Fintech startup in the Middle East
There are currently over 470 fintech unicorns globally, with 40 of them added in Q1 2022 alone. That equates to over one new fintech unicorn every 3 days, and hundreds more being created every day. A recent study by Saudi technology venture capital fund STV predicts that MENA will see 45 unicorns worth over $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 wanted to be at the forefront of financial innovation and has witnessed a recent acceleration in investment and fintech startups. According to Statista, it was estimated in 2019 that there would be approx 465 fintechs in the region, while this figure was already over 760 in 2020.
While most of the capital has traditionally been 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 in search of the next big opportunity. In September 2020, Mubadala, Abu Dhabi’s sovereign wealth fund, and Silver Lake, the global leader in technology investment, established a partnership for long-term investment strategy and looking at regional prospects. More recently, Brookfield Business Partners, a global investment firm, made a significant investment (over US$1 billion) in the UAE by acquiring a stake in Magnati, First Abu Dhabi Bank’s payments spin-off.
According to MAGNiTT, fintech startups in MENA recorded 183% year-over-year growth in funding in 2021, the highest annual growth rate in the past five years, while most fintech deals (32%) and funding (49%) were focused on the UAE.
Significant government initiatives and support
Middle Eastern governments have embarked on major fiscal reforms and launched significant initiatives to privatize assets, increase public-private partnerships, monetize infrastructure resources 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 with 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 the Dubai International Financial Center (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, while Qatar and Oman have also recently announced similar initiatives.
In addition, countries in the Middle East also have long-established financial centers in capital cities such as Dubai, Abu Dhabi, Riyadh and Manama. In 2020, Dubai was the most attractive financial center in the Middle East region and integrated the top 10 financial centers globally back in 2019. In 2017, it launched a US$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 Center Index1
Financial inclusion is driving fintech investment in the region
Fintech growth in the Middle East is particularly driven by infrastructure needs to meet the high proportion of economically excluded population. In a region where over 70% of people do not have access to bank accounts, fintechs are bridging market gaps where traditional banks have had limited success so far. And they have succeeded in securing fundraising, especially within the areas 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 general adoption of fintech solutions in the region picks up. This applies in particular to digital wallets/money transfers and account aggregation, where customer usage was already there 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 use in the region is currently still nascent compared to Europe – and especially Northern Europe. According to Statista2BNPL’s market share in domestic e-commerce payments was only around 1% in Saudi Arabia and the United Arab Emirates in 2021, compared to 25% in Sweden, 18% in Norway and 6% in the UK.
Still, BNPL is expected to benefit from the overall regional growth in electronic payments (cards, e-wallets, e-commerce and m-commerce) as well as the global inflationary environment – and is poised to grow significantly over the next few years .
As such, the region has seen a proliferation of BNPL players addressing a regional infrastructure gap. Local businesses such as tabby, cashews, spotii, Tamaraand arrears payment is currently well positioned to drive this growth and is 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 dealers and volume of transactions. tabby reported over 3,000 regional sellers and more than 1.1 million active shoppers in March 2022. Meanwhile, Tamara reported 2 million customers and more than 1,000 sellers in the network. spotii on board over 700 sellers from October 2021.
In 2020, spotii raised a seven-figure seed from Daman Investments and was subsequently acquired by Zip, the Australian BNPL giant. Similarly, in August 2022, tabby secured USD 150 million in debt financing from 2 major US-based investors.
This momentum appears to be accelerating and sees increased collaboration between BNPL players and retail banks, as highlighted recently by Mashreq Bank’s investment in cashewswhich should drive further synergies and seize opportunities with regional retailers.
Instant payments to drive further fintech growth and consolidation
Following up on existing initiatives, the drive against financial exclusion and major government infrastructure investments, fintech growth is expected to continue in the coming years. Some of the region’s most significant upcoming initiatives are around the development of fast/instant payments. The central banks of Egypt, Saudi Arabia and the United Arab Emirates have launched – or are in the process of launching – National Instant Payments Platforms (IPPs) to accelerate the digitization of payments and drive financial inclusion.
While IPPs usually initially cover banks and traditional financial institutions, they usually open quickly to include non-financial institutions. This in turn drives fintech innovation in the areas of e-wallets and super apps, which seek to aggregate most of the core financial needs of consumers and SMEs (pay, save, pay and access credit).
We can therefore expect many partnerships between existing players that provide parts of the need for financial solutions – and potential consolidation over the coming years – all of which contribute to positioning the Middle East as a fintech leader, with ambitions to expand globally.
The contents of this article do not reflect the official opinion of Edgar, Dunn & Company. The information and views expressed in this publication belong solely to the author(s).
1. Note from Statista: The private institute Z/Yen has constructed an index for financial center rating, in which a number of factors are integrated. Important areas for competitiveness include the business environment, human capital, taxation and infrastructure.
2. Market share of Buy Now Pay Later (GNPL) in domestic e-commerce payments in 41 countries and territories worldwide from 2016 to 2021.
About Jean Sideris
Jean Sideris is director and head of Edgar, Dunn & Company’s Dubai office. He is responsible for industry consultancy, project delivery and business development. He has over 20 years of experience in payments, in the areas of strategy, financial analysis, partnership negotiations and due diligence, product design and launch, traditional, digital and mobile payments, pricing and exchange, regulation and financial inclusion. Prior to joining EDC, Jean held several senior management positions with global payments leaders and is a frequent speaker on fintech and payments in emerging economies. Jean has an MSc in applied economics from the Solvay School of Economics & Management, ULB in Belgium.
About Edgar, Dunn & Company
Edgar, Dunn & Company (EDC) is an independent global payment consultant. The company is widely regarded as a trusted advisor, offering a full range of strategy consulting services, expertise and market insights. EDC expertise includes M&A due diligence, legal and regulatory support across the payments ecosystem, fintech, mobile payments, digitization of personal and corporate payments and financial services.
