Banks should embrace fintech startups, not fight them
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The word disruption is often heard in the banking industry and is impossible to ignore. A key disrupter is financial technology, or fintech, with the number of startups and capital invested in this sector growing rapidly in the Gulf. In response, established banks need to combine old and new working practices to ensure they flourish.
Fintechs understand the difficulty of trying to compete with established players, given that banking is heavily regulated by costly rules, such as know your client and anti-money laundering measures. Instead, these new market entrants focus on areas such as payments or personal financial management that use existing banking infrastructure.
Some banks have reacted positively to fintech growth, because their convenient services, execution, and attractive pricing have generated a new appetite for financial services among untapped younger consumers.
One feature of fintech startups is that they often focus on the back office functions of established lenders, potentially relieving banks from highly demanding back office rules that were introduced when banks had to deal with major balance sheet restructuring. For larger banks willing to embrace disruption, the back office operations of lenders will become more efficient by transferring fixed costs into variable costs.
Joint ventures between banks and fintechs in this area will reduce operational costs, potentially leading to acquisitions along the way. Scale is also important for growth in the financial industries, but to date, with a few exceptions, fintech peer-to-peer lending has not generated sustainable profits and digital wealth management has struggled to grow its customer base.
Another issue faced by fintech companies is that many do not have a banking license. Although in the Gulf some young firms have acquired these, which has given them much-needed acceptance among clients, as backers tend to shy away from investing large sums in firms without a banking license unless offered a significant risk premium.
However, fintech firms often offer initial free-of-charge services ensuring that they are in a good position to provide free-of-charge digital solutions over the longer term, because they have broad customer bases that allow them to cross-subsidize non-revenue generating innovations.
Around half of the region’s fintechs are based in the UAE, making it the region’s fintech hub. However, Saudi Arabia is also a significant player, with active startups in Jordan, Egypt, and Bahrain.
The top funded fintechs in 2021 was Saudi payments firm Tamara with $116 million of backing. Lower down the list came another payments business PayTabs with $20 million of backing, which includes angel investor backing from oil giant Saudi Aramco’s Wa’ed entrepreneur fund. In the UAE, retail investments platform Sarwa topped the funding list last year with $25 million of backing, followed by financial services comparison website Yallacompare at $22 million, with all fintech funding in the nation coming in at around $150 million. Egypt’s payment platform Paymob raised $ 18.5 million last year.
How will banks benefit from fintech integration? One answer is that fintech startups generally focus on addressing a particular customer need, which they generally do well. Allowing customers to conveniently carry out such services as investing, trading and transferring assets have proved popular. The addition of a trusted established bank, using secure IT infrastructure with solid capital backing, would produce a significant match between the two.
There will be stumbles along the way for some of these new fintechs, but for those that survive, there will be no turning back. Their early success has certainly grabbed the attention of banks, who will look for a synergetic relationship that will shape the way financial services are delivered in the future.
• Dr. Mohamed Ramady is a former senior banker and Professor of Finance and Economics, at King Fahd University of Petroleum and Minerals, Dhahran.
