Will 2018 Mark a Gulf FinTech Revolution?

Bahrain’s FinTech Bay, launched last month in the capital of Manama, is an intriguing example of managed development in a region of oil and gas producers keen to diversify their economies away from fossil fuels. The product of a public-private partnership between the Bahrain Economic Development Board (EDB) and FinTech Consortium, the FinTech Bay actually fits into a long tradition of Bahraini investment in the financial services sector that goes back to the 1970s.

By going all-in on cryptocurrencies and other emerging financial technologies, could one of the Gulf’s smaller emirates place itself at the forefront of a global industry?

If that’s the plan, the Bahrainis are off to a good start. FinTech Bay is part high-tech workspace, part incubator operating out of Manama’s Arcapita building. Tasked with supporting the acceleration of businesses in the sector and facilitating collaboration between investors, entrepreneurs, government agencies and banks, it has already secured the support of major international sponsors like Cisco and Microsoft.

Jockeying for First Place in FinTech Innovation

Bahrain is hardly the only member of the Gulf Cooperation Council (GCC) with this idea. The economic sands are shifting for all of the GCC countries. As the international appetite for fossil fuels continues to wane, the bloc’s oil economies are embarking on a region-wide push for economic modernisation. Bahrain has followed Saudi Arabia’s lead with its own “Vision 2030” programme. The Bahrainis also have company in the United Arab Emirates (UAE) when it comes to stimulating fintech innovation.

With fintech investment in the Middle East predicted to grow by 270% this year, the region is gathering momentum. The Gulf is, in particular, playing host to a rapidly growing fintech sector, which was on display at the Finovate Middle East summit held in Dubai at the end of February. The summit paired early-stage startups with financial service institutions and investors looking to secure stakes in a rapidly expanding market. Dubai has its own financial hub, the Dubai International Financial Centre(DIFC), which recently introduced infrastructure designed to attract fintech companies and established a $100m fund to invest in fintech startups.

Exciting developments aside, it is important to note that fintech investment in the Middle East is in its infancy compared to powerhouses like the United States, China and the UK. Less than 0.1% of global fintech investment currently originates from the region. Fortunately, a sharp upturn is likely on the horizon. Wamda and Payfort’s fintech report expects the number of Middle East fintech startups to more than double by 2020.

Room for Disruption

A few factors help those chances for growth. First and foremost: the MENA region has ample room for financial market disruption. Despite high rates of smartphone use, a large majority of the region’s population (86%) remains unbanked. Improving access to finance for all remains a priority for many international organisations, but traditional financial institutions haven’t been able to service low-income customers via existing channels.

Greater financial inclusion is a key stepping stone to unlocking economic growth. Fintech could provide an intelligent response to this troublesome service gap. Thanks to advances in mobile technology and AI, hopes are high for low-cost banking solutions.

This is an opportunity not just for disruptors, but also for existing banks to invest in a new financial ecosystem. Regional regulators and governments alike are supporting an emerging fintech infrastructure. Traditional financial services providers can also benefit from investing in digital initiatives, not least because of the potential to optimise their own operational efficiencies.

An Example for Europe?

The Gulf approach to the startup sector differs somewhat from the organic, “ground-up” growth that is a feature of tech ecosystems like Silicon Valley. It instead favours a “top-down” infrastructure to kick-start development. That means Gulf startups can look to a raft of government-sponsored support schemes and entrepreneurs can access a wide range of business incentives.

Can other trading areas –and especially the EU – take away a lesson or two from this approach?

The wave of innovation in the Gulf is gaining momentum, in part because of a new approach to regulatory flexibility. FinTech Bay ties into a regulatory “sandbox” created by the Central Bank of Bahrain (CBB) to provide a safe space in which companies can experiment with banking ideas.This sandbox model was originally set up by the British Financial Conduct Authority, though its use has now spread worldwide.

Abu Dhabi has launched a similar project. The Abu Dhabi Global Market (ADGM) established a regulatory lab – RegLab – to make it easier for startups to do business and design a framework to enable VC firms to invest. RegLab allows fintech startups a two-year window to develop and test their propositions before taking them to market. ADGM is collaborating with a number of global accelerators to nurture entrepreneurs, including PayPal and Dropbox incubator Plug and Play Tech Center. Dubai has signed an agreement with the Monetary Authority of Singapore to partner on joint fintech projects.

These types of regulatory and support programmes, as implemented by the Gulf states, could offer a model that enables EU-based companies to better compete in the sector. Estonian-based forex company TransferWise and France’s payment processing company PayPlug may be among Europe’s most famous fintech successes, but Brussels and the European member states still need to improve EU-wide conditions for startups (and especially fintech startups).

There are already plans in the works to create pan-European licences as part of the Capital Markets Union, tasked with removing barriers to cross-border investment. Could an EU sandbox propel the bloc into the frontline of fintech growth? As the GCC’s fintech sector spreads its wings over the next few years, Europe could very well find its answer to that question in the Gulf.