Investors made 2018 a record year for startups in the MENA region, highlighting its rapid embrace of fintech. But regulation and infrastructure still have to catch up.
Startup fever has gripped the Middle East and North Africa (MENA) region. Last year was once again a record year, with 366 deals, attracting $893 million in investment, according to the latest report from Magnitt, a Dubai-based entrepreneurs’ network. That was modest compared to other parts of the world, but momentum is building fast.
And when it comes to digital startups, fintech is attracting the most interest—accounting for 12% of all deals in the region, closely followed by e-commerce. MENA fintech, which barely existed a few years ago, is now a $2 billion market. With dozens of new companies launching each year, annual growth is expected to reach $125 million by 2022, according to Beirut-based consultants MENA Research Partners.
Some of 2018’s major fintech deals in the region were an $8 million capital injection in Dubai-based financial-comparison platform Yallacompare; a $1.5 million round by four VCs and two angels for Jordanian cloud-based POS software POSRocket; and $1.3 million in Dubai-based automated investment-advisory platform Sarwa, which launched in 2018. Saudi payment provider PayTabs still holds the record for the biggest round closed by a MENA fintech, with $20 million raised in 2017.
The road is not without bumps for startups, however. While capital is increasingly available for seed and early-stage investment, experts say money is lacking for later-stage growth: Series B and above.
“The MENA fintech ecosystem is at a frontier stage. The vast majority of initiatives launched are still in the incubation phase,” says Eric Modave, COO at Jordan’s Arab Bank, one of the Middle East’s largest banks. “The main challenges that startups have been facing historically in the region are a combination of shortage of funds, low customer acquisitions and difficulties creating new partnerships.”
A Nurturing Environment
This is changing, as more stakeholders take a hand in building up a brand-new ecosystem. “Changing the state of the wealth industry in the region requires a lot of collaboration from the regulators, technology providers, banks and early customers,” says Mark Chahwan, co-founder and CEO of Sarwa. “It takes time and a lot of patience; it’s a lot of work that’s invisible to the market but is so key.”
The United Arab Emirates (UAE) have the most advanced ecosystem, with several public and private initiatives supporting innovation. These include the Dubai International Financial Centre, which supervises a $100 million fintech fund and the region’s first fintech accelerator, Fintech Hive; and the Abu Dhabi Global Market, which developed its RegLab (regulatory laboratory) specifically to help new companies solve their regulatory issues.
In other countries, central banks are taking measures to encourage digitization and innovation. Lebanon just legalized electronic signature, which is expected to boost online banking, transactions and trade. Lebanon has one of the most dynamic digital ecosystems in the region, partly thanks to the Banque du Liban’s 2013 pledge of more than $600 million to guarantee up to 75% of all commercial banks’ investments in local startups or venture capital funds. “Banks have certainly realized the importance of partnering with external innovators to accelerate their internal rate of innovation,” says Arab Bank’s Modave. In the past two years, central banks in several countries, including Bahrain, Jordan, Saudi Arabia and Kuwait, have been setting up regulatory sandboxes, creating frameworks for safer fintechs.
“The percentage of digital products sold is still very small compared to Western countries, but the trend is changing,” says Shiv Gupta, co-founder and director of MyMoneySouq, a UAE-based financial-products comparison platform that quadrupled its growth last year and expects to do the same in 2019. “Fintechs are now more accepted than ever before, and I believe banks are much more open to exploring partnerships.”
Recent examples of this include Kuwait’s Ahli United, which took on rent-payment mobile app Ajar Online; Beirut-based startup FOO, which provides digital solutions for regional banks and telecom providers; and even international players like US-based fintech Ripple, which signed cross-border payment deals with three MENA banks: National Commercial Bank, Kuwait Finance House and National Bank of Kuwait.
Some institutions are pushing further, investing directly in grassroots innovators. Last year, Arab Bank was the first lender in the region to set up its own $30 million fintech venture capital fund, and telecom providers Alfa and Touch established a $48 million Beirut-based fund to invest in information and communications technologies.
Backup from traditional stakeholders such as these provides fintechs with trust, traction and the ability to scale faster. Financial institutions and large companies, for their part, benefit from the flexibility, speed and technical skills of young entrepreneurs. They are instantly able to offer clients a service that would have taken more time and money to develop internally.
Payments: "Out There To Grab"
One financial technology has enjoyed a dramatically higher level of attention. “Payments is the one that is out there to grab,” says Fadi Obeid, assistant COO at Lebanon’s Bank Audi, which partnered with the PinPay mobile payment platform as early as 2009.
Two structural factors—demographics and mobile internet penetration—make payments systems especially attractive to investors. According to the latest figures from the World Bank, 48% of men and 65% of women in the Middle East are still unbanked. Among them, 86% of men and 75% of women have a mobile phone. The region is also home to the world’s second largest youth population, with over 100 million people currently under the age of 30. This tech-native generation is likely to increase the region’s connectivity even further. The number of unique mobile subscribers is expected to rise from 375 million in 2017 to 459 million by 2025, according to mobile industry trade body GSMA Intelligence, while smartphone connections are expected to grow from 49% of all connections to 74% over the same period.
Egypt’s TPAY has been one of the beneficiaries. Launched in 2014 as the region’s first open mobile payment platform, it now boasts 673 million users spread over 16 countries. Last September, majority shareholder A15, a Cayman Islands–based tech-investment firm, sold its 76% stake to Helios Investment Partners. TPAY returned more than the entire value of the fund when A15 exited, making it the region’s first major “dragon” company.
Challenges: Regulation, Infrastructure
“Countries in MENA possess all the ingredients they need to leapfrog into the digital future,” the World Bank says in the October MENA Economic Monitor. But regulators occasionally sound a note of caution.
“Fintech can present huge opportunities, but we need always to be aware that its mighty forces, if unchecked, can be equally destructive,” Mohammad Al-Hashel, governor of the Central Bank of Kuwait, said in an official speech last November. “Modern and efficient regulations form a key building block for a safe, state-of-the-art fintech ecosystem.”
Risks related to multiplication of fintechs can include system hacking, data breaches and money laundering. Most financial institutions in the region remain risk averse when it comes to truly disruptive technology. Unlike other parts of the world, the Middle East’s only fully digital banks emerged from already established banks rather than as independent entities. Examples include Emirates NBD’s Liv; Mashreq Bank’s Mashreq Neo; and, to start in early 2019, Bank ABC’s “neobank” in Bahrain. These new entities typically cater to young, tech-savvy customers.
Other areas of fintech, such as artificial intelligence, data management, cloud computing, blockchain and cryptocurrencies, have attracted a lot of interest but not as much funding or as many users. “We do not believe there are too-advanced technologies for the MENA region, but fragmented market regulations and limitations related to data transportation between countries have the effect to slow down adoption,” says Arab Bank’s Modave.
In a region comprising some 20 countries, harmonizing regulations and legal frameworks is another significant challenge. “While a lot of players are excited about the MENA region, not everyone is necessarily familiar with how advanced the regulatory framework is over here, so it can take a bit of time to get the conversation going,” says Sarwa’s Chahwan.
The quality of infrastructure in the region is also a concern. Problems like internet speed, high prices of connectivity and network coverage still hinder development of a seamless digital economy in most countries.
How quickly stakeholders in the region resolve these issues will depend on how urgent they are perceived to be, which in turn will require a shift in customer habits and business culture. But that’s also one reason investors see opportunities. “Even though internet penetration is high in the Middle East, only a fraction of people are willing to use online tools to apply for financial products,” says Gupta at MyMoneySouq. “We see this as a challenge and also a potential opportunity to grow.”