Highlight & stories

9 September 2020, by ADGM's Staff Editor

Abu Dhabi-based fintech startups are navigating the global pandemic with the support of regulatory frameworks and strategies that encourage taking calculated risks, even during turbulent times.

With most global markets remaining under lockdown due to COVID-19, companies big and small are adapting to new market trends with agility and resilience. In recent years, the fintech sector has attracted VCs and private equity investors in, and COVID-19 has proven to accelerate the growth of new opportunities in this maturing market.

Globally, financial technology (fintech) services are changing economies by transforming the way consumers pay for products, borrow, and earn money. In simple terms, fintech is a global multibillion-dollar industry that includes online banking, alternative lending, wealth management, insurance, peer to peer lending, capital markets, SMB, real estate, digital payments, and much more.

On the other hand, and beyond the ongoing mergers and strategic partnerships among fintech startups, VC investors around the world are also betting big on fintech. Global investment in the fintech industry adds up to $512.1B since 2010 (Statista).

After a noticeable decline in investor activity during the early days of COVID-19, Q2’20 has seen renewed signs of activity as funding increased after two straight quarters in decline (CBInsights, The State Of Fintech Q2'20 Report). While ticket sizes increased 17% QoQ to $9.3B in Q2’20, quarterly deal activity continued its steady decline which began pre-pandemic in Q4’19. This activity could potentially indicate the presence of other headwinds in addition to COVID-19: a global recession on the horizon?

How fintech startups are surviving post COVID19

Fearing a global economic recession, many fintech startups face the major issue of extending their cash runway as much as possible, especially with VC funding in fintech on the decline. Nimble startups with lower fixed costs performed best with mergers and partnerships offering new synergies across industries. Fintech startups are taking direct actions to slash costs by simplifying legacy systems, taking SaaS beyond the cloud, and adopting AI.

Considering funding data from Q2’20, the trend shows an increase in embedded fintech applications (where non-financial companies integrate fintech services into their offerings) - highlighting the increased appetite for industries across the board to adopt digital payments as online retail spending stays elevated during the pandemic.

In this situation, an e-commerce boost will accelerate the growth of global fintech enablers and providers. Digital entertainment providers (VOD streaming, gaming platforms, music providers), telemedicine, education technology services, and e-commerce have all seen a drastic increase in fintech adoption.

The rise of fintech adoption during the past few months has forced many retailers, lenders, and insurers to embrace new digital technologies that would allow them to lower their prices, become more agile, and enter new markets.

Corporations and government entities adopting fintech

Incidentally, it’s not only startups and investors who are getting into fintech, but also some of the biggest tech companies in the world are betting big on fintech like Google Pay, Samsung Wallet, Alipay, Apple, and many more. Specifically, tech giants are eyeing payments as the first step towards a plethora of financial services. For example, Facebook announced that it would be testing its new Whatsapp payment service in Brazil, its second-biggest market globally.

The announcement faced a significant backlash from the Brazilian central bank, saying that the service could damage a long-held Brazilian payment system in areas of competition, efficiency, and data privacy. Eventually, the testing was later approved by the central bank, calling the service an ‘important advance’ in Brazil’s economy (Reuters).

This event highlights the continuous need for an open and ongoing conversation between fintech companies and regulators, particularly as these services could impact the growth and development of economies. Managing regulatory compliance transparently and efficiently is a key enabler to long-term fintech innovation and growth.

Furthermore, fintech regulators are increasingly adopting a wide range of data gathering and analytical tools too. Using sophisticated analytical tools on large data sets allows regulators to predict and prepare for issues before they become full-scale market problems. Also, giving such predictions allows regulators to create the legal frameworks needed to foster innovation and increase financial inclusion.

Why global consumers are choosing fintech services

On the other end of the spectrum, consumers are adopting fintech fast. According to EY’s Fintech Adoption Index (2019), 64% of global consumers have adopted a fintech service because of the attractive rates and fees they offer. The increased adoption rates globally are an indicator of a synergistic relationship between fintech startups and consumers, by which the former are catering to global consumer needs and expectations while laying the foundations of trust and competency on the fronts of data security and services.

With financial technologies services comes a growing risk of security exploitations and unclear policies, and thus many regulators around the world struggle to keep up with the pace of innovation that is mainly driven by entrepreneurs and consumers alike. Take peer-to-peer lending, for example, where 2 people can transfer money without the need of a third-party, which has always been the bank acting as arbitrator of such transactions. Also, another growing risk in global fintech adoption is cybersecurity threats and ransomware attacks that hold hostage a user’s bank accounts.

Though, for many businesses and users, the benefits of a fully-digital fintech economy outweigh the risks.

Fintech and financial inclusion in the UAE

Fintech has given millions around the world access to banking and other financial services. As a matter of fact, it is estimated that almost 1.7 B people around the world remain unbanked with 301M being in the MENA region. Now thanks to fintech that’s going to change: all you need is a phone, an internet connection, and your fingerprint to take out a loan, an insurance plan, or transfer money.

According to the MENA Financial Inclusion report (2020), financial inclusion rates in MENA stand at only 20%, with the UAE having the highest inclusion rate at 46%, followed by Bahrain at 39%, and Saudi Arabia at 31%. The UAE stands at a relative advantage mainly due to its initiatives and incentive programs initiated by the public and private sector to foster innovation, increase financial literacy, and improve access to financial services.

In regards to digitalization, the UAE government has played an active role in supporting the growth of the local fintech ecosystem with key initiatives that include the launch of a regulatory sandbox as well as rules on crypto-assets and alternative lending, among other things.

Across the world, financial inclusion is the main driver of a nation’s economic development and social mobility. The increased participation of individuals in the economy ensures greater equality, customer reach, increased transparency in policy making, and efficiency with society. To maximize a country’s socio-economic potential, financial inclusion gives governments a foothold in creating an environment of stability and peace.

Close up at a blockchain fintech startup based out of Abu Dhabi

Jibrel is a blockchain-based fintech startup that is on a mission to simplify and democratize equity investment. Last year, the team won Fintech Abu Dhabi’s Innovation Challenge and have also participated in ADGM’s RegLab, a regulatory framework that allows entrepreneurs to experiment, develop, and test innovative fintech solutions in a risk-free environment.

“The original idea is to empower startups to raise capital at a fraction of the time and cost, while giving investors access to deals that they, otherwise, might not have had access to,” commented Talal Tabbaa the cofounder of Jibrel. Equity crowdfunding gives regular investors private company securities, and therefore they are part of the capital markets and are heavily regulated.

With financial inclusion at its core, Jibrel believes that crowdfunding for equity will definitely create an impact in the regional innovation scene, though it will not be seen in the short term. Micro-investors and first-time millennial investors are now hungry to diversify their portfolio across the board, given the digital transformation that is being accelerated by COVID-19 and regulatory frameworks that encourage safe and trustworthy transactions. More and more first-time investors are making remote large-ticket investments in startups they believe are game-changers, something which was unimaginable just a few years back.   

When asked about crowdfunding-for-equity ability to break down Big Tech’s monopoly over innovation (empowering people to invest in the companies they want to see), Tabbaa said: “I don't think that equity financing will have any effect on the ‘big four’ – diversified access to funding will allow fintech companies and other tech companies to take over market share from incumbents. If you think of the lending space, for example, it was historically dominated by merchant banks and other types of lending institutions. Now, you're seeing new innovations in the field of peer-to-peer lending. There's a new field within the crypto economy called decentralized finance that focuses on credit and lending, so I think that equity crowdfunding will help startups raise capital more efficiently and transparently.”

Government authorities taking the lead on proactive activation of the ecosystem

ADGM has created a progressive regulatory framework and a broad innovation ecosystem that acts as a springboard not only to the region but to the world. The Abu Dhabi market is a great starting point for a fintech startup, though it's important to remember that the UAE’s population is 10 million, which is limiting for a B2C fintech startup. Tabbaa highlighted the fact that ADGM’s reputation and business-friendly policies has encouraged global investors to look at the region’s startup ecosystem as mature and serious about technology. For many, it has grown to become a gateway through which Abu Dhabi-based startups can enter global markets confidently.

While the full effect of COVID-19 on the fintech industry is yet to be clear, it’s obvious that a paradigm shift has caused companies to rethink their business models and growth strategies. Survivors of this market shift will not have only proven their agility and resilience towards megatrends, but also have the opportunity to lead the way towards a fully digital financial sector, something which allows for hyper-personalized banking and fintech solutions across the board.

Which begs the question: Are MENA fintech startups ready to lead the way towards economic recovery post COVID-19?