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The Middle East is going through a large digitalisation phase, backed strongly by local government efforts. As banks’ approach to fintechs is changing, Dubai is turning into a preferred destination for fintechs to get a foothold in the region.
The Middle East and North Africa (MENA) has historically had a strong reliance on cash payments. Many markets in the region, for example, have lagged behind the levels of digitalisation and payments development that has occurred in many other parts of the world.
Despite the large digital-savvy young population and an average smartphone penetration of 65 percent, cash is still the most widely used payment method at the point of sale (POS) in many MENA markets.
According to the FIS global payments report, in pre-pandemic 2019, cash accounted for over 70 percent of the total POS transaction value across MENA.
Although the pandemic has significantly accelerated non-cash payments, coins and notes remain the preferred payment method to date. In 2021, cash accounted for 44 percent of the value of purchases in the region.
One of the markets leading this charge for digital payments innovation is Dubai. Even before the pandemic, the emirate, which is part of the United Arab Emirates (UAE), was ahead of the curve in terms of non-cash payments.
According to the MENA Fintech Association, around 70 percent of transactions in the UAE and Saudi Arabia are now cashless and mobile wallet adoption at the POS grew to 13.4 percent and 13.6 percent, respectively, in 2021.
“Fintech expansion has accelerated significantly in the last twelve months. The fintech landscape in the UAE has experienced a big transformation, with particular focus on digital banking and payment services,” Charles Matta, SVP of strategy and business growth at Monty Group, told VIXIO.
This is partly due to the positive approach of local regulators that launched a number of fintech-friendly initiatives to boost innovation.
The UAE was the first player to lay the groundwork for a fintech ecosystem in the Middle East and is aiming to become one of the top five fintech hubs globally by December 2023.
In 2017, the Dubai International Financial Centre (DIFC) launched a first-of-its-kind fintech accelerator in the region, called Fintech Hive, to help fintech, insurtech and regtech startups set up and grow in the Middle East, Africa and South Asia (MEASA).
“The Dubai Fintech Hive works like a separate country,” said Carmen Vicelich, founder and CEO of Australian fintech firm Valocity.
It has its own lawyers, an independent regulator and a judicial system with an English common law framework, she explained. The Fintech Hive offers cost-effective licensing solutions, fit-for-purpose regulation and accelerator, start-up and scale-up programmes.
In addition, the Dubai Financial Services Authority (DFSA) has created its own regulatory sandbox, known as the DFSA Innovation Testing Licence (ITL) Programme, which enables licence holders to test new and innovative financial products and business models.
“If you want to start a business in the region, one of the perfect places to start from would be the UAE”, Matta said. “Regulations are designed to foster innovation and a number of accelerator programs were incorporated to accommodate for the new business models in place.”
“Regulators take your hand and walk you through every step of the process,” he added.
Although these initiatives have been in place for years, the incumbent sector has only recently taken a more open approach to new market players.
“Banks’ behaviour has changed significantly, even compared to last year,” Matta said.
“Banks thrive for adoption. Partnerships between banks and fintechs are forming,” Vicelich added.
“They understand that digitalisation is no longer a project that their own teams can do internally on their legacy systems and cloud adoption is accelerating,” she explained.
Although open banking regulations are currently not in place in Dubai, it is understood that they are in the making and it is only a matter of time till the city adopts a framework for it.
Meanwhile, customer expectations have also changed in the region.
According to the Mastercard New Payments Index, 95 percent of consumers in MENA are considering emerging payments such as wearables, biometrics, digital wallets and currencies, and QR code in addition to contactless and 65 percent of consumers have tried new payment methods in the last year.
The supportive regulatory framework, banks’ open approach to fintechs and changing customer expectations have all contributed to Dubai experiencing a fintech boom recently.
By the first half of 2021, the DIFC said the innovation centre had already achieved its 2024 strategy growth targets, when the total number of active registered firms reached 3,644 entities. This included 1,124 financial and innovation-related entities, whose number grew by 23 percent compared to 2020.
The country is also embarking on a payment modernisation journey.
In February, Italian-based payments company SIA, part of the Nexi Group, was chosen by the UAE central bank, in partnership with technology consultancy Accenture and Abu Dhabi-headquartered computer software company G24, to deliver a new instant payment system for the country.
SIA is the same company behind EBA Clearing’s pan-European instant payments service, RT1.
As well as managing the new infrastructure, the consortium will be responsible for delivering many new overlay services, including adding new capabilities such as e-checks to digitalise cheque-based payments and a payments application to accelerate adoption.
Regional potential
With a population of more than 500m, the MENA region offers great potential for digital payments growth and innovation.
In most developed markets, the fintech space already has large, established market players, such as Monzo in the UK or N26 in Germany. However, the Middle East and North Africa fintech landscape is not yet saturated and most of the fintechs are relatively new market players, Matta noted.
This leaves plenty of opportunities for new businesses to challenge new and existing participants, and potentially use hub markets such as the UAE as a stepping stone for the region and beyond, using its connectivity to Africa, India and ASEAN markets.
For example, as a fast-growing and largely untapped payments landscape, many African markets present a huge opportunity for businesses to capture growth. In 2020, the African online payment market was valued at more than $30bn and is expected to grow at a compound annual growth rate of 30 percent between 2021 and 2025.
Last October, in what some called a landmark deal, Network International, the largest acquirer in the UAE, paid a $291.3m sum for African payment service provider DPO.
The acquisition will enable Dubai-headquartered Network International to increase its presence throughout 21 countries in Africa and launch a new payment product in both its home markets and new ones.
VIXIO conducted the interviews during the Seamless Middle East 2022 in-person event in Dubai.
