Regulatory environment biggest hurdle facing fintech startups

Richard Teng, CEO of FSRA

The Middle East’s financial technology (fintech) sector has become one of the fastest growing over the past five years, attracting $237 million in investment. Since 2015, there have been 181 deals across the Middle East and North Africa (Mena) of which 46 took place in 2018 and 51 so far in 2019 according to a new report from Magnitt.

With growing smartphone and mobile internet penetration and a friendlier, more supportive startup environment in the region, the fintech sector has received a boost.

“Digitalisation of financial services is happening at an unprecedented pace. From payments, banking, financial advisory, capital market and insurance, deployment of financial technology have reimagined the financial services sector resulting in innovation, efficiency and greater financial inclusion,” said Richard Teng, chief executive officer at Abu Dhabi’s Financial Services Regulatory Authority (FSRA).

Yet despite such growth, startups are facing a few major hurdles, primarily in regulations and financing.

“In a lot of places, there are no regulations. If you waited for the regulations to be there, you’d probably never start,” said Jonathan Rawling, chief financial officer at yallacompare, a financial services comparison website based in Dubai.

Several cities are attempting to become the fintech hub of the region by launching sandboxes and regulations friendly to startups. The Abu Dhabi General Market (ADGM) announced the launch of its own digital sandbox, a cloud-based environment of fintech startups and banks to co-create and test products with guidance from the regulatory body at the Fintech Abu Dhabi summit this week. It replaces the RegLab programme currently in place and joins eight other sandboxes in the region including Bahrain’s Fintech Bay and Dubai International Financial Centre’s (DIFC) Fintech Hive which are all attempting to attract startups to their own space to test and launch new products and services.  

But there is a catch, they all require entrepreneurs to relocate or have a presence in their country in order to be eligible for funding.

“There is money available, but it is attached to a lot of conditions. If you are a new company with two people, it is easy to move around. For companies like ours, you’re at a scale where you can’t just move head offices. It’s harder for us to tap into this kind of fundraising,” said Ambareen Musa chief executive officer at Souqalmal, a Dubai-based price comparison website.

The regulatory framework across the Middle East differs from one country to another, which for startups is like founding a new company in each jurisdiction. This fragmentation prevents scaling and growth.

“We don’t have market size here. If you fix the core of the problem, it goes all the way to the top and opens corridors between GCC countries, then automatically you have one region,” said Musa. “If that happens, suddenly the symptoms – the lack of funding and talent, will disappear. You can tap into the region with one market.”

For Souqalmal, it took a year in Bahrain to secure the right licence and two and a half years in Saudi Arabia.

“You’re touching the financial services industry which is the core of every economy,” said Musa.  “It is normal for regulators to want to take time, but it means it takes longer for us to get into a country. We [startups] need to be part of that education system and grow as much as the regulators. The question of when [to enter a new market], is when the countries are ready to say yes, welcome.”

Both Musa and Rawling feel confident that the regulations will eventually improve.

“It’s a matter of being a bit more pragmatic and relaxing these conditions,” said Rawling.

Wamda Capital has invested in yallacompare

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