Any new technology brings disruption to the established order. But can it also bring new opportunities? Fintech, for example, is big business. In 2016, according to KPMG, US$24.7 billion was invested in fintech companies globally. Even though this represented a reduction on 2015, after what KPMG called ‘a challenging year’ for fintech, it is still a significant figure.
A survey from Innovate Finance showed that in China last year fintech swallowed up US$7.7bn of investment, while in the US and the UK the figures were US$6.2 billionn and US$783 million respectively. And while fintech investment in the UAE has lagged behind those levels, it is set to be transformed over the next few years. According to a report by Wamda Research Lab, the UAE leads the way in the MENA region, with US$50 million in growth expected next year alone, adding to the US$100 million already invested in fintech over the last ten years. Wamda predicts that by 2020 the number of UAE fintech companies will more than double from 2015 levels, to around 250 firms.
When we talk about fintech, we mean financial technology, but in particular we mean new, disruptive and non-traditional ways of operating. Examples are crowdfunding platforms, peer-to-peer (P2P) payment services, and new approaches to lending and raising capital, as well as payment solutions like the standard bearer PayPal.
In fact, payments and lending businesses represent 84% of all MENA fintech startups today. According to Wamda, two-thirds of the 250 predicted fintech companies operating by 2020 will be payment, lending and capital raising platforms. A good example from the UAE is Payfort, a Dubai-based online payment system, which processed more than AED3bn in payments during its first year of operation.
Firms like this are the new kids on the block, and bring tech-enabled products and services that improve on traditional ways of working, often where nobody else has seen an opportunity or need for improvement. They’re normally startups, so while they’re seeking big growth as rapidly as possible, they’re often as keen on collaboration as they are on competition. We’ll see why that’s important later.
What’s been the fintech impact so far?
Although fintech has had a slower start in the region than elsewhere, the UAE is a potentially lucrative breeding ground. Currently 86% of the country’s population does not have a bank account. While that can mean no financial record and no credit score –which can be an obstacle to providing financial services– one thing the UAE does have is very high smartphone penetration. In a country where e-commerce is set to quadruple over the next five years, this is where the ‘tech’ part of fintech comes into its own. Startups can serve sections of the market that traditional providers can’t. They’re smaller, more flexible and more responsive to change than larger corporations and, even among those customers who do have bank accounts, many are keen to explore new ways of working. A recent survey from YouGov and Payfort found that, of 1,429 banking customers in the MENA region, almost half were interested in exploring working with new companies that offer payment, lending and investment services.
While the early movers in UAE fintech investment were mainly focused on making and receiving payments, the second wave of new fintech firms in our region includes firms working in areas, such as wealth management, reflecting the trend in other markets, such as the US. For example, there have been new fintech startups in the region providing both robo-advice and tailored investment solutions built around a client’s risk appetite, income and investment time horizons. Platforms such as Finerd didn’t even necessarily require Gulf Cooperation Council (GCC) residents to open an account, and attracted significant interest particularly from expats.
How does it affect brokers?
Technology generally makes things happen more quickly. For a broker, that can be good and bad. On the one hand, it gives clients more opportunity to do their own research, and robo-advice can give people means to manage their own wealth without involving a broker. These automated services can provide unrelenting, real-time insight on the move. It’s a proposition that chimes with an audience of investors, many of them millennials who are already well versed in social media and concepts like P2P. And while the UAE isn’t quite there yet, online solutions don’t fear national borders.
On the other hand, not all clients have the time or the confidence to go it alone, or to wade through the profusion of information on offer. So, while cutting out the middleman can seem appealing, conversely it can draw attention to the middleman’s value and expertise, which can be a beacon of sense in a sea of numbers. Meanwhile, as automation gives back more of a broker’s working hours, there’s extra time to conduct research and hone that professional insight.
Another area where fintech has contributed positively is risk. Risk management in banking has changed dramatically in the years since the global financial crisis, and one of the ways new technology has contributed is in machine learning– the ability of automated systems to improve the accuracy of data models. While still in its infancy in wealth management, the potential of automated systems that can incrementally improve risk models -while saving both time and money– is compelling.
Fintech isn’t going away, and people are increasingly receptive to it. Brokers who embrace it and find a way to combine its speed, accuracy and convenience with their professional knowledge, hard-won experience and real customer service can reposition themselves as the forward-thinking ‘best in breed’ in the market. They can absorb the advantages of fintech and automation, while at the same time offering expertise and experience that the newcomers can’t. Collaboration can give savvy brokers a way to market themselves as innovative and groundbreaking, leading clients through the cacophony of fintech noise.
The power of collaboration
Fintech firms themselves are well aware of the value of this kind of collaboration. According to Wamda, almost nine in 10 UAE fintechs seek an established collaborator, while a report from Accenture shows that those who choose to collaborate, rather than compete directly with the establishment, are getting the lion’s share of the available investment.
Fintech startups can also use collaboration with established players to help navigate regulatory hurdles. As fintech specialist David Martinez de Lecea noted, this is one of the biggest challenges faced by new fintechs in the investment space, which can require a complex and time-consuming set of licenses. He also pointed out the idiosyncrasies of the UAE ‘know-your-customer’ (KYC) laws, which apply extra due diligence requirements, particularly to politically exposed persons. This kind of work is something that doesn’t come naturally to robots, and is another potential advantage for real brokers.
So, fintech startups as well as established financial institutions have clear opportunities to help one another. Where established firms may lack innovation, fintechs often face issues around regulation, reputation, trust and security which collaboration with an established firm can help mitigate.
However, while many firms are grasping the opportunity (or need) to embrace fintech, many are yet to open up. PwC research found that, globally, 67% of established businesses surveyed saw pressure on margins as the biggest threat from fintech, while 59% believe the biggest danger was loss of market share. Yet, when asked whether their organisations had put fintech at the heart of their strategy, 24% either didn’t know or actively disagreed.
In a recent interview, author Ray Wang put it succinctly, saying ‘Digital Darwinism is unkind to those who wait’. The march of fintech in the UAE has begun and isn’t going away. In their recent survey, Wamda found that 98% of fintech startups in the UAE plan to expand their activities. The key international financial centres and their regulators are starting to get behind it too. To demonstrate this, Dubai International Finance Centre (DIFC) recently launched its FinTech Hive accelerator, hot on the heels of Abu Dhabi Global Market (ADGM) unveiling its new fintech sandbox.
From the days of the machine-smashing Luddites in the early nineteenth century, there have been three general responses to new technology. You can resist it and be overwhelmed. You can ignore it and risk being blindsided along the way. Or you can embrace it and learn not only to live with it, but to harness its power. Those who are successful will see the future not so much as the rise of the machines, but rather as the coming together of natural ability and new technology. So maybe the future of a successful broker in the new fintech world will be a blend of old-fashioned skill and brand new efficiency, able to unleash real expertise more quickly and accurately than ever before.