Would you trust a robot with your life savings, lend money to a complete stranger, or buy a stake in a start-up in a country you’ll never visit?
Many of us would, quite prudently, say no. But thanks to the boom in fintech – or financial technology – investors are doing all these things and more, and increasingly so in the tech-savvy UAE.
Fintech has emerged as one of the latest buzzwords among global entrepreneurs. And the online services that this technology makes possible are creating waves of interest – or hype, according to some – in the investment world.
Opportunities include peer-to-peer lending and “crowd investing” in properties and equities, as well as so-called “robo advisers”, which offer automated access to investments at a far lower cost than their human equivalents do.
But as with all investments there are some risks attached. Here’s the lowdown on the hot new fintech investment services active in, or on their way to, the UAE – and, crucially, how to avoid getting your fingers burnt.
1. Peer-to-peer lending to businesses
Given the collapse in global interest rates, investors are craving yield like never before. And one fintech model promising investors a better return is peer-to-peer lending, which allows individuals to lend to small and medium-sized businesses as part of a crowd.
Dubai’s Beehive Group specialises in just this, and has so far arranged Dh44 million in funding across about 100 loans.
Craig Moore, its chief executive, said more than 2,000 investors had signed up to the platform, and that the average return is about 12 per cent, of which Beehive takes 1 percentage point. The typical Beehive investor puts in between Dh10,000 and Dh20,000 across 20 different loans; Mr Moore emphasised that this should be done as part of a diverse portfolio.
“We never expect for people to have more than probably 3 to 5 per cent of their net wealth on a platform like this. But if they’re able to make double-digit returns, or even high single [digit] returns, then it makes a meaningful contribution to a good, well-balanced portfolio,” he told The National.
Such financing does come with risks – with Mr Moore saying that Beehive’s loan default rate stands at just more than 2 per cent. “You’ve got to make sure that you’re only investing a small amount of money that you can take a risk on,” he said.
(In comparison, the UAE’s overall rate of non-performing loans stood at 5.2 per cent in 2015, according to the IMF and World Bank. Those numbers do not indicate what the rate is specifically for SMEs, but it was reported in November that a rising number of company owners are abandoning the UAE without repaying debt. People in the SME sector may have left behind Dh5 billion of loans in 2015, Abdul Aziz Al Ghurair, chief executive of Mashreq and chairman of the UAE Banks Federation, told Bloomberg at the time.)
Another peer-to-peer lending platform courting investors in the UAE is the London-based ArchOver, which secures loans against the borrower’s accounts receivable as a way of providing additional security to the lender. At the time of writing it has arranged more than £20 million (Dh96m) in loans, promising investors interest of between 6.25 per cent and 8 per cent, with zero defaults.
“The hunger for yield is definitely still out there. People are putting money in, and they believe in our secured and insured model,” said Angus Dent, chief executive of ArchOver. Although the platform is open to UAE investors, it does not currently offer loans to SMEs outside the UK.
2. Peer-to-peer lending to individuals
The world’s largest peer-to-peer platform for individual loans – the UK-based Zopa – was launched in 2005, before fintech was a common term. To date, more than £1.62bn in consumer loans has been arranged through the platform, with 63,000 active lenders. Zopa’s domestic service is for UK residents only.
The peer-to-peer lending model is yet to take off in the UAE but that could be about to change, according to one expert on financial technology. David Martínez de Lecea, a Dubai management consultant who has worked with fintech companies, said that he was aware of at least one entrepreneur looking to bring the Zopa-style model to the UAE. One barrier has been the lack of clear regulation in this area, he said. “It’s not allowed, but at the same time it’s not forbidden,” Mr de Lecea said.
3. Crowd funding for equities
One model that has taken off in the UAE is crowd funding for equities, which helps investors buy stakes in start-up and small businesses. One of the most prominent platforms is Eureeca, which has offices in Dubai, London and Kuala Lumpur.
Christopher Thomas, Eureeca’s co-chief executive and co-founder, said 16 businesses have been successfully funded through the platform, raising $3.5m with an average individual investment of $5,800.
Eureeca investors have so far benefited from one formal exit, involving a company called Search in Mena, which delivered a return of 150 per cent over 13 months. That meant that, if an investor had put in Dh10,000, they received Dh25,000 back. “This … was unusual because normally it will take a number of years before exits are realised,” said Mr Thomas.
Given that most start-ups fail, and that there is no guarantee of a return, investing through Eureeca also comes with its risks.
“This is why it is very important to build up a portfolio of deals,” said Mr Thomas. “The key is diversification. Who knows – you may invest in the next Facebook, Uber or Airbnb, which is the dream of every investor.”
Joe Hepworth, chief executive of the Dubai-based British Centres for Business, which helps UK firms establish and expand in the UAE, has invested in three companies through Eureeca. He said he is hopeful of a decent return but is wary of the old adage – “only invest what you can afford to lose”.
Mr Hepworth said: “I have invested small amounts – a few thousand dollars in each deal. Returns-wise, I would hope for the businesses to at least double in value before exiting in three to five years’ time.”
4. Crowdfunding for property
Fintech has also been used to bring crowdfunding to work in property investments. In the US, one of the most prominent platforms for investing in real estate is called Fundrise, which promises returns of 12 to 14 per cent on individual stakes starting from $1,000, although it is not available to foreign investors.
Mr de Lecea said that the model has been slow to take off in the UAE, although it has been attempted. “It’s really hard to reach volume,” he said.
One such attempt is Humming Crowd Realty in Abu Dhabi, which lists on its website three funded deals with claimed annual returns of between 8 per cent and 11 per cent. The company did not, however, respond to requests for comment and phone calls went unanswered. Another company, Dubai’s Durise, in 2014 announced the launch of its crowdfunding concept for property, allowing investors access to the market from just $5,000.
Many UAE residents complain of unsolicited calls from so-called financial “advisers”, loudly selling the virtues of long-term investment plans, while remaining a little quieter about their own commission rates. So why not turn to someone – or something – you can trust better … like a robot?
So-called robo advisers offer automated investment services, assessing individuals’ appetite for risk through questionnaires, and managing a portfolio of exchange-traded funds for a low cost. Popular US robo-advisers include Wealthfront and Betterment – although neither are available overseas.
Comparable services are springing up in the Middle East with the arrival of Finerd, and a planned new robo-service by the fee-based financial advisory AES International, which has an office in Dubai.
Sam Instone, chief executive of AES International, said he was wary of other new and sector-specific investment opportunities being made possible by the rise of fintech.
“If you are investing into fintech, or into crowdfunding for equities, or real estate … or peer-to-peer areas, we would look at that [as being] very sector-specific. We believe that the only way to invest properly is to diversify very well at a low cost, and keep your money in the market,” he said.
“Good investment is like watching paint dry, or grass grow. It’s boring. Anything else is speculation.”
The robo-adviser model is more sensible, Mr Instone says, and says his own company plans to launch such a service, called the AES Direct Investment Platform and serving investors across the Arabian Gulf, next year.
It is currently difficult for a company like AES International to provide financial planning for those with less than £500,000 to invest, because the cost of the advice would eat up the potential returns, Mr Instone said. And so there is potential for robo-advisers to help give those falling in this “advice gap” access to exchange-traded funds (ETFs) with investments of as little as $1,000, he added.
But Mr Instone warned against other services that he said amounted to “online gambling sites”, such as speculative spread-betting sites.
This, he said, is the negative side of the fintech boom for investors.
“It’s a double-edged sword. You can use technology as a force for good, which is what low-cost robo-advisers are doing. Or you could use it to perpetuate the [negative] industry culture.”
Case study: Khaled Al Nuami
Investing in property is an obvious choice for many UAE investors – but the hefty deposits required can be prohibitive for some.
This was the case for UAE national Khaled Al Nuaimi, who ended up turning to new financial technology as a way to make an investment for his future.
The 28-year-old government employee, who lives in Abu Dhabi, bought shares in the start-up HigherEducation.ae, which successfully raised $100,000 via the Dubai crowd investing site VentureFin.
“If you want to make money, real estate is the place to do it. But because the income is not that high for me, investing a very small amount in a start-up company [was a good option],” said Mr Al Nuaimi. “It’s more of a long-term shareholding value. I just want to keep it there, see how it goes.”
He said investing via VentureFin, which launched in February, is an “easy process”, with the service doing due diligence on the company and sending share certificates to investors.
So far HigherEducation.ae is the only start-up that the platform has listed. It plans to post more after summer, as well as launching a crowdfunded loans service early next year, said Ibrahim Jaber, VentureFin’s founder and chief executive.
Investing in young businesses is risky – with Mr Jaber pointing out that more than 80 per cent of start-ups fail.
“With every investment comes risk. But the rewards in comparison to that risk are much higher,” he said.
“You can invest in government bonds, for example, and get a yield of 1 per cent, 2 per cent, 3 per cent in five years. Well the difference is that, if you invest in a start-up, the rewards could be 10 to 100 times higher – take Twitter or Uber, for example.”