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June 12, 2024June 12, 2024 byGloria Methri

FinTech Surge in MENA: 5 Key Enablers Driving Growth in the Industry

The Middle East’s FinTech ecosystem, though relatively young, has experienced remarkable growth since the establishment of its first start-ups in 2015. Today, the MENA region hosts over 800 FinTech startups valued collectively at $15.5 billion, with the majority based in the United Arab Emirates.

A report by MAGNiTT highlighted a staggering 183% year-over-year growth in funding for MENA FinTech startups in 2021, marking the highest annual growth rate in the past five years. Furthermore, predictions from Saudi Arabian technology venture capital indicate the emergence of 45 unicorns worth over $100 billion by 2030.

Let’s explore the five key enablers driving this exponential growth in the MENA FinTech industry.

Government Initiatives

Government reforms and initiatives have played a crucial role in fostering the FinTech ecosystem in the MENA region. Middle Eastern governments are actively promoting privatization, increasing public-private partnerships, and monetizing infrastructure assets to drive financial inclusion. By implementing FinTech-friendly regulations, they support the growth of home-grown startups and attract global players. Regulatory sandboxes across the region have been established to facilitate the adoption of digital financial solutions, further accelerating FinTech growth.

For example, the UAE and Saudi Arabia have been at the forefront, launching initiatives such as National Instant Payments Platforms (IPPs) to digitalize payments and enhance financial inclusion. This supportive regulatory environment has been instrumental in creating a fertile ground for FinTech innovation.

Financial Inclusion

One of the primary drivers of FinTech growth in the Middle East is the urgent need to address financial exclusion. Over 70% of the population in the region does not have access to traditional banking services. FinTech startups have emerged as a solution to bridge this gap, offering innovative financial products and services where traditional banks have struggled.

The launch of instant payment platforms by the UAE and Saudi Arabia’s central banks exemplifies the region’s commitment to enhancing financial inclusion. These platforms aim to streamline and digitalize payments, making financial services more accessible to a broader population.

Demographics

The MENA region boasts a young and tech-savvy population, which has been a significant factor in the growth of the FinTech sector. With over 450 million people, more than half of whom are under 25 years old, the region represents a vast market of potential customers who are eager to adopt new technologies. This youthful demographic is driving demand for digital financial solutions, creating a robust market for FinTech startups.

High mobile penetration rates further support this growth. The Middle East has achieved 100% mobile penetration, providing a solid foundation for FinTech companies to reach a large and receptive audience. As digital natives, this young population is more likely to embrace innovative financial technologies, fuelling the expansion of the FinTech sector in the region.

Investment and Funding

The influx of investment and funding into the MENA FinTech sector has been another critical enabler of growth. In 2021, the region saw a 183% increase in funding for FinTech startups, indicating strong investor confidence in the market’s potential. This surge in investment has provided startups with the necessary capital to scale their operations, develop new products, and expand their reach.

The rise in funding has also led to an increase in the number of financial firms in the region. As of February 2022, the MENA region was home to more than 3,600 financial firms, a 25% increase from the previous year.

Infrastructure Development

The development of robust infrastructure has been fundamental to the success of the FinTech industry in MENA. Governments have invested heavily in building the necessary infrastructure to support digital financial services. This includes high-speed internet connectivity, secure payment gateways, and regulatory frameworks that ensure a safe and efficient financial ecosystem.

For instance, the establishment of digital-only banks and the introduction of blockchain technology for secure transactions are examples of how infrastructure development is driving FinTech growth. The conducive environment for innovation in the region, is attracting both local and international FinTech companies.

As these enablers continue to evolve and strengthen, the MENA region is poised to become a global hub for FinTech innovation, offering exciting opportunities for startups, investors, and consumers. Much like Cedar-IBSi FinTech lab, which has been home to global technology companies who need a “soft-landing” opportunity into MENA and India. Join the FinTech Lab to tap into the Middle East banking technology today.

December 20, 2023December 20, 2023 byPriti Gaikwad

Digital Disruption: How FinTechs Are Outpacing Traditional Banks in Trade Finance

Trade finance has always been pivotal for global trade, shoring up global supply chains and addressing liquidity concerns. However, there has been a significant shift in its landscape in recent years. While traditional banks once dominated trade finance, FinTechs are rapidly ascending due to several prevailing industry trends.

FinTechs: Pioneers of a Digital-First Era

As in many other industries, the COVID-19 pandemic expedited the digital transformation of the trade finance sector. Data from Statista highlights that the trade finance deficit recently rose to $2 trillion, up from $1.5 trillion before the pandemic.

As the world’s trade infrastructure felt the strain, it became clear that established systems and conventional bank services were lagging behind, enabling the growth of the trade finance gap. Many traditional banks struggled to adapt quickly enough, causing disruptions and delays in trade financing processes.

Enter FinTechs – with digital, cloud-centric solutions that boosted the accessibility of trade finance, which particularly benefited SMEs in emerging markets. In contrast to banks, burdened by paperwork and red tape, FinTechs harnessed innovations like open banking, digital data capture, and cloud-based storage.

By Oliver Carson, CEO and Co-Founder of Universal Partners

This gave way to a much more refined, agile process – introducing a modern approach that has effectively addressed the inefficiencies of traditional trade finance, heralding a new era for the industry.

Tailored Financial Solutions for SMEs

For decades, traditional banking practices, with their rigid criteria and legacy systems, have often disadvantaged SMEs. The innate nature of SMEs, characterised by limited credit histories and sporadic cash flows, has frequently resulted in declined trade finance applications.

However, FinTechs recognised an overlooked opportunity. Rather than viewing SMEs through the same lens as traditional banks, FinTechs delved deeper into understanding their unique needs, challenges, and potential.

FinTechs saw SMEs’ requirements and developed tailored financial solutions, such as non-recourse financing. This not only placed the responsibility of payment recovery squarely on the financiers but gave SMEs the crucial working capital they needed without the usual risks.

The success of this approach is evident in the numbers, with FinTechs able to offer a faster, more cost-effective digital service. According to Bain & Co’s projections, by serving these previously underserved SME sectors, FinTechs could earn an extra $2 billion annually in trade finance fees and potentially drive trade volumes up to a staggering $1 trillion by 2026.

A Battle of Agility and Reputation

Traditional banks, once dominant, are now facing challenges in the trade finance domain. Regulatory measures like the Basel III framework, designed to ensure financial stability, have inadvertently decreased the operational flexibility of banks, making it harder for them to adapt swiftly to changing market dynamics.

Compounding this is the banks’ cautionary approach toward SMEs, and this conservative stance has not only limited the growth potential of these enterprises but has also dented the banks’ image as holistic financial service providers.

In contrast, FinTechs have shown remarkable agility in adapting to the current market needs. Their strategies, inherently more favourable towards SMEs, have filled the void left by traditional banks. By leveraging the latest technological advancements, FinTechs have introduced enhanced security measures and streamlined operations, providing a more user-centric experience.

While banks recognise the evolving landscape and are making concerted efforts to innovate with platforms like ‘we.trade’ and ‘Trade Finance Gate’, there’s a palpable sense the institutions are trying to regain lost momentum. The challenge is not just about introducing new tools or platforms but fundamentally reshaping their approach to be more inclusive and adaptive, much like the FinTechs they now compete with.

In summary, FinTechs, with their proactive models and emphasis on customer needs, are continuously making their mark in the trade finance landscape. For traditional banks, the onus is now twofold: not only to innovate but to re-establish the trust of SMEs who now see FinTechs as more dependable allies. As the financial world moves ahead, agility, innovation, and customer-centricity will be at the heart of success, and at present, FinTechs are leading the charge and will find themselves the trusted partners of the global giants of the future.

Analytics Banking as a Service (BaaS) IBSi Blogs IBSi Flagship Offerings

December 1, 2023December 18, 2023 byPriti Gaikwad

What’s the difference between BaaS and embedded banking? Quite a lot

The problem with a loosely defined term is that its meaning can become stretched. Anyone who has described a stadium-filling act such as Ed Sheeran as “indie” because he plays a guitar is guilty of this.

Banking-as-a-Service (BaaS) is just such a loosely defined term.

Some providers have stretched the term to encompass services such as Open Banking, card platforms, and APIs. This confusion is further exacerbated when aggressive marketing campaigns overlap BaaS with another fast-growing term: embedded banking. Using one term to describe all of these disparate services makes about as much sense as using the same word to describe a multi-platinum-selling artist and the band playing to three people in the local pub.

By John Salter, Chief Customer Officer at ClearBank

Confusion over these terms is already widespread. According to Aite, a third of fintech providers do not believe there is any difference between embedded banking and BaaS.

There are, however, important differences between BaaS and embedded banking. Businesses need to understand the differences between these two concepts if they are to understand their own responsibilities, especially around governance and compliance, and what it could mean for scaling up or adding new features in the future.

Breaking it down: What’s the difference?

Despite its name, BaaS does not necessarily mean working directly with the holder of a banking license or that the services provided require a license. Instead, providers offer banking-related services and infrastructure, sometimes on behalf of a licensed bank, to firms including fintech startups, e-commerce platforms, and even other financial institutions.

BaaS is a “push” model. A banking product is created and offered “as a service” to a potential user. BaaS is the distribution of banking products to financial institutions and non-financial institutions. For example, non-bank players like Uber or Lyft work with a BaaS provider that is responsible for payments, cards, accounts, and loans. However, who is responsible for compliance and governance can vary between providers and use cases.

On the other hand, embedded banking is on the “pull” side. This simply means that financial services and products are embedded into financial or non-financial platforms, such as e-commerce and mobile banking applications. Embedded banking is the provision of a banking service directly from the holder of a banking license and embedded directly into the user experience. A typical example would be the Buy Now Pay Later (BNPL) functionality online shops have included at the point of purchase for customers to access installment payment options.

Do businesses need to understand the difference?

Should anyone care about this? This is a good question as most businesses won’t start with the question of whether they want BaaS or embedded banking. In fact, they’re unlikely to ask this question at all. Instead, they will have specific requirements for banking or banking-like services, and approach the right provider with those needs in mind.

So, who cares? Aren’t we simply over-analysing the technicalities?

It may seem so, but there are important implications for regulation and who is responsible for compliance.

BaaS providers may have a banking licence, or they may hold an EMI licence. Embedded banking providers are, by definition, holders of a banking licence. It’s important when entering into any agreement that the customer-facing business understands the regulatory nature of the agreement—who is responsible for compliance and KYC, how funds are safeguarded, and whether they are protected by a full banking licence. There is already concern from regulators around where consumers’ money is held and how safe it is—is there enough transparency? Knowing the difference is important, especially when the “gold standard” is when funds are held by a bank in an embedded solution.

Businesses aiming to enhance their offerings with financial services have the potential to create differentiated services that set them apart from the competition. But working with the right partner is crucial to success. When evaluating a partner, businesses must consider the range of services on offer, technology implications, compliance, security, and more.

So, a clear understanding of the differences between BaaS and embedded banking will make it easier for any business to decide what is right for them and their customers.

Analytics Digital Banking IBSi Blogs

October 21, 2023December 18, 2023 byJeet Vasa

Digital Banking: Prioritising Financial Inclusion

In recent years, digital transformation and the rise of FinTech technologies have made digital banking increasingly accessible. Now, there is a wide variety of digital services available as banks continue to focus on delivering the best, most convenient services to their customers.

By Hans Tesselaar, Executive Director at BIAN

There is clear momentum happening in online and digital banking, with 416 million active users of online banking in Europe alone, an increase from 398 million in 2022. This is reflected globally, with 170 million users in 2023 in Latin America, expected to spread to almost 198 million next year. Emerging technologies can support this expansion, but it’s the responsibility of the industry as a whole to ensure financial inclusion and economic growth for all, which is a priority amid this growth.

Digital inequalities caused by this shift must be addressed through collaboration and emerging technologies, an area where some developing countries are leading by example. The role of industry standards is also incredibly important when looking to better deliver digital services to all.

Counting on industry standards

We can look to the Union Bank of the Philippines as an excellent example of this. The extensive use of legacy technology within banks means the speed at which these established institutions can bring new services to life is often too slow and outdated. This challenge is also complicated by a lack of industry standards, meaning banks continue to be restricted by having to choose partners based on the ease and cost of integration. This is instead of their functionality and the way they’re able to transform the bank.

To truly digitise, banks need to overcome these obstacles surrounding interoperability with a coreless banking model. This approach to transformation empowers banks to select the software needed to obtain the best-of-breed for each application area without worrying about interoperability and being constrained to those service providers that operate within their own technical language or messaging model.

By translating each of that proprietary messages into one standard message model, communication between different parts of organisations is, therefore, significantly enhanced, ensuring that each solution can seamlessly connect and exchange data.

Adopting emerging technologies to increase accessibility

While some elements of financial inclusion and digital adoption require a more considered approach, there are instances where emerging technologies are bringing transformative services to the unbanked.

The Union Bank of the Philippines, for example, overhauled its quick loans retail engine (RLE) to serve as the central platform for the bank’s loan and credit products, leveraging its reusability and ease. Using a combination of low-code, based on the BIAN Models, and the adoption of BIAN APIs, the bank sought to establish a seamless, fully digital experience that could scale up to meet the country’s huge demands for loans by the unbanked.

This has enabled the Union Bank of the Philippines to overcome the issues preventing the RLE from scaling to the mass market to reach the 51.2 million unbanked Filipinos. Through this innovation, those who otherwise wouldn’t have access to a fully digital quick loan service now do.

This is just one example of many, as fintech adoption continues to grow in emerging markets due to the increasing use of mobile phones and the internet, the large unbanked population, and the growing middle class. It will be no surprise to see more of these examples where banks look to digital services to reach the mass market over the coming years.

Creating a supportive ecosystem

As FinTech adoption continues to grow in emerging markets, banks must form an ecosystem alongside fintech, service providers, and aggregators. This will help banks when it comes to the speed they can introduce new products.

An effective ecosystem strategy will make banks more relevant to their customers, providing an opportunity to drive better relationships and bigger wallet shares by providing the speed, scale, and differentiated products that make the most of the opportunity presented by the significant shift to digital banking. With this approach, banks can focus on offering services to meet the demand of all customers, whether that be digital, analog, or reaching the unbanked population.

The journey to digitalisation

To be truly inclusive, banks must assess their customer base and look to meet its needs.

Where digital adoption risks leaving customers behind, banks must ensure these customers are prioritised through collaboration, access to offline services, and a slow, steady digital transformation process. In other cases, digital transformation is the answer to bringing financial services to the mass market. In both situations, industry standards can be the key to unlocking new technologies and providing services to those who otherwise wouldn’t be able to access them.

Putting the customer first and taking a collaborative approach will be how the industry brings all customers along on the digitalisation journey. As long as the priority for banks remains on financial inclusion and innovation increasingly supports this, there will never be a customer left behind.

Digital Banking

FinTech Surge in MENA: 5 Key Enablers Driving Growth in the Industry

What’s the difference between BaaS and embedded banking? Quite a lot

Digital Banking: Prioritising Financial Inclusion

Counting on industry standards

Adopting emerging technologies to increase accessibility

Creating a supportive ecosystem

The journey to digitalisation

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