The UAE Digital Economy: Weaving The Thread Between Innovation And Legislation
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This article was co-written with Tammer Qaddumi, Senior Adviser, The MENA Catalysts.
Fifty years ago this month, the first message ever was sent over the internet. A college student sent the text “Login” to Stanford Research Institute on ARPANET, the precursor to the Internet- but after the letters “L” and “O”, the system crashed, making the first message ever sent online “LO.” An hour later, after recovering, the full text “Login” was successfully sent. No single invention of the last half century has changed the way we live now as much as the internet. Fast forward to the UAE today -a still point in a turning world- and imagine looking at the “gears” and “pipes” of the UAE digital economy that govern how payments online are made- as backend developers looked at the predecessor of the internet, full of stunning potential, but a system that only responds to those addressing it in the proper form. That’s what’s happening for UAE-based businesses wanting to conduct transactions online. They must navigate and decipher the Central Bank’s cumbersome policies simply to process a payment.
Bureaucratic rules for businesses to get a “clean bill of health” even to legitimately participate in the UAE payments economy have worn down, akin to an old ship floating along, drifting between icebergs of the bureaucratic payment processing rules- leaving fintech companies to figure out how to grow without ending up on the “wrong side” of the law. This results in a situation that presents a fundamental choice for the chief architects of the UAE digital economy: make it easier for new businesses to legally enter the payments sector allowing them to, one, get licensed, and, two, onboard small businesses more efficiently (to really oversimplify it)- or continue business-as-usual through an incremental approach to reform, essentially looking after incumbent banks.
The emerging reality is that UAE long-term interests straddle reimagining the country's payments economy -on how to attract or include- newer digital payments’ businesses to foster the nation’s future-oriented, non-oil economy. Payment platforms are similar to arteries in the body, circulating blood, or in this case, “cash,” through the financial system, contributing to the larger body, the economy’s long-term health. When the body and arteries are neglected and become lethargic, they begin to become less healthy, and less competitive. The UAE payments economy sits at the heart of this. It can become overweight, slow down, and less productive as well, without careful management.
Modernizing the UAE’s payments economy is probably also in the country’s business interests. The country’s economy only grew 1.7% last year, but online transactions swelled 21% here. The total value of the growth in online transactions in 2018 exceeded the combined capital needed to build Dubai Media City, Dubai Internet City, and Dubai Marina. UAE online transactions have been posting double-digit growth the last several years, unlike a range of analog, “off-line” industries.
The UAE has more fintech startups than the rest of the Arab world- combined, north of 85. This is no anomaly. The UAE has more than 90 incubators and accelerators, in a country of 11 million people- London, a place with roughly a similar size population, only has 68.
EMERGING CHALLENGES TO THE UAE DIGITAL ECONOMY
The status quo, drip-drip approach, however, to reforming how -and which- UAE-based businesses can process payments here may not be economically viable much longer for three reasons.
First, the UAE payment economy is fundamentally changing. Its share of cash-on-delivery payments has shrunk from 77% four years ago to 42% today. Healthy fundamentals of digital payment growth are rapidly shrinking revenue per transaction. The public’s accelerating shift in preferences from “off-line” to “on-line,” coupled with bulging youth demographics, are increasing the quantity of services that banks provide, beyond a traditional card system, to stay relevant with the changing needs of a younger public than 30 years ago.
Second, unwieldy rules objectively expand incentives for foreign businesses to migrate to less-regulated platforms. New market entrants which the UAE is trying to attract, vent “in a friendly way” how ambiguous the controls governing payments online still are in 2019. Despite facilitating a growing number of “sandboxes,” the Central Bank has only issued a trickle a fintech licenses to non-incumbent businesses, since unveiling fintech licenses almost two years ago now. The financial system here often rejects well-intended small businesses pursuing markets online because of minimum revenue thresholds, burdensome documentation, or simply because they don’t have an existing relationship with a large bank here. This maze has fostered a local payments system ecology here where many payment processing startups practically avoid dealing with the Central Bank- which is not healthy for anyone. If leading high-tech companies that are literally building the future, and government regulators are working in separate silos, that is a recipe for miscommunication.
Third, the traditional argument that the public “needs” stringent payments rules to protect it from online fraud may no longer hold up to scrutiny that they are making the UAE safer online. One seasoned Emirati law enforcement leader put it best: “Cybercrime is eclipsing all other forms of crime here.”
THE PRIZE IS SIGNIFICANT
The challenges hampering the UAE payments economy, however, do beg the question: imagine the UAE ten years into the future- and what’s best for the nation. Do we want to protect the past from the future or the future from the past? The most important policy document in the country, Vision 2021, at the core, is a plan to build a new knowledge economy. Picture this future-oriented economy with the newest Careem’s, Airbnb’s, and Deliveroo’s. It doesn’t take a secret decoder ring to know that they will almost all rely on efficient, sophisticated payment processor firms to send “capital” through the UAE digital economy. The upcoming “big bang” of disruptive financial technologies will see regulators determine how to apply today’s laws, some of which may not be nimble enough to change- but this doesn’t have to be complicated.
Envision writing the rules governing payments like playing with a box of Legos. You have all these building blocks, you take the things that you’re already familiar with, and just repackage them in ways that make more sense. The Central Bank could explore rebooting the rules of the payment economy -to enable, rather than stifle fintech startups- in clear ways that do not inhibit, or even touch on national security:
- Ensure fintech application process is operational, simplified and easily accessible on the Central Bank website.
- Create training sessions and forums to show fintech startups how to obtain a license. Answer their questions. Outline common pitfalls made on the application forms, and show them good practices of what the Bank’s licensing regulators are looking for.
- Quality-assure responsive, professional staff who want to find creative ways to cooperate with companies.
- Provide a clear decision-making process and timeline for payment processors’ license applications, with a target to have them adjudicated in 30 days.
- Listen to UAE digital payments companies, and global ones like Stripe and Careem, that know “what they’re doing.” There is no substitute to listening directly to experts. How many people would ever have a brain surgery, performed by a dentist? You wouldn’t. And fintech is a multi-billion-dirham UAE industry, and among the fastest growing parts of the country’s digital economy.
THE WAY AHEAD
Not doing anything is also a choice. But building the fintech payment processing revolution is becoming almost like water behind a breaking dam: trying to ignore it is practically self-defeating, because it’s inevitable. It will either happen to you, or you can manage it. The ultimate question is to what extent financial regulators here will manage this disruptive event, or generally continue business-as-usual, letting coming global market creative disruptions happen to them.
Perhaps overhauling the UAE’s fintech licensing system could help “level the playing field”, but what we do know is that reforming the country’s fintech policy approach would create new opportunities for smaller businesses that don’t know the regulators too. That said, we are under no illusions that government priorities face a constantly-shifting frontier between developing a knowledge economy, strengthening public safety, and preserving traditional businesses. Balancing these concerns is a difficult problem to solve- but that’s never stopped the UAE before.
Related: Inside The MENA High Tech Boom