Developing a FinTech ecosystem in the GCC: Let’s get ready for take off
In the U.S. and Europe, financial technology (FinTech) “ecosystems” have stimulated technological innovation, made financial markets and systems more efficient, and improved the overall customer experience. These ecosystems — composed of governments, financial institutions, and entrepreneurs — have also shown that they can energize the broader local economy by attracting talented, ambitious people and becoming a locus of creative thinking and business activity. Until now, the Gulf Cooperation Council (GCC) countries1 have not established particularly deep FinTech ecosystems. However, that could soon change because the four key design elements necessary for FinTech ecosystems are present in the GCC. These are: the business environment/access to markets, government/regulatory support, access to capital, and financial expertise.
Moreover, a consensus is emerging among governments and financial institutions that nurturing these ecosystems is important and beneficial for the region. Indeed, there are already some success stories in the GCC, particularly in the United Arab Emirates (UAE) where incubators, enterprise development funds and programs, and innovation hubs are supporting the creation and growth of local entrepreneurs. Given the benefits of FinTech ecosystems and their viability in the GCC, we recommend several immediate steps, ideally done in coordination with one another, for governments and financial institutions to nurture these ecosystems.
The elements of a FinTech ecosystem
FinTech ecosystems are critical to nurturing the kind of technological innovation necessary to make financial markets and systems more efficient and improve the overall customer experience. Moreover, given the scope of financial technology, a vibrant FinTech ecosystem can stimulate the broader local economy by attracting talented, ambitious people and becoming a locus of creative thinking and business activity. FinTech ecosystems enable growth opportunities for many sectors, including software, data analytics, payments, platforms (e.g., peer-to-peer lending and trading), mobile banking, and algorithmic asset management systems.
A sign of just how significant FinTech has become, global investment in this sector jumped three-fold between 2008 and 2014, reaching US$3 billion. By some estimates, that investment will at least double again by 2018, and may even hit $8 billion.2
Many of the necessary elements exist in the GCC to develop FinTech ecosystems.
Although most FinTech investment is currently in the U.S., which captures about 80 percent of this spending, meaningful innovation is also occurring in the European Union, particularly in the U.K. Although relatively little FinTech investment has occurred in the GCC to date, that could and should change. Many of the necessary elements exist in the GCC to develop FinTech ecosystems. There are good reasons to believe the region has the collective will to give rise to these ecosystems and reap their broader economic benefits.
The participants in a FinTech ecosystem
Establishing and nurturing a FinTech ecosystem is difficult given the level of sustained collaboration that is necessary among governments, financial institutions, and entrepreneurs. For a FinTech ecosystem to function, it is imperative that each participant clearly understands its role, as well as the benefits it stands to gain from involvement (see Exhibit 1).
Exhibit 1: Major participants in the FinTech ecosystem
Governments must implement and enforce policies and a regulatory environment that will ease the development of the FinTech ecosystem. Doing so encourages entrepreneurial activity and hiring by financial services and technology firms. It also improves the country’s overall competitiveness.
Financial institutions, including global and local banks, private equity shops, and venture capital funds could contribute deep content and market expertise to the ecosystem. Also, many of these financial institutions can stimulate their own innovation by establishing partnerships with FinTech startups. These partnerships can strengthen the competitive position of financial institutions, for example, by shortening the time it takes for new products and services to reach the market.
Entrepreneurs contribute innovative and often disruptive technology solutions to the FinTech ecosystem. In return, entrepreneurs benefit from greater access to financing and market expertise, as well as a receptive market for their innovations.
The design of a FinTech ecosystem
There are four critical design elements that support the development of a FinTech ecosystem (see Exhibit 2):
- Business environment/access to markets
- Government/regulatory support
- Access to capital
- Financial expertise
Exhibit 2: FinTech ecosystem development framework
Business environment/access to markets
FinTech ecosystems must create an overall cost advantage to working in a country or region if they are to flourish. This means, for example, that facilities (such as land and real estate), equipment, technologies, and utilities must all be available and affordable.
Another factor is the degree of integration and synergies among the players. Technology clusters (or hubs), where entrepreneurs have similar business objectives and are integrated, make it easier for the ecosystem to flourish. These clusters promote the availability of skilled labor and know-how (such as banking analysts, IT developers, sales force, and management staff).
Finally, the quality of infrastructure is critically important. This includes the state of physical infrastructure (e.g., roads and ports), the ecosystem’s connections (e.g., distance to existing business hubs and ease of access), the utilities (power, water, telecommunication, etc.), and the overall quality of real estate and facilities.
Governments can influence many aspects of the ecosystem, including easing business regulations (such as copyright, product registration, initial public offering [IPO] requirements) and keeping taxes and fees low. However, the extent of the government’s involvement can vary. In relatively mature FinTech ecosystems such as in the U.K. and the U.S., the private sector dominates the service provider landscape. In these countries, the government’s role is limited to policy setting, regulations, and property development. In less-mature FinTech environments, such as Jordan and Saudi Arabia, the government should be involved across the entire ecosystem (see Exhibit 3).
Exhibit 3: Government roles and responsibilities in the FinTech ecosystem
Access to capital
FinTech ecosystems are typically funded through four main sources.
Governments may fund the construction of the FinTech hub, by providing seed funds, interest-free grants, or even through provision of subsidized office and co-working spaces. This can be done with banks in a consortium. The government may also provide initial financial support to venture capital or private equity funds, banks, and incubators to encourage investment in small businesses.
Venture capital funds and private equity shops are traditional investors in FinTech startups. Funds’ involvement will typically increase as these business models gain momentum and reach critical mass.
Incubators and accelerators prepare businesses for venture capital fundraising and provide grants and investments. By offering financial and due diligence services to entrepreneurs, they become a one-stop shop for buyers and sellers in the ecosystem.
Broad financial expertise and know-how is necessary to structure the ownership of a FinTech ecosystem, provide advisory services to entrepreneurs from the early stages of idea generation through commercialization, and lastly provide legal and regulatory counseling to ensure adherence to local law and tax regulations.
These experts can also be instrumental in lobbying for financial or regulatory measures (e.g., relaxation of IPO requirements, reduced taxation, and financial participation of governments) to ease the conception and acquisition of startups. In addition, by promoting reduced business regulations (e.g., copyrights, product registration) these experts support entrepreneurs and financial services players and increase the attractiveness of the overall ecosystem.
Case study: FinTech in the U.S.
The U.S. has been the most successful at fostering the FinTech industry, receiving the lion’s share of global FinTech investments. Companies such as Mint.com (personal finance), Kickstarter (crowd funding), and OnDeck (business peer-to-peer lending) have been FinTech-funded. Financiers include Goldman Sachs, Barclays, Bank of America, and Wells Fargo (see Exhibit 4).
Exhibit 4: The U.S. FinTech landscape
FinTech growth in the U.S. is driven in part by the efforts of institutions such as the New York FinTech Innovation Lab. The lab is a mentoring program, designed to help FinTech entrepreneurs engage with finance leaders. Companies coming out of the lab have raised tens of millions of dollars in financing, with some companies achieving substantial valuations.
The lab has helped tech startups understand the consumer issues of foremost concern to large financial institutions, thus turning their innovations into the products and services that participating banks need the most. This has helped to reduce the typical startup sales cycle from 18 months to 12 weeks. Moreover, the lab has strengthened the competitive position of financial institutions by cutting the time to develop and launch new products.
The key success factors for FinTech in the U.S. include:
- the country’s position as a leading global financial center
- its proximity to a large potential customer base of financial institutions
- banks, capital markets firms, and insurers that increasingly understand the benefits of having a FinTech cluster close to home
- a vast, existing financial technology workforce
- a burgeoning venture capital ecosystem
The potential for FinTech in the GCC
Today, FinTech ecosystems are not well established in the GCC and still face obstacles to development. For example, GCC governments have been promoting financial e-services and digitized financial interactions. However, many of these initiatives have stalled, and few private-sector companies with digital experience have joined the effort.
Meanwhile, traditional financial services players are coping with several problems. They may have outdated or non-integrated technology and dissatisfied customers suffering many pain points (such as administrative burdens, a lack of personalization, and difficult account access). They may also face a competitive threat from entrepreneurs stepping up to address customer pain points with innovative digital offerings that could disrupt the financial services industry. Finally, although the region is starting to entice some entrepreneurs, government regulation in much of the GCC and the lack of financing possibilities hamper significant growth of entrepreneurial activity.
The future is more promising. Despite these difficulties, the critical design elements for FinTech ecosystems exist in the GCC. As important, a consensus is emerging that nurturing these ecosystems is important and beneficial for the region. Indeed, there are already some success stories in the GCC, particularly in the UAE where incubators, enterprise development funds/programs, and innovation hubs are supporting the creation and growth of local digital enterprises.
For example, the UAE Academy aims to stimulate enterprise in the country by increasing awareness of entrepreneurship. The UAE Academy’s Business Start-up and Innovation Park (BSIP) includes a startup boot camp that imparts a basic understanding of entrepreneurship. It also conducts “ideation” workshops in which participants formulate and develop concrete business ideas.
The BSIP provides a way to test a business idea in a virtual/simulated environment over a period of 12 weeks. Once a business proposal is ready for implementation, the academy disburses a “scholarship” from a fund financed by private-sector donors to help start the business. Each business is incubated within the BSIP for one year and receives mentoring from an industry specialist and/or a successful Emirati or non-Emirati.
In a complementary endeavor, the UAE Academy’s SME One-Stop Center conducts grassroots-level awareness campaigns to encourage and inspire young inventors and entrepreneurs. It targets schools, universities, and corporate entities when headhunting talent and potential, while identifying a broad network of interested investors. This approach is important as it recognizes how wide the broader landscape of FinTech actually is. A FinTech ecosystem is about more than matching promising ideas to financing. It is about generating innovative ideas through the interplay of the four design elements of the FinTech ecosystem and the involvement of multiple stakeholders, including the media, disruptive non-bank players, universities, software and infrastructure providers, and venture capitalists (see Exhibit 5).
Exhibit 5: The FinTech innovation ecosystem
GCC governments, particularly the UAE’s, can build on these advances to encourage a region-wide FinTech ecosystem by connecting a multitude of different stakeholders to support innovation. Indeed, we believe that other GCC members are well positioned to develop FinTech ecosystems given the presence of all four critical design factors (see Exhibit 6).
Exhibit 6: FinTech ecosystem success factors in the GCC
Also worth noting is that the GCC has a large retail customer base receptive to new and disruptive financial technologies. For example, e-commerce sites such as Groupon, Dubizzle, and MarkaVIP have enjoyed significant success. The region also has a robust financial services industry that wants to quickly leverage proven local and Western FinTech developments.
Indeed, there is already evidence of the impact that developing the elements of a FinTech ecosystem can have in such a favorable environment. FinTech start-ups, government backing, and support programs are creating pockets of innovation in the UAE (see Exhibit 7).
Exhibit 7: UAE FinTech entrepreneurs
Next steps for GCC governments and the financial sector
To capitalize on this potential and nurture a FinTech ecosystem, governments and financial institutions should take 10 immediate steps, ideally done in coordination with one another. The measures are equally divided between GCC governments and the financial sector.
GCC governments should:
- estimate the financial benefits of establishing such an ecosystem
- develop their strategy for setting up a FinTech ecosystem
- develop the ecosystem’s operating model and governance structure • select financial institutions to partner with, and prioritize the type of startups the government wants to encourage and support
- if the government is setting aside a zone of development for an innovation hub, establish a set of criteria to guide the best use of the space
Financial services players should:
- develop a FinTech business case and understand the financial risks and opportunities
- if an innovation hub is being created, define the financial structure of the hub and the role of stakeholders
- identify the business needs of those in the hub and coordinate with the government
- create a screening and selection process for entrepreneurial tenants of the hub
- prioritize financial startups for potential mergers, acquisitions, and joint ventures
In the GCC, where FinTech ecosystems have yet to take root, governments will have to play a more significant role than in established markets. However, the GCC does have an advantage over other emerging markets: All four critical elements for a FinTech ecosystem are already in place. The challenge is to achieve the necessary level of coordination to make the ecosystem work. If the region can rise to this challenge, the rewards for the financial industry and the broader regional economy could be significant.
- The GCC consists of Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates.
- Philippe Gelis and Timothy Woods, “The Rise of Fintech in Finance: How fintech is reshaping the finance sector and how you handle your money,” Kantox, 2014.