Banks and FinTechs in the Middle East - Partners or Rivals?

As originally published in CNN Business Arabic

The financial technology sector has become one of the most important sectors affecting the economy, with a clear imprint globally and more recently regionally in the Middle East and North Africa. Some have even described it as the “pearl” of emerging corporate sectors in the region, with total financing of $1.1 billion in 2022, which constitutes about 33 percent of the total. The amount of funding for emerging companies in the region.

However, the relationship of these companies with banks and major financial institutions remains a question, as some classify them as competitive and others see them as complementary, as “Fin-Tech” companies do not have the ability to compete with banking institutions, whether in terms of investment volume, capital or number of customers.

In light of Arab governments encouraging innovation in the financial technology sector, we will likely see in the coming years that companies in this sector provide more banking services.

Do fintech companies represent competition to the banking sector?

Mohamed Negati, an entrepreneur who has previously established financial technology companies, believes that the sector in the Middle East cannot compete with major financial institutions such as banks, whether in terms of their business volume or financial value.

"The financial inclusion sector in the Middle East still lacks coverage of many services," he said.

He pointed out that the number of financial technology companies would increase during the coming period, especially since the cadres working in the sector are currently establishing their own companies.

The importance of the role of technology partners for the banking sector

Contactless digital payments have become one of the approved options for consumers since the outbreak of the Corona pandemic three years ago.

Banks needed to enter the digital payments sector in line with consumer trends and reach a larger number of customers, especially in places where there are no banks.

The Gulf leads countries that currently rely on electronic payment methods and digital banking services, but it still faces a set of challenges, on top of which are government measures and qualified cadres to lead these companies through business models that achieve sustainable profitability.

On this point, Saifallah Gaafar, Regional Director for the Middle East and North Africa at Software Group for financial technology solutions, says that the Gulf countries, led by Saudi Arabia and the UAE, have invested heavily in emerging fintechs in the sector in addition to establishing financial technology innovation centers (fintech innovation hubs), whose number in the Gulf increased from one center in 2018 to four in 2022.

"The situation in the Egyptian market is different, given that a large number of users do not trust the use of smartphones as a means for banking transactions," indicating that the most viable solution to accelerate financial inclusion in Egypt lies in agency banking which allows access to users in remote areas and helps raise awareness of banking services.''

The concept of agency banking refers to banks partnering with agents to provide banking services, which contribute to reducing the cost of services for customers while ensuring compliance with the provisions of the banking control system.

He explained that full financial inclusion has begun to be achieved in the Gulf countries in light of the increase in the number of smartphone users, in addition to the fact that digital banks have become the dominant trend in the Gulf markets, whether they are well-known banking institutions or independent brands, pointing out that in both cases there is a technological partner to facilitate the process of digital transformation. 

He stressed that the technology partner plays an important role in establishing digital channels by launching digital banking applications and supporting them with integrated tools that provide a better user experience.

He pointed out that the challenges facing financial technology companies differ from one country to another, as companies in the Egyptian market face difficulty in obtaining the necessary regulation permits, while in Saudi Arabia and the UAE they find challenges represented in obtaining financing or the presence of qualified cadres that most of the time fail to follow sustainable business models. Whether in profitability or expansions.

He pointed out that obtaining financing for emerging financial technology companies may be a challenge in light of the unstable global economic conditions, in addition to the presence of major players in this sector who have proven their presence over the past years.

The growth of Gulf and Egyptian startups

What is remarkable is the doubling of the growth in the volume of investments in the markets of Arab countries in the sector of financial technology companies, specifically emerging in the UAE, Egypt and Saudi Arabia, from 10 to 20 percent during 2022.

In addition to skeptics about the ability of financial technology companies to compete with banks, another group believes that the future will soon be for those companies, especially the emerging ones, which were able to obtain financing worth $ 75 billion globally, including $ 1 billion in Dubai, Egypt and Saudi Arabia.

The matter is not limited to financing, but extends to the number of emerging companies operating in the sector, which number in Dubai only to 700 companies, while in Egypt the number of these companies is approximately 150 companies, and in Saudi Arabia about 170 companies.

In this context, Hani Fikry, CEO of Enza Group for financial technology, said, "Growth is not only limited to financing, but also in the number of companies, the volume of their sales and customers, in light of the technological development and the digital transformation paths followed by the three countries, in addition to user preferences."

He added, "Emerging financial technology companies in the Middle East and North Africa region have reaped huge funds over the past year," pointing out that Emirati financial technology entities in Dubai alone have raised about $600 million in financing.

He pointed out that Saudi and Egyptian companies reaped $650 million in financing during the same period, Saudi Arabia $400 million and Egypt $250 million.