What is the next frontier for fintech in Saudi Arabia?

Financial technology (fintech) is significantly revolutionizing the Saudi banking and financial sector. According to the startup data platform MAGNiTT, Saudi fintech startups have raised $23 million over the last 5 years in just 9 deals, which highlights the Kingdom’s position as one of the biggest and fastest-growing ecosystems in the region.

Digitalization of the economy, combined with several government-supported initiatives such as Sandbox regulatory environment, along with incubators and accelerators have expanded the base of fintech start-ups in the Kingdom.

In Dec. 2017, for example, Saudi Arabia’s Capital Market Authority (CMA) launched the Fintech Lab, an initiative aimed at supporting innovation and the development of new products in the fintech sector.

Another major step was taken by the Saudi Arabian Monetary Authority (SAMA), with launching the Fintech Saudi initiative to support the ecosystem and promote the Kingdom as a fintech hub.

Further, in February 2019, the Kingdom’s central bank launched the Sandbox experimental environment, which opened the door for financial companies and start-ups to test advanced digital solutions including e-wallets, digital payments, P2P transfers, QR codes purchases, international transfers, point of sale (POS) devices, SADAD bills, SADAD account and Saudi Payments Network (Mada) online.

Following the launch of the Sandbox, SAMA granted 14 fintech firms permits in June last year to join the Sandbox experimental environment for offering fintech services.

Growth drivers

The growth of fintech in the Kingdom is being driven mainly by the digitally-savvy young population, and innovation, along with the supporting government policies.

Clifford Chance, a multinational law firm, noted in a report that Saudi Arabia has the potential to become a future fintech hub, and the Kingdom is generally introducing new technologies and innovative solutions for doing business.

The report further noted that SAMA is very conscious of the need to adopt fintech initiatives.

The Financial Sector Development Program is an initiative under Saudi Vision 2030, which aims to permit fintech companies, alongside SAMA-licensed banks, to provide financial services in the Kingdom, the report added.

Serge Tohme, Managing Director, MENA & Turkey, Finastra, a global fintech firm that has been working with Saudi banks for more than 15 years, attributes the rapid rise of fintech in the Kingdom to customers’ appetite for digital services.

The Middle East and North Africa (MENA) region has some of the most penetrated mobile markets in the world. By the end of 2018, nearly half of the 25 countries in the region had unique subscriber penetration rates of 70% or more, compared to 66% globally.

He further noted that the past year witnessed a few milestones for Saudi Arabia’s fintech sector.

“The inclusion of the country’s stock market into the MSCI Emerging Markets Index in addition to the robust demand for its sovereign bonds coupled with Saudi Aramco’s IPO has demonstrated Saudi Arabia’s openness to foreign investors,” Tohme stressed.

Moving forward

Going forward, experts are also optimistic about the outlook for the development of fintech in the Kingdom.

The report by Clifford Chance maintained that an important element of Saudi Arabia’s fintech ambitions is the King Abdullah Financial District (KAFD), a massive new business area in the center of Riyadh.

“It is expected that fintech will be at the heart of the new district, as is the case for its regional competitors, like Dubai International Financial Center (DIFC) and Abu Dhabi Global Market (ADGM),” it added.

However, S&P sounded in a recent report cautious over the impact of fintech on the overall banking sector in the GCC.

“Fintech could disrupt the money transfer operations of banks and exchange houses in the GCC, as by definition, these companies focus on lowering transfer fees and reducing transfer times,” the ratings agency stated.

While noting that demand for fintech solutions is expanding, driven primarily by the lower costs for service provision and speed of execution, S&P added that collaboration between banks and these fintech firms could help enhance efficiency, allowing them to redeploy resources and staff on higher added-value transactions.

Payment services is another business line that fintech is disrupting, with some fintech companies developing alternative payment methods, contactless payments and securing transactions through blockchain.

Overall, experts say while most banks in Saudi Arabia consider fintech being an active player, they have yet to demarcate a clear role.

“Within the Saudi banking system most of the banks are in exploratory phase as to how to cooperate with fintech and where to deploy them,” Rushdi Duqah, Partner, Consulting, Deloitte Middle East, told Argaam.

Tohme of Finastra also points out that while the attractiveness of banking online and through apps is clear, but they must be feature rich, secure and user friendly to address the demands of the customers.

The payments and remittance models have been at the heart of fintech innovation in Saudi Arabia and the wider Gulf region. Experts, however, believe fintech firms should now expand their offerings to other fields and provide a common platform that brings together both the financial and non-financial businesses.

“What we have seen as a key trend in the fintech ecosystem is that many companies in Saudi Arabia are looking to integrate fintech solutions into their proposition to capture more users and have better user retention rates,” Philip Bahoshy CEO of MAGNiTT, told Argaam.

In the coming years, several regional and international fintech firms will look forward to enter Saudi Arabia as its current financial ecosystem paves the way for a favorable environment for adoption of the technology. In the short to medium term, fintech firms are expected to focus on providing the value proposition to the overall financial system, while demonstrating more clearly their ability to scale the business.

Write to Sunil Kumar Singh at sunil.kumar@argaam.com