The expert panel shared insights on global economic developments and shifts of power in the financial ecosystem and the impact on the region.
Salmaan Jaffery, Chief Business Development Officer, Dubai International Financial Centre
Nameer Khan, Chairman & Founding Board Member, MENA Fintech Association
J.K. Khalil, Regional General Manager, Mastercard MENA East
Moderator: Alexandra Topalian, Presenter and Interviewer
Salmaan Jaffery: The policy decision in the way the pandemic was managed in Dubai has resulted in significant foreign direct investment into the country, including, but not limited to financial services, particularly hedge funds and technology. However, we are pegged to the USD, and thereby we are not immune from interest rate changes. However, the outcome of the economic challenges is that, regardless of economic diversification, oil is back and floats everything up. It will be interesting to see how excess income at the sovereign level will be directed into projects that deliver value for the economy.
J K Khalil: The spend data evaluated by MasterCard reveals a few trends, such as a significant shift to digital payment activity, with 85% adoption in the last 12-18 months, as per our 2022 new payments index publication. About 30% of this trend is expected to outlive post COVID correction. There is a greater shift of SMEs to digital platforms, which will bring a positive windfall to entrepreneurs. Many seem to be taking advantage of the digital transformation that has swept across all sectors. Another trend, with relaxing of travel processes, is that about 100 million people (from the EMEA population of approx. 2bn) will travel in the next 12 months – this is 150 million more people than last year, which is a healthy 5% jump.
Moderator: How are technology and innovation helping the economy to overcome challenges?
J K Khalil: Digitisation is going to create tremendous opportunity. And fintech redistributes value across the ecosystem, with merchants and buyers in the B2B flows being winners. When B2B flows get digitised, they create better discovery, have more control of price, and better access to quality. Digitisation redistributes wealth more equitably. The last three years, there has seen the digitisation of everything, but now there is a return to fundamentals and investors are looking at startups with better questions, asking whether the fintech companies are trying to solve real world problems. The MENA market is quite fragmented, and disparate from a regulatory perspective, so fintech is going to address many problems.
Moderator: How do you think the pandemic has affected fintech companies?
Nameer Khan: We have been analysing about 650 fintech companies, which is 70% of the entire fintech population of the region, and most of them are focused on the payment sector. The fintech ecosystem is under duress with an increased expectancy of ROI. Many fintech companies are starting to close due to cash burn and the investors are going back to fundamentals; looking at shorter horizons and examining more thoroughly the problems being solved by the various companies. There was a lot of saturation in the payments landscape, which is the heart of fintech, but innovation is incremental, and many may not be scalable.
The new niche that these tech companies are focusing on are SMEs and sustainability; looking at real world problems that fulfil both purpose and profits. The regulatory framework in this region is quite fragmented and we are working together to resolve this. One issue is regional passporting and how to set up a fintech in one country in the region and then scale to other markets. The customer requirements are the same throughout the region. We are seeing a new breed of fintech companies coming in, that is diverting away from payments.
Moderator: How is Fintech becoming a part of the infrastructure of the global economy, and can you compare the different markets?
Nameer Khan: Regarding the adoption rate of digital payments, the MENA region has outperformed global markets. The growth has been in double figures. Both KSA and UAE has had 75% growth on digital payments which is now embedded into the financial infrastructure. This is partly due to the pandemic and is also driven by the high youth population, who are high consumer of YouTube and Instagram.
Moderator: It is said that the UAE is becoming the hub for fintech. Is there some truth in this statement?
Salmaan Jaffery: We need to look at the strategic impact of digitisation and fintech on this economy. One hallmark of this economy is that, unfortunately, productivity has been generally low. And one of the promises of digitisation and a fintech is to increase the rates of productivity. This, by itself, is very important. At DIFC, we are interested in job creation and economic growth. The other aspect is that the role of digitisation and fintech is bringing more people into the financial economy and creating inclusion. There is a change in power, moving away from providers into the hands of consumers, which is the inevitable impact of digitisation.
Interestingly, in the large economies like USA, despite an incredible level of innovation, the large incumbent payment systems like cheques and complex banking systems have made the national rollout of fintech strategies very challenging. There is an explosion of great ideas but scaling of fintech in USA is very challenging. Here, we have the luxury of being in an economic milieu that is relatively small, and there is a top-down initiative to digitize everything. Furthermore, the UAE has made the visa system far easier than the US and EU, and so acquiring talent is a big win – example of Rapyd, US$10 billion Israeli payments company, who came here to recruit the best people.
J K Khalil: The most successful fintech companies are the large merchants, like Amazon and Apple, that can operate across borders. They can transcend regulation, to a very large extent, and their infrastructure isn’t rigid or connected to a domestic switch in the US or Europe. They can create a layer that supersedes the local complexities of networks and ecosystems.
Moderator: It seems like only yesterday banks were setting up and launching their first online banking portals. But with this rapid digital transformation within the UAE and the broader MENA region, what are some of the key transformations that are shifting our operating environment?
J K Khalil: In the last 15 years, banks have been trying to change themselves, but unfortunately with the same back-office infrastructure. The focus has been on apps that makes banking more seamless. However, the big shift isn’t in the increasing number of banking apps but real digital banks that are native by default. A digital bank is a great equalizer. Any bank that gives a value proposition that can cater to the needs of large unserved consumers in the market will compete in a more level playing field. Already, there is a rise of smaller and medium sized banks who can compete with the larger players, because size no longer matters in the digital continuum. Large banks are trying to grapple with this and rushing to reinvent themselves before it’s too late.
However, the KSA is quite different where the big banks have between eight to 10 million customers; medium sized banks have around two million customers and smaller banks would be typically less than one million. There are a couple of very large fintech players in that market. Generally, in the region, there are different models emerging from the banking industry who are creating their own digital versions.
Nameer Khan: Trust plays an important role, and some new players are emerging. The question is – would you keep your primary funds in a digital bank or a traditional bank? This evolution is going to take a couple of years, when customers will become familiar with the services and start trusting the digital banks enough to keep their primary funds into those accounts.
Salmaan Jaffery: There are banks today, globally, that have servers from the late sixties and early seventies with programming languages that are now almost extinct. Industry transformation, particularly of a sector whose job it is to intermediate capital between users and investors, will take a long time. And it’s going to pan out in different regions in different ways, because obviously there are different regulatory environments, objectives and client needs.
We are observing some interesting scenarios. For instance, how the 600 fintechs at DIFC are going to scale. They don’t have scale embedded as do corporates, banks and telcos. How do you apply innovation to scale? Another interesting question is around the rate of incorporation of WEB3 and how fast will decentralization happen?
J K Khalil: I don’t think wallets or digital banks are going to beat the big banks. There will be entities causing disruption in the financial ecosystem which will create better customer experiences. And banks will either copy or acquire. And since they have deep pocket, there will be consolidation.
Salmaan Jaffery: Can you think of any relatively well-known global fintech that is profitable? Certainly, no one is profitable in the region. Let’s circle back to the original question on macroeconomics. People forget it’s not about raising money. It’s about making money. And at some point, the founders must deliver. If you are a large business with 20 to 30 million clients, you have a shot at creating positive cash flow and generating profits. The battle lines are less about technology, consumer behaviour, or regulations, and more about the theory and business model.
J K Khalil: Some large global remittance players have succeeded in the last decade and are profitable.
Salmaan Jaffery: When remittance players charge 10% fees per transaction for every dollar remitted, of course they will be profitable. However, fintechs with squeezed margins, need massive volumes to make money and they are unable to scale enough to be profitable.
Moderator: Is there a regulatory framework of sustainable finance that clearly defines what is green and what is not?
Nameer Khan: There has been a green framework that has been launched in the UK and US. There are going to be strong movements in the UAE as well towards green finance.
Salmaan Jaffery: In the UAE, we need to spend a bit more time on the Social and Governance aspects of the ESG parameters, because they are related. And more attention needs to be on pricing carbon. If you tax or create a cost, then you can shape behaviour. More attention is needed on scaling markets for carbon.
Nameer Khan: In the retail industry, you will soon see carbon labelling, which will show you the carbon emissions for specific products. This requires open data, which is also coming in the region.
Audience 1: Do you see any energy providers getting into payments that could solve both sustainability as well as fintech, enabling socially responsible payments?
Nameer Khan: Many energy players are leveraging payments to enable offsetting, and they are also investing into fintechs that are focused on sustainability.
J K Khalil: Companies in larger markets of USA and Europe, have facilitated consumers to sell back to the grid, for over a decade. We are probably lacking in more regulatory oversight and proper policies that incentivise good behaviour versus bad behaviours. Consumers should not pay premium prices for green products, but instead more for the ‘red’ products.
Nameer Khan: Unfortunately, the cost of producing a green product is higher.
Salmaan Jaffery: We need more nuclear energy, but it’s a debt agenda globally, particularly in Europe.
Nameer Khan: R&D funds are moving towards nuclear energy. And nano nuclear is coming, which is the cheapest and cleanest form of energy. But you need to be able to pay that green premium to increase the economies of scale so that it becomes cheaper in the long run for everybody.
Audience 2: Is there is a development of silos, with China payments ecosystem, Indian payments ecosystem; Mastercard and Visa in the developed world. What will the future look like?
J K Khalil: I don’t think MasterCard and Visa have dominance in the developed nations. In the US, there are at least five ecosystems only in one market. I think you’re referring to the localization of payment ecosystems, which is a true trend. The fact that local ecosystems are now evolving and localizing domestic payment systems or building domestic payment systems is not necessarily a bad thing. I see the whole industry moving upwards in its evolution and maturity.
Audience 3: What are your thoughts on the crypto ecosystem?
Salmaan Jaffery: Certain elements of the decentralized digital tokenization assets and crypto are here to stay. There is no shortage of startups and innovation in the space, but the rate at which they become integrated with the financial system will vary. Within the regulated space, you can be an exchange, a market maker. Or you can be a broker or an intermediary, just like in traditional finance. And finally, you can be an asset manager, buying, holding and trading equities and fixed income and derivatives. You can also be a payment company, and in the last 12 months, they have been providing the rails on and off ramps from fiat to crypto. Note that the entire innovation and fintech space is a lot easier to do in the B2B space than it is in the in the end consumer.
J K Khalil: Banks will be very cautious about touching crypto unless you’re doing it from an asset management side of the business.
Audience 4: What would you say to the government to ensure that UAE succeeds as a hub for fintech?
Salmaan Jaffery: Opening of bank accounts needs to be much easier. It is a tiny operational procedure on the face of it, but it has massive impact on things ranging from the ability of fintechs to scale and be successful and come to the UAE, to hire people, etc. There is a mismatch between the ambition that the UAE projects globally, and the reality on the ground, in terms of ease of business.
A bank may or may not take on a fintech client for a variety of reasons, but these include the fact that the company is small, and not profitable. Or it is not consistent with the bank’s risk profile. The company may even compete with the bank for payments. But banks are also unsure about the regulatory response they will get from the US Central Bank, which has a daunting task. We just went through FATF review at the UAE level, which also has a massive sovereign impact and can have repercussions on correspondent banking relationships. There is a lot at stake here and it is complex. The answer is not policy per se. We need more clarity and working together between the financial institutions and the regulators to make sure that everyone is aligned on what constitutes a real risk. Also, to be noted that SMEs are not the same as fintechs. A small company that’s a tech startup is not a SME. This is a common mistake, and we use the term SMEs very loosely.