Fintech has without a doubt arrived in the Gulf. Within a very short period of time, it has not only generated a great deal of excitement but also offered a promise of transformative change for the regional financial services sector. There is palpable anticipation about the ability of fintech innovation to trigger broader changes toward the productivity-led growth model envisioned by regional governments. But many are hoping that this wave of enthusiasm could also put the region at the forefront of innovation in financial services at a global level.
The promise of technological innovation is very welcome as it promises to help cater to many of the developmental needs and challenges of the region. By delivering superior transparency, it can help boost market efficiency and reduce the cost of regulation. It can help reinvent Islamic finance and deliver broader halal-economy solutions for consumers. It can help better pool and allocate capital by delivering better data about investment options.
But how can this sudden burst of enthusiasm be channeled into sustainable change? The region has made good progress in terms of putting in place the right kind of digital infrastructure, and strong consumer preferences for digital interaction are a major plus. The Gulf is one of the most “connected” regions globally. But the raw material needed to drive the growth of the fintech cluster is data. The ultimate impact of digital solutions comes from the ability to access and process data, as well as to disseminate their services widely, reliably, and at a competitive cost.
It is this strategic need for access to data that will effectively drive the next stage of the Gulf’s digitisation journey. In this area, what is needed for success is little short of a cultural paradigm shift. After all, a major focus of regulatory reform over the past decade has been on better safeguarding and controlling information. The relevant question today is how to ensure better access to and utilisation of data without compromising on security and confidentiality.
Technological change in recent years has delivered important new opportunities in this regard. A key case in point is Open Banking which allows third-party developers to access the data of financial institutions for the purpose of developing innovative solutions. For instance, the European Union proactively encouraged such developments through its Payment Services Directives (PSD2) which had the explicit goal of promoting the development of innovative online and mobile payment solutions.
In Bahrain, the Central Bank in December 2018 released rules on open banking with a similar goal. The rules provide customer access to aggregated bank account information through a single platform. Payment initiation services allow licensed third parties to initiate payments and permit transfers through mobile applications.
Bahrain has also been a regional leader in introducing and supporting cloud computing. This in principles provides the framework for aggregated data storage and easier access. Cloud computing globally has served as a key enabler of the progress of artificial intelligence-based solutions. Also, cryptocurrencies are attracting growing attention in the region. Saudi Arabia and the UAE in early 2019 agreed to work on developing a regional cryptocurrency solution.
Cryptocurrencies are an important application of blockchain technology which is as the one most dynamic, high potential enablers and focus areas of fintech innovation. Blockchain is designed as an open, distributed ledger that can record transactions in ways that are permanent and verifiable. The technology can thus dramatically boost security and trust without the need for centralized control. The Saudi-UAE agreement is also promising is underscoring the openness to regional integration in this space, which would ultimately entail a larger market for all players.
But whatever the strides being made in artificial intelligence, as well as other areas, the financial services are still, at a fundamental level, designed by humans for humans. Driving this technological transformation will require high-quality talent. This is an area where the Gulf can compete on multiple levels. Home to a large population that is educated and tech-savvy, the Gulf is in a good position to develop a significant, dynamic local talent pool in this area. But the Gulf can also compete through regulatory innovation and cutting-edge technology.
Fintech is inherently a global industry with mobile companies and entrepreneurs. Creating an attractive platform can draw these companies to the Gulf, as it has to New York, London, and Singapore, among others. Competitiveness in this global competition can, in turn, commit to ongoing regulatory innovation but also mix with local talent and capital to drive organic growth in the Gulf.
Fintech is a fast-moving industry in a constant state of evolution. Ultimately success in it will depend on agility and responsiveness as much as on the other enablers reviewed here. While the Gulf is still at an early stage of its digital transformation, its achievements in Fintech speak to a commitment to nimbleness. This has been particularly evident in Bahrain which has, within a short period of time, achieved the status of a regionally and globally recognised player in this space.
Building on its long history as a financial hub as well as its more recent innovation in telecommunications liberalization, Bahrain has made significant strides in developing a positive partnership between industry and the regulator whereby the Central Bank has dedicated resources to interaction with the industry and proactive regulatory reform to enable change in this area.
The CBB’s Fintech unit has created a Fintech Sandbox to encourage innovative entrepreneurship without some of the constraints applying to more established companies. It has introduced crowdfunding regulations to improve access to capital and it has developed open banking rules. Bahrain Fintech Bay is a leading accelerator in the region, created in partnership with the industry. The Al-Waha Fund of Funds is a new source of professionally managed venture capital to support the growth of successful innovators. 60,000 km of fiber optic cable will be rolled out as part of telecommunications modernisation to improve performance, costs, and security
While it may still be early days, the momentum achieved within a short period suggests that the Gulf is indeed ready to claim its place as a serious contender in the evolving global Fintech marketplace.
About the author
Jarmo Kotilaine is chief economist at the Bahrain Economic Development Board