fuelled by the growing influence of a millennial population and rising expectations for efficiency, transparency and accessibility, fintech initiatives are rapidly gaining purchase in the Middle East.

Certainly, the potential for fintech to enact real change in the region is huge, with the sector set to grow 270 per cent this year alone. And while it may have been the start-ups that initiated the fintech agenda, banks are now key players driving fintech opportunities in the region.

Fintech and trade

While the past decade has heralded a new “fintech era”, this has been predominantly contained within the payment industry. And to great success—evidenced by the roll-out of everyday solutions for modern banking and the rise of digital banks. For example, Payfort, one of the largest payment fintech companies making its mark across the region, started its own “Fintech Factory” accelerator in 2016. But increasingly, attention is turning to opportunities elsewhere.

One such area, with the potential for considerable impact in the Middle East, is trade. Both labour and document intensive, trade arguably has the most to gain from digitisation. Fintech developments can streamline the trade and value chain process—replacing paper-based, time-consuming manual procedures with automation. And this means improved efficiency, reduced costs and accelerated cash flow.

Yet—perhaps most importantly—technological innovation brings with it the prospect of significantly enhanced security and transparency.

One of the most promising developments in this respect is distributed ledger technology, such as blockchain—the decentralised, cryptographic database that comprises bitcoin’s infrastructure. Any information entered into a “block” is instantaneously in the public domain; it cannot be changed. Crucially, this affords a level of transparency that is unparalleled across the financial industry. And so, for the Middle East—a region where concern around political and economic risk can be a barrier to trade—the implications are hugely exciting.

Addressing cultural needs

However, if the region is going to realise the full potential of fintech, cultural barriers must be addressed. Local businesses are often family-run, meaning they have not deviated much from their founding structures and business methodologies. Naturally, a business culture with established roots such as these will find it more difficult to adapt. And so, convincing these companies—en masse—of the benefits of financial innovation is the first sizeable challenge.

Nonetheless, with a young population—60 per cent of people in the UAE are under 25, for example—preconceptions about technological developments are changing. MasterCard’s 2016 Impact of Innovation Study is testament to this, with 59 per cent of UAE respondents stating that mobile phones are their preferred payment device—considerably higher than the 37 per cent of respondents in Western Europe.

On the back of this millennial drive, governments are fast recognising the rewards of investing in the fintech market. Lebanon’s Circular 331, a $400 million entrepreneurship investment stimulus lead by Banque du Liban, is one example. Through Circular 331, Lebanon is both directly encouraging investment in financial innovation and contributing to changing business practises in the region. 

Even with governmental stimulus and millennial drive, barriers to progress are compounded by the relative newness and unfamiliarity of the “fintech” brand. Lacking experience and establishment, fintechs are struggling to succeed in the hugely competitive world of corporate finance. And while this could have been detrimental to their success in the region, where the fintechs waver, the banks excel.

Collaboration is key

Unrivalled in market knowledge, working capital, and client reach, banks are championing the importance of innovation and—crucially—collaboration. Where banks are looking to leverage the tech know-how of fintechs to deliver value-added digital capabilities to clients, by engaging with banks, fintechs stand to gain much-needed market insight and a comprehensive local client-base. Certainly, the benefits of joining forces are clear, and bank-fintech partnerships in the Middle East are becoming increasingly prevalent. Such collaboration is helping to drive the opportunities shaping an increasingly technological financial landscape.

For example, January this year saw the National Bank of Abu Dhabi (NBAD) collaborate with Ripple, a US-based fintech start-up, to perform the first cross-border payments using blockchain in the region. With 70 per cent of Gulf Cooperation Council (GCC) bankers open to fintech integration, it seems the region is poised to follow suit in establishing ties with new fintech players .

A further example of collaboration is that of local-global bank partnerships. Investing in digital innovation can be a significant challenge for many local banks—particularly when combined with the costs of compliance—and it is here that non-compete correspondent banking alliances can play a key role. In fact, such partnerships are mutually beneficial: local banks can benefit from the technological capabilities and extended reach of global payment specialists, while global banks gain access to the inimitable country-specific insights of local banks.

To this end, collaboration is already generating more home-grown innovative solutions, more integration with the rest of the digital world, and more investment from home and abroad.

Fundamentally, as the Middle East begins to fully embrace the benefits and opportunities proffered by fintech innovation, it is the banks that are shaping the region’s fintech future. With the right technology and strategic global collaborations in place, this could spur a new, dynamic era of finance in the Middle East.