The Impact Of The Middle East's Fintech Boom On Economic Inequality In The Region
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This article was co-written with Heather Matranga, Senior Manager, VilCap Innovations at Village Capital.
Recently, a collection of social enterprise and entrepreneurship experts convened at Amity University in Dubai for the second annual National Treasure Conference, a gathering focused on the role that socially responsible for-profit ventures should play in achieving the Sustainable Development Goals set by the United Nations in 2015. One conversation that was surely on the minds of many of the participants: will the Middle East’s fintech boom increase -or decrease- economic inequality?
History tells us that any new technology can lead to one of two diametrically-opposed social outcomes: the technology can help balance the distribution of global wealth, or it can deepen economic and social inequality. The financial technology (fintech) revolution in the Middle East has led to just such an inflection point, but to what end? Will the new crop of fintech companies increase or decrease the staggering levels of inequality in the region?
The past decade has shown that fintech can be a powerful force for equality. Blockchain, data analytics, and mobile phone technology are evolving at breakneck speed and have shown potential to bridge the gap between the rich and the poor. Safaricom’s mobile-money platform, M-Pesa, reaches an estimated 96% of households in Kenya, and is credited with lifting at least 200,000 Kenyan households out of poverty. The Indian mobile wallet, PayTM, has nearly 200 million users, including women and rural families that can now participate in the digital economy. Will the Middle East produce companies of the same caliber and social impact? There is certainly an opportunity, thanks to three factors.
The first factor is necessity. The Middle East is in dire need of ideas to bridge the massive gulf between the rich and the poor. The region leads the world in economic inequality, where the top 10% of the population enjoy about 60-66% of the region’s income. 86% of the adult population is underbanked, which means they don’t have access to services at formal financial institutions. This provides a tremendous market opportunity.
The second factor is a wealth of ideas. Governments like the United Arab Emirates and Jordan are investing in entrepreneurship and small and medium enterprises, including fintech, to diversify and grow their economies, and the number of fintech companies in the region have more than doubled. Several of them have a financial health focus. NOW Money provides mobile banking technology to bring accounts and remittances to the largely unbanked 26 million lowincome migrant worker population in the GCC. Uhoncho and Ennota are two startups that provide unbanked small business owners and freelancers with important financial tools to manage their expenses, track profits and losses, and conduct analysis on key business financials. Maliyya and Solfeh are building Sharia-compliant lending and borrowing platforms for Muslims whose religious beliefs prevent them from using traditional banks.
Finally, investors are paying attention. In 2016, fintech investment in the Middle East totaled US$18 million. In 2017, that number was surpassed with a single investment, a $20 million round raised by the Saudi Arabia-based payment platform PayTabs. While year-end results are still being counted, Wamda Research Lab forecasted that investment in 2017 would top $50 million.
Still, it is an open question whether these early-stage companies will get the investment they need to scale and have a broad impact like M-Pesa. What kind of businesses will venture capital flowing to the region support?
We see two options. One scenario: the future of the financial services industry will be built with just existing clients in mind. In this scenario, only innovations that improve the bottom line for large financial institutions or the wealthiest individuals will succeed. As a result, inequality is exacerbated by new technologies when the only “winners” are the already-wealthy, and lower and middle-income people lack access to the potential benefits.
Silicon Valley provides a glimpse at what the first scenario could look like. Silicon Valley investors tend to favor new technologies that are on track for high growth, but do not necessarily improve the lives of the underserved, such as the “new Uber for dry cleaning services.” As one example from the financial sector, Silicon Valley investors have poured money into robo-advisory services that help people make better decisions about investments, but also charge high fees, limiting who can participate in these wealth generating activities.
A second scenario: the future of financial services will be built around improving the financial health of society- startups providing the tools to help low-to-middle income households build healthy financial habits, weather financial shocks, and plan for the future.
M-Pesa shows us what the second scenario could look like. To make the second scenario a reality, investors need to look beyond the token Silicon Valley startup. Instead, investors should focus on innovations that are improving the livelihoods of individuals and families, where the market opportunity is huge.
As the participants at the National Treasure Conference discussed, global trends point to rising disparities in income growth– which means that the world’s poorest 10% have gained very little, while a small concentrated group of people at the top have made significant gains. Technology for technology’s sake won’t chip away at these persistent headlines. But, with the right resources and customer-centric lens, the fintech explosion in the Middle East is cause for hope.