How Gulf Countries Are Embracing FinTech

FinTech in the Gulf Cooperation Council (GCC)

On a global scale, the adoption of advanced technologies has been rapidly accelerating. FinTech has affected almost all the industries that are located in the GCC, including the sports and telecommunication sectors. All the countries under the GCC are highly adaptive to the technologies or any innovative idea for that matter.

The GCC nations have embraced the opportunities in FinTech and blockchain technology, in particular, at different paces. FinTech plays a crucial role in the future of the financial services industry in the region – the industry is expected to immensely impact public and private sectors. FinTech is bringing advanced technologies into the financial sector, improving its performance and delivering value to customers. Some estimates suggest that investments in Gulf-based FinTech startups are expected to reach $2 billion in the next decade, compared to $150 million invested in the last 10 years.

Among the GCC nations, the banks located in the UAE have wholeheartedly welcomed FinTech. The Emirates NBD has stationed itself as the leader of the technology by releasing the Emirates NBD Future Lab. And along with this, they have also declared their commitment to invest AED 1 billion in the space (~USD 272+ million).

FinTech in the GCC is still in its early stage. However, a few stars are already visible:

  • PayTabs, a payment gateway, raised $20 million for its global expansion in 2017.

  • Beehive is one of the iconic startups in the UAE that focuses on P2P lending and crowdfunding. In 2017, the UAE launched a regulatory framework that opened the door for crowdfunding in the region. Other countries in the region are expected to follow the same trend.

  • Aqeed, a fast-growing FinTech startup that focuses on the car insurance segment. Aqeed raised $18 million in 2018.

The culture of structured and organized seed capital is still new in the region. However, there are some strong VCs that have invested significant amounts, including:

  • Wamda Capital was founded in 2014 and has built its brand as one of the most active VCs in the UAE. Wamda invested $17.4 million in YallaCompare, which is a comparison website for financial products. Recently, Wamda launched a $100 million fund named WamdaX.

  • BECO Capital is a VC firm focused on automotive startups but also has exposure to FinTech. It has invested $3.5 million in Bayzat.

  • GoCompare is a UK-based company which showed a great interest in the region with an investment of $10 million in, another comparison website for primarily insurance, loans, and cards.

In summary, comparison websites focusing on insurance and financial products seem to be of the greatest interest to investors. There are also a few other emerging segments – crypto exchanges and remittances.

Remittance companies have a great potential in the region considering that the majority of the residents in the GCC are expats. The new payments regulations in the UAE, for example, opened the door for online remittances.

In its active interest in FinTech, the UAE is followed by Bahrain – a small country by size but with high potential. The country has set itself to become a regional hub for cryptocurrencies by issuing drafted rules to regulate cryptocurrencies. While Bahrain has created a FinTech regulatory unit, Abu Dhabi and Dubai are cultivating a financial startup scene.

Kuwait is another nation that is embracing advanced technologies – the country launched its FinTech sandbox in December 2018. Kuwait’s central bank has issued regulatory guidelines for companies wishing to experiment with new FinTech products and services.

How some of the GCC countries are embracing blockchain technology

In the GCC, the UAE leads the pack in terms of embracing the potential of blockchain technology across industries by setting 2020 as a target to have all government documents on the blockchain.

I consider Saudi Arabia to be the Big Brother for all the GCC countries and believe nothing can scale in the GCC if Saudi Arabia is not in on it.

Understanding the importance of blockchain technology, Saudi Arabia is getting closer to US-based blockchain focused startups. In 2018, the Saudi Arabia Ministry of Communications & Information Technology partnered with ConsenSys as part of its responsibility for the development of national cadres in future technologies. The three-day boot camp run in collaboration with ConsenSys is aimed at introducing participants to how blockchain technology works from both a business and strategy perspective, its numerous applications, and the features that make this technology positively disruptive, unique as well as powerful. It also included a training course, where technologists from several entities received in-depth training on how to startup a development environment, build decentralized applications (dApp) with Ethereum smart contracts, and integrate these with web applications.

Saudi Arabia is also associated with Ripple. The Saudi Arabian Monetary Authority (SAMA) – the central bank for the Kingdom of Saudi Arabia – has signed an agreement with Ripple to help banks in Saudi Arabia improve their payments infrastructure using xCurrent. Participating banks from Saudi Arabia used xCurrent to instantly settle payments sent into and out of the country with greater transparency and lower costs. Saudi Arabia gained access to every financial institution (banks and payment providers) on RippleNet, which not only helps modernize their payments systems but also further their reach into major corridors. SAMA is the second central bank to support the use of blockchain technology to revolutionize payments, following the Bank of England’s successful proof-of-concept with Ripple in 2017.

Saudi Arabia also has a partnership with IBM. In July 2018, as part of the Riyadh Municipality’s collaboration with Elm Company (owned by the Public Investment Fund of the Kingdom of Saudi Arabia), Elm announced that IBM has been selected as the strategic partner for the integration of blockchain technology. IBM and Elm will develop an implementation strategy to facilitate government services and transactions to better serve customers digitally and to support the transformational objectives of the Saudi Vision 2030. Riyadh Municipality, IBM, and Elm will jointly organize workshops in collaboration with key government departments, and private and semi-government sectors in Al Riyadh to identify services which can be transformed and enhanced through blockchain. IBM will then design the first blockchain-based solution at the municipality level, while Elm will integrate the technology into the government’s services as the next stage.

Riyad has another – this time not blockchain related – important development. Riyad Bank, one of the largest financial institutions in Saudi Arabia, has launched the country’s first-ever range of contactless payment wristbands in collaboration with Gemalto in March 2018. Fitted with contactless MiniTag, the bracelets are linked to the user’s existing debit or credit account and offer the freedom to make swift tap-and-go payments with their wearables.

Along with the bracelets, Riyad Bank has also launched Gemalto’s contactless sticker which can be fixed to the back of any cell phone to turn it into a secure contactless payment device.

In terms of regional cooperation, Saudi Arabia and the UAE are working on a project to allow cross-border transfers between the two nations. In December 2018, the UAE and Saudi Arabia started developing FinTech for cross-border settlements, including a digital currency project. For the joint digital currency, the UAE and Saudi central banks have launched a distributed ledger PoC system to facilitate cross-border settlements. The digital currency would be backed by fiat currencies of the two nations.

Experts familiar with the region are expecting the project to cover the whole GCC region once the pilot goes live. All the GCC fiat currencies are pegged to USD except the Kuwaiti Dinar. There is great potential for a regional cryptocurrency here.

While Saudi Arabia is not too behind in terms of FinTech development, it may need better marketing for its achievements. Also, regional cooperation is key to having solutions that can scale.

FinTech has a major significance to the financial sector in the region as well as globally. The financial system globally constitutes of transactions involving over trillions of dollars a day made by billions of people. And although all the systems might appear to be working alright, when you take a closer look at them, they are often impaired with various issues that require immediate attention. And this is where blockchain technology, and the FinTech industry in general, come in hand. The FinTech effect is driving Saudi Arabia away from the image of a nation dependent on oil and towards a nation that has embraced innovative technologies to bring power to its country. Saudi Vision 2030 aims to cover a lot of ground on this journey.

As the government of Saudi Arabia continues with its experiments, the country is gradually transforming into a major technology and innovation hub that can compete with long-established innovation centers.

Active areas of blockchain technology application in Saudi Arabia

Money transfer and settlement

The structure of international payments still follows a closed and categorized system. We all come across major issues while transferring payments internationally, which include waiting for the opening hours of the agencies, and of course, the amount taking more than a day to process.

The reason behind this is, before the money reaches its destination, it goes through a various number of banking systems which have a number of their own processes. This becomes a problem for not only customers but also for the banks as it increases the work of cross-checking the data.

The answer to all these issues lies in the involvement and investments in FinTech, and, possibly, blockchain technology. Innovations in this area are expected to modernize the cross-checking issues that are conducted by different organizations associated with the international fund transfers – by providing an easy verification system over the various levels of checks. The National Bank of Abu Dhabi (NBAD) has become the first bank in the Middle East to use Ripple’s solution to provide real-time cross-border payments to its customers.

In February 2018, Saudi Arabia’s central bank has also signed a deal with Ripple to help banks in the kingdom settle payments using blockchain software. The pilot program was the first of its kind to be launched by a central bank, allowing banks in Saudi Arabia to use Ripple’s software to instantly settle payments sent into and out of the country.

Embracing the blockchain technology in the banking sector, the National Commercial Bank along with the Saudi Arabian Monetary Authority has joined RippleNet. The NCB is Saudi Arabia’s oldest and the very first bank which was established in the country. Over the last few years, it has become one of the Middle East’s largest financial institutions with more than 5.4 million customers across the world. It has now decided to communicate with the rest of the financial institutions using the technology of RippleNet. This Ripple’s blockchain technology is equipped with the potential of serving its customers with a much faster and a transparent form of international payment services. Its first connection target is with the financial institutions in North America and Asia, starting in Singapore.

Saudi Arabia is among the largest sources of remittances in the world and it has maintained its position since the last decade. According to the World Bank, $37 billion were sent as remittances from the country in 2017. This huge market comprises of the citizens as well as the workers from the overseas (over 10 million) in the Kingdom of Saudi Arabia.

In addition to this, the substantial payment volume has been received from both the large corporates along with SMEs. The requirement of economic growth is particularly needed in the SMEs as they are currently served by domestic financial institutions for the most part.

This adoption by the NCB inclined toward an efficient result in the remittance operations and according to the pilot tests, it is also predicted that it will generate savings between 40% to 70%, which is what usually is paid to the middleman of the foreign exchange services. Thus it not only increases the speed of payment settlements but also helps in saving money.

Providing banking services to the unbanked

In October 2018, STC Pay, a subsidiary of Saudi Telecom Company (STC), Saudi Arabia’s largest telco, and Western Union entered into strategic discussions to embed Western Union’s cross-border functionality into a new STC Pay-led FinTech platform offering financial services locally and globally. It will allow customers to seamlessly transact a range of payments without the need of formal bank accounts.

Under the proposed arrangement, STC Pay users can stay local and still enjoy the benefits of a global marketplace, thanks to a proposed integration with Western Union. They can shop local, receive money, or send money to friends and family nearly anywhere in the world. Once, such transactions were the privilege of customers with bank accounts but under the proposed agreement, they would be available at the touch of a button to anyone with an STC Pay mobile wallet. – Nasser Al Nasser, CEO, Saudi Telecom Company

In 2017, there were 6.4 million unbanked adults in Saudi Arabia, out of a population of 21 million adults, according to the World Bank. Saudi Arabia is host to millions of international workers and is the world’s second-largest remittance-sending nation.

Operational efficiency

The Islamic Corporation for the Development of the Private Sector (ICD) based in Saudi Arabia has come to an agreement with the Tunis-based FinTech company with the sole purpose of developing blockchain solutions for the Islamic banks.

ICD has signed an investment agreement with I-FinTech Solutions (IFTS) to cultivate a pipeline of products, which will be basically designed with the purpose of solving the liquidity management issues.

Their initial product in the pipeline will program the real-time platform which will assist the problem which occurs while doing the business of real commodities and will put an end to the issues related to the inter-banking between the conventional and Islamic bans in a Sharia-compliant manner.

The ICD has also stated that the use of blockchain in their products will not only decrease their time of carrying out a task but will also reduce the expenses related to financial and commercial transactions. Moreover, it will also bring an improvement in a transaction’s transparency and traceability.