Fintech take-off in the Middle East

Fintech take-off in the Middle East

Jean Sideris
November 1, 2022

There are currently over 470 fintech unicorns globally, with 40 of them added just in Q1 2022. That equates to over one new fintech unicorn every 3 days, and several hundred others are being created every day. A recent study by Saudi Arabian technology venture capital fund STV predicts that MENA will see 45 unicorns worth over USD 100 billion by 2030. So, will the Middle East become the global fintech leader in the coming years?

Strong Investment Growth

The Middle East has always aspired to be at the forefront of financial innovation and has witnessed a recent acceleration in investments and fintech startups. According to Statista, in 2019, it was estimated that there would be about 465 fintechs in the region whereas this number was already above 760 in 2020.

Whilst most of the capital has been traditionally provided by the sovereign wealth funds of the Gulf States, the post-COVID-19 period has been particularly prosperous, with more and more international investors turning to the region looking for the next large opportunity. In September 2020, Mubadala, Abu Dhabi’s sovereign wealth fund, and Silver Lake, the global leader in technology investing, established a partnership for long-term investment strategy and are looking at regional prospects. More recently, Brookfield Business Partners, a global investments company, made a significant investment (over USD 1 billion) in the UAE by acquiring a stake in Magnati, First Abu Dhabi Bank’s payments business spin-off.

According to MAGNiTT, fintech startups in MENA recorded a 183% year-over-year growth in funding in 2021, the highest yearly growth rate over the past five years, whilst most of the fintech deals (32%) and funding (49%) were focused on the UAE.

Significant Government Initiatives and Support

Middle Eastern Governments have embarked in major fiscal reforms and launched significant initiatives to privatise assets, increase public-private partnerships, monetise infrastructure assets, and drive financial inclusion. Government-led initiatives have also been a key growth driver in the financial services venture capital sector in the region.

In the area of financial regulation, Governments have launched many initiatives of regulatory sandboxes across the region to drive the adoption of digital financial solutions and accelerate fintech growth. The first fintech lab in the region was launched by Abu Dhabi Global Markets in 2016 (ADGM RegLab), followed by Dubai International Financial Centre (DIFC) Fintech Hive and the Central Bank of Bahrain in 2017. In 2018, SAMA, the Central Bank of Saudi Arabia, and the Central Bank of Kuwait also launched regulatory sandboxes, whilst Qatar and Oman have also recently announced similar initiatives.

Additionally, Middle Eastern countries have also long-established Financial Centres in main cities such as Dubai, Abu Dhabi, Riyadh, and Manama. In 2020, Dubai was the most attractive Financial Centre in the Middle Eastern region and integrated the top-10 Financial Centres globally back in 2019. In 2017, it launched a USD 100 million  fintech-focused fund to accelerate the development of financial technology by investing in startups from incubation to scale-up stage. In February 2022, it was home to more than 3,600 financial firms, up 25% from the previous year, and including 1,000 new registrations in 2021 compared to 735 in 2020.

Source: Statista – Z/Yen Financial Centre Index

Financial Inclusion is Driving Fintech Investments in the Region

Fintech growth in the Middle East is particularly fuelled by infrastructure needs to address the high proportion of financially excluded population. In a region where over 70% of people do not have access to bank accounts, fintechs bridge market gaps where traditional banks had limited success so far. And they have been successful in securing fund raising, especially in the areas of digital wallets/money transfer, lending, payments, and insurtech.

Source: Forbes Middle East – Top 20 Fintech Startups

These investments are starting to pay off as the overall usage of fintech solutions in the region is picking up. This is particularly true for digital wallets/money transfers and account aggregation, where customer usage was already close to 40% in 2020.

Source: Statista

In-focus: BNPL Solutions

One of the recent focuses of fintech initiatives has been in the Buy Now, Pay Later (BNPL) sector. Its usage in the region is currently still nascent compared to Europe – and especially Northern Europe. According to Statista2, the market share of BNPL in domestic ecommerce payments was only about 1% in Saudi Arabia and the UAE in 2021, in comparison with 25% in Sweden, 18% in Norway, and 6% in the UK.

Nevertheless, BNPL is expected to benefit from the overall regional growth in electronic payments (cards, e-wallets, ecommerce, and m-commerce) as well as by the global inflationary environment – and is poised to significantly increase over the next few years.

As such, the region has seen a proliferation of BNPL players addressing a regional infrastructure gap. Local companies such as tabby, cashew, spotii, tamara, and postpay are currently well positioned to drive that growth and are attracting significant investment from PE firms and investors.

tabby and tamara are the leading providers in the UAE and Saudi Arabia in terms of number of retailers and volume of transactions. tabby reported over 3,000 regional merchants and more than 1.1 million active shoppers in March 2022. Meanwhile, tamara reported 2 million customers and more than 1,000 merchants in its network. spotii onboarded over 700 merchants as of October 2021.

In 2020, spotii raised a seven-figure seed from Daman Investments and was then acquired by Zip, the Australian BNPL giant. Similarly, in August 2022, tabby secured USD 150 million debt financing from 2 large US-based investors.

This momentum seems to accelerate and sees increased collaboration between BNPL players and retail banks, as recently highlighted by the investment of Mashreq Bank into cashew, which should further drive synergies and grab opportunities with regional retailers.

Instant Payments to Drive Further Fintech Growth and Consolidation

Following up on existing initiatives, the drive against financial exclusion, and large government-led infrastructure investments, fintech growth is expected to continue over the coming years. Some of the region’s most significant upcoming initiatives are around the development of fast/instant payments. Egypt, Saudi Arabia, and the UAE Central Banks have launched – or are about to launch – National Instant Payments Platforms (IPPs) to accelerate the digitalisation of payments and drive financial inclusion.

Whilst IPPs are usually initially covering banks and traditional financial institutions, they typically quickly open up to include non-financial institutions. This in turn fuels fintech innovation in the areas of e-wallets and super apps, which seek to bring together most of the consumers’ and SMEs’ core financial needs (pay, save, remit, and access credit).

We can therefore expect many partnerships between existing players providing parts of financial solution needs – and potential consolidation over the coming years – all contributing to position the Middle East as a fintech leader, ambitioning to expand globally.

1. Note from Statista: Private institute Z/Yen has constructed an index for financial center rating, in which a multitude of factors are integrated. Important areas of competitiveness are, among others, business environment, human capital, taxation, and infrastructure.

2. Market share of Buy Now, Pay Later (BNPL) in domestic ecommerce payments in 41 countries and territories worldwide from 2016 to 2021.

This article was first published by The Paypers, the Netherlands-based independent source of news and insights for professionals in the global payment and e-commerce community.

The content of this article does not reflect the official opinion of Edgar, Dunn & Company. The information and views expressed in this publication belong solely to the author(s).

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