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Filling the banks: Is fintech leveling the playing field for small businesses in the Middle East?

Financial service companies are filling a gap, industry players say, especially as traditional financial institutions have been slow to innovate and understand customer needs and demands.

Filling the banks: Is fintech leveling the playing field for small businesses in the Middle East?
[Source photo: Anvita Gupta/Fast Company Middle East]

Ahmed Ahmed, who owns an ad film production company in Dubai, received a coveted loan — a few thousand dollars was in his bank account — within three days after applying, thanks to a fintech firm. He first tried to apply through a bank, but they were not taking applications. 

How he did it was, in retrospect, the result of a convergence of online financial service companies that are filling a gap that many small business owners do not get from well-established traditional banking institutions.

“Many businesses cannot open bank accounts for many reasons, from a lack of financial history or simply because their revenues were too low. Fintech startups are filling this gap, creating products and services for those who need them most,” says Asim Janjua, co-founder of Mamo, a fintech firm that allows SMEs and startups to collect and disburse payments.

To put into perspective: It takes 3-4 months to open a business bank account. Bank transfers are slow and drive payment conversion rates down. And Gateways and point-of-sale terminals are complex and expensive.

Fintech startups are helping SMEs, Janjua adds. “In the last two years, we have learned much about SME financial services and banking. Businesses are still forced to visit branches for simple needs…Many SMEs are likely to switch their financial provider. The rejection rate for SME lending in the UAE is 50-70%.”

The pandemic has revealed that fintech is savvy and effective for people with lower earnings and savings.

When it comes to offering the crucial financial support small business owners seek, some fintech firms best more established financial service firms. Through technology, these companies can meet their client’s financial needs online.

“Innovations in digital payments, lending, remittance, and even open banking, continue to democratize access to financial services for consumers and businesses,” says Girard Moussa, Head of UAE and MENA Expansion at Stripe, a fintech firm that works with small startups such as ChatFood, WeKeep, and Illusions Online.

“These partnerships are examples of how fintech innovation is giving small companies the tools they need to stay competitive,” he adds.

Stressing on the importance of leveling the playing field for startups and growth businesses, Moussa says, “Rising inflationary pressures, cost of capital, and increasing total cost of ownership have made it ever more challenging for young startups to come to market.”

Additionally, the needs and requirements for SMEs are also shifting, says Omar El-Gammal, EVP, Global Business Development, Paymob, the payment aggregator in Egypt. “While bigger merchants have all the support and services from banks and financial institutions, SMEs find it easier to grow their businesses via low-cost, tailor-made, localized payment technologies.” 

IMPACT OF FINTECH

Fintech innovations — from SME financial services and consumer financial services to insurtech— create financial inclusivity for those who need it most, experts say. 

“It’s a type of financial inclusivity,” Janjua says, “that is rarely spoken about but extremely important, especially when it comes to the impact of these businesses who employ new people and grow their business, creating a thriving economy.”

What fintech firms are counting on is that businesses, now forced to do things differently in the crisis, will continue to use fintech for more of their needs.

According to experts, the sector has enormous potential for widespread impact on financial services and, as such, has the potential to increase economic diversification and sustainable economic growth.

“We expect to see more innovations within banking, especially using blockchain platforms and business models,” says Ramesh Jagannathan, NYU Abu Dhabi Research Professor of Engineering and startAD Managing Director.

The UAE recently approved a new digital banking platform, Wio, backed by ADQ, an Abu Dhabi-based investment and holding company. Yap and other digital banking offerings, such as Liv by Emirates NBD and Mashreq Neo, were also launched.

“But what is helpful for fintech is the work being done to help resolve issues related to regulation, payments, and raising funding rounds, among others. Abu Dhabi-based NymCard has partnered with Fintech Payment Solutions to bring end-to-end payment solutions to the region. This will help neobanks deliver digital solutions to businesses and consumers,” adds Jagannathan.

And as artificial intelligence and machine learning continue to evolve, fintech can harness enormous amounts of data, creating a positive feedback loop of new products and services underpinned by information on their customers’ needs.

“I’ve had the privilege of seeing how these developments are aiding and catalyzing startups in the region. The recent edition of startAD’s Corporate Sprint Accelerator, run in partnership with Ripple’s XRPL, VentureSouq and ADGM, acts as a launchpad for growth in the UAE for global fintech early-stage startups,” says Jagannathan. 

FACTORS DRIVING FINTECH GROWTH

In a region where over 70% of people do not have access to traditional bank accounts, fintech is bridging gaps in the market where incumbent banks have had less emphasis to date. Many fintech firms are allowing SMEs and micro-businesses to thrive in the digital economy.

“As consumer adoption continues to grow, so does the demand for digital payments,” says El-Gammal. “For example, with merchants, we see an increased desire to build an online presence and to become as accessible to the region’s population as possible. In many cases, this means adopting fintech services.”

Fintech centers have sprouted up all across the region. The Abu Dhabi Global Market, Bahrain Fintech Bay, Fintech Saudi, and the FinTech Hive at the Dubai International Financial Centre are among the expanding number of fintech hubs in the region.

“We also see increased funding and government initiatives within the sector as growth drivers. Central banks in Egypt, Saudi Arabia, and the UAE are launching National Instant Payments Platforms to accelerate the digitization of payments and to drive financial inclusion,” says El-Gammal. The support offered to the fintech ecosystem has fueled fintech innovation in alternative payment methods, solving issues faced by SMEs, he adds.

ATTRACTING INVESTMENTS 

Recently, UAE-based fintech Baraka, which offers a subscription-based investment platform for users in the Middle East, closed a $20 million Series A round led by Valar Ventures. Qashio raises $10 million in a seed round from global and regional investors.

In the first half of 2022, fintech companies in MENA raised $819 million, almost as much as all funds raised in 2021. 

“We are seeing this growth across a vast range of fintech sectors, spanning digital payments, BNPL, and omnichannel merchant financial services platforms,” says Moussa.

Sparking this growth is not only an increasingly flourishing and active regional fintech VC ecosystem, with leaders like Shorooq, VentureSouq, Global Ventures, and Sheera but also from prominent global VCs such as Y Combinator, Tribe Capital, and Tiger. 

A supportive regulatory framework has contributed to the region’s fintech success. 

“DIFC’s Innovation Testing License, Egypt’s fintech sandbox, and SAMA’s regulatory sandbox in Saudi Arabia are providing the foundations for fintech to scale and mature in the right way,” adds Moussa.

Having a robust, solid platform underpinning fintech innovation and testing will attract more investments in the long term, according to experts.

“As the region moves away from being a cash-dependent society, the focus on fintech-led innovation will continue to be supported as the demand from individuals and businesses continues to grow,” says El-Gammal.

FUTURE OF FINTECH 

Moving forward, greater access and collaboration between banks, regulators, and industry players will be needed.

With regulation on the rise, the next stage is for cross-border collaborative partnerships to allow companies from one country to operate seamlessly in the other, say experts.

“These developments will allow fintech to disrupt and come to the market faster. The MENA region is expected to have 45 fintech unicorns by 2030, a tenth of global numbers,” says Jagannathan.

According to Janjua, the growth of e-commerce has brought with it the need for easy-to-use, online, secure payment services, which will continue to grow. 

“Massive amounts of data available from e-commerce transactions, social media, and internet searches allow fintech companies to determine what financial services to offer different segments and provide better price points than incumbents. Financial data that fintech firms have access to provide them with the ability to innovate aggressively.”

MENA’s fintech sector has been steadily growing at a CAGR of 30%, and forecasts suggest that over 800 fintech firms will raise more than $2 billion in VC funding by the end of the year. 

“It’s a significant marker of growth when we think five years ago there were only around 30 fintech firms in the market raising a total of less than $80 million in funding,” says Moussa.

From its network of high-growth tech businesses and open and collaborative accelerator hubs to strong demand for digital services, the region is conducive for fintech, especially for the growth of SMEs 

“As the region advances on its path to a more diversified economy, there is no doubt that fintech will be a central driving force for years to come,” adds Moussa.

According to Janjua, the incumbent financial institutions have been “slow to innovate and understand customer needs and demands” over a significant period. 

“The onus is on startups to address the lack of innovation in financial services. When industries and institutions are unwilling to listen to customers or proactively innovate and spend time and money on R&D, agile startups, in tune with consumer sentiments and demand, will develop products and services much faster.” 

“We have seen this with taxi services (Uber) and the hotel industry (Airbnb), and today we are finally seeing the same with financial services,” Janjua adds. 

ABOUT THE AUTHOR

Suparna Dutt D’Cunha is the Editor at Fast Company Middle East. She is interested in ideas and culture and cover stories ranging from films and food to startups and technology. She was a Forbes Asia contributor and previously worked at Gulf News and Times Of India. More

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