From a slow start, innovative fintech could shake up finance in the GCC

While financial technology, aka fintech, is ascendant in most of the world, it is still finding its feet in the GCC. That is despite several digital transformation drives initiated by regional governments. In the West, governments play the role of facilitator in terms of policy and regulation, and in providing the right environment for innovation to flourish, leaving it to the private sector to come up with solutions. However, in the GCC, with regulations lagging in most sectors and the private sector wary of joining in, governments play a more central role in fostering innovation.

Still, fintech has begun to bubble up across the region, in payment systems (CashU), peer-to-peer lending (Beehive), crowdfunding (Eureeca, Aflamnah and Durise), online/mobile banking and online trading.

While cash is still king, the use of online banking, plastic cards and alternate payment systems, such as CashU, are slowly rising in popularity, mainly because of increasing e-commerce transactions. But mobile banking does not have many takers, mostly because of a lack of user-friendly interfaces, which is expected to change over time.

Crowdfunding is one area where fintech has begun to show its potential in the region. While it may not replace the traditional sources of funding, such as banks, private equity and venture capital, crowdfunding has provided another option for a region that is facing a severe liquidity crunch. In addition, crowdfunding, at times, focuses on motives beyond financial return, as in the case of Qatar’s Silatech, which has joined hands with Qatar Charity to launch a crowdfunding platform dedicated to funding young Arab entrepreneurs.

As in conventional finance, fintech’s penetration into Islamic finance is still in its infancy with very few participants, such as Beehive, a Dubai-based Sharia-compliant P2P lender. However, the potential disruptions to traditional Islamic finance cannot be underestimated. From a consumer perspective, fintech provides more choices that suit individual needs at competitive cost and easier access. SMEs that find it hard to obtain bank funding from Islamic financial institutions (IFIs) could look to fintechs to fill that gap, via Sharia-compliant P2P lending and crowdfunding platforms.

But the biggest potential impact of fintech on Islamic finance would be the increase in reach of Islamic financial services, as an alternative to conventional finance, especially in places where it is yet to enter. Fintech eating into IFI margins will force the latter to provide more services online and standardise offerings to customers.

Other potential areas where fintech is likely to have an impact, especially from a GCC standpoint, are remittances, insurance, investment advisory and online trading.

The arrival of online insurance marketplaces will lead to a homogenisation of risks and a complete overhaul of traditional channels of distribution. Technology companies could enter the insurance distribution space, leveraging on their extensive data collection and distribution capabilities, and charge insurers a fixed fee for every customer click. According to the World Bank, the cost to a diaspora of sending money home averages 7.7 per cent globally. India, which receives the highest remittances from the Gulf region and worldwide, loses US$5 billion annually in bank transfer costs. Despite regulatory hassles in some places, fintech companies have entered the remittance space and are cutting out the middlemen.

So how close is the GCC to celebrating this fintech revolution? Currently, it is still at a nascent stage in most areas where fintech could have a potential impact. These technologies have far-reaching effects, and will most certainly affect the business of the banking, financial services and insurance industry, the biggest and most prominent sector in the region after oil and petrochemicals. In terms of policy and regulation, the GCC still lags behind the rest of the world and change takes an inordinate amount of time to occur. But demand from consumers is expected to give rise to faster adoption across the region. This is one revolution the GCC won’t be able to sidestep.

MR Raghu is the managing director of Marmore Mena Intelligence, a research house focused on conducting Mena-specific business, economic and capital market research.

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