Is regional financial tech evolving or disrupting?

Top Stories

Is regional financial tech evolving or disrupting?
Emirati investors look at monitors showing the prices of stocks at the Dubai Financial Market at Dubai World Trade Center.

Dubai - The sector's outlook in region remains promising

By Shailesh Dash

  • Follow us on
  • google-news
  • whatsapp
  • telegram

Published: Mon 6 Jun 2016, 12:00 AM

Last updated: Mon 6 Jun 2016, 10:45 PM

In the past five years, the financial technology sector, known as fintech, has emerged as the poster child of global investment activity, with more than $50 billion invested in almost 2,500 companies since 2010. Fintech firms, which commenced operations as mere startups offering payment solutions to consumers, are now transforming the global financial services industry. While this growth is largely attributed to expanding Internet users and smartphone penetration, the change in consumer behaviour and stringent regulatory environment for financial industry, particularly the leading requirements for small and medium enterprises, post the 2009 financial crisis also played a critical role in the evolution of the fintech industry.
Foiled from the traditional financial service institutions and their offerings, post-2009 consumers were more receptive to alternative channels of payment, lending, fundraising, etc, whereas fintech emerged as a game-changer for SMEs, offering innovative tailor-made products, such as marketplace lending, crowdfunding and tech-enabled payments, especially when lending from traditional banks was tiring and futile.
As a result, the value of investments in fintech grew multifold since 2010, from $1.8 billion to $22.3 billion at the end of 2015. Fintech investments grew by 75.5 per cent in 2015, outpacing the 29 per cent growth in the overall venture space, which affirms the sector's position as a hot ticket in the financial service space. Moreover, last year also witnessed several fintech IPOs such as PayPal, Square, WorldPay and First Data, commanding multi-billion dollar valuations.
On the other hand, 2015 also saw the demise of some iconic industry players, most notably Powa, which built mobile payment products and was once considered one of the UK's brightest tech start-ups, valued at $2.7 billion in 2015. These developments - elimination of weaker players, successful IPOs and increasing number of big-ticket deals - clearly indicate that the global fintech market is reaching the next level of maturity and moving into the mainstream.
Broadly speaking, there are two types of fintech companies: the competitive, which are direct challengers to the incumbent financial services institutions; and the collaborative, which offer solutions to enhance the position of existing market players. Although the competitive fintech companies enjoyed some success in the initial years, the collaborative companies are lately gaining traction as traditional financial institutions harness these technologies to complement their existing business models.
Consequently, global investments in collaborative companies increased from 38 per cent in 2010 to 44 per cent in 2015. It is also important to note that regional regulatory environment plays a critical role in realising this trend. For instance, while the shift to collaboration has been particularly strong in North America, this trend is reversed in the European market primarily due to favourable regulatory framework for competitive players.
From a regional perspective, the fintech industry remains at a nascent stage, despite favourable demographics - highly-educated people, high levels of income and smartphone penetration - and several digital transformation drives initiated by regional governments. Lagging regulations in most sectors combined with limited private sector interest and dominance of cash as the preferred mode of payment remain the key bottlenecks for development of fintech in the region.
That being said, several fintech companies are already making a mark on the regional financial services industry. For instance, alternate payment systems such as CashU are slowly gaining popularity on the back of increasing e-commerce transactions while crowdfunding (Eureeca, Aflamnah and Durise) and peer-to-peer lending (Beehive) platforms have emerged as a potential "game-changer" for regional SMEs that find it difficult to obtain financing from traditional channels. Similarly, fintech firms are also entering/expanding in other lucrative segments such as Islamic finance, remittances, insurance, investment advisory and online trading and, therefore, their future growth potential should not be underestimated. Further, it is important to note these fintechs primarily target less-profitable/untapped segments, which were not serviced by traditional financial services institutions, and therefore their rise should be regarded as an evolution of regional financial services industry rather than disruption.
Additionally, the global fintech revolution has also compelled regional financial institutions, particularly the banks, to proactively accelerate the pace at which they adopt financial technology to reduce costs and improve customer experience. For example, Emirates NBD invited global fintech firms to assist them in key areas such as customer acquisition and on-boarding, loyalty and engagement, SME banking, Islamic banking, etc. Simultaneously, the regional governments have also been supportive to this cause, with Abu Dhabi announcing its intention to become the regional fintech hub while the UAE continues to promote innovation hubs and digitalisation of local enterprises. Clearly, the overall region is moving in the right direction as they understand the importance and benefits of nurturing these technologies to align with the changing consumer behaviour.
In conclusion, the regional fintech outlook remains promising, despite being at a nascent stage compared to the global fintech industry. Regional firms have made their mark by targeting less-profitable/untapped segments and by delivering better customer experience and therefore, their future growth potential should not be underestimated. Furthermore, the accelerated adoption of fintech by regional financial institutions will assist in bridging the gap between the regional financial services and their western counterparts. Regulatory environment would be critical for growth going forward and fintech's ability to operate and adhere to stringent and rapidly changing regulations would be key to success.
The writer is the founder and CEO of Al Masah Capital. Views expressed are his own and do not reflect the newspaper's policy.


More news from