Technological innovation is changing the face of finance. Recent years have seen fintech investment reaching new highs across the North America, Asia, and Europe. Now, the Middle East is beginning to catch on, says an industry expert.

Bana Akkad Azhari, head of Relationship Management MEA and the CIS, Treasury Services EMEA, BNY Mellon, discusses the potential for fintech to impact the Middle East financial sector, including– perhaps most significantly –the region’s trade landscape.

Bringing with it the promise of enhanced efficiency, security and transparency, fintech is gaining recognition across the Middle East. Spurred on by a growing millennial population – some 60% of the UAE is under 25–the region is increasingly looking to leverage fintech developments for all-round improvements to the financial sector.

Fintech has already found a degree of success in the payments space in the Middle East. The high profile status of PayFort (UAE) and other payment fintechs such as Fawry (Egypt) and Madfoo3atCom (Jordan), for example, are signalling growing acceptance of fintech in the largely traditional Arabic business market.

The state of trade

However, fintech has still been largely underexploited – and this is true across the globe – by a sector wherein it could be truly transformative: trade finance.

Global trade value chains are complex and laden with physical documentation – which, in turn, is highly susceptible to manual errors and fraud. For regions that can be prone to security issues, this is a crucial barrier to both intra- and inter-regional trade.

Moreover, enhanced regulatory measures such as Know Your Customer (KYC) and Anti-Money Laundering (AML) have resulted in a growing number of rejected trade finance transactions.

To both points of contention – the inefficiency of global value chains and the threat to growth posed by increasing regulations – fintech could offer the solution.

Blockchain and APIs

Two innovations that hold promise in this respect are blockchain and APIs (application programming interfaces).

First: Blockchain. The distributed ledger technology that underscores bitcoin, blockchain is cryptographically secure – that is, once a piece of information is entered into a block it is immutable, and becomes part of the infinite chain of information comprising this shared network.

While blockchain is still in the very early stages of development, it is believed that it could significantly enhance the finance industry – including trade. Indeed, the transparency of the blockchain, and visibility of all information and transactions that pass across it, is being closely looked at as a means of enhancing risk mitigation methods in trade. Blockchain could also help to improve the speed and efficiency of transactions.

The potential impact of blockchain in the Middle East is being attested to by the global community. Innovate Finance, a global fintech forum headquartered in the UK, recently set up operations in both Bahrain and the UAE. Furthermore, an Innovate Finance member, Infosys, recently helped to facilitate a sizeable trade finance transaction via blockchain with Emirates NBD.

Second: APIs. The value of APIs is becoming increasingly understood, and banks – and the wider industry – are exploring their capabilities. APIs allow seamless integration and interaction between online connected services. Moreover, their flexible and customisable properties mean that systems based upon APIs can easily adapt in line with changing client needs. Not only does this make APIs important tools in this fast-changing landscape, these properties also help to promote greater levels of collaboration. And by working together, banks and clients can ensure that end-products are specifically tailored to client requirements – a particularly key advantage for the trade space, where clients being somewhat less receptive to digital innovation than other sectors is a key driver in the speed of digital development.

Indeed, the trade landscape in the Middle East is formed largely of family businesses – who often prefer to stay rooted in their traditional, founding business methodologies. And while the Middle East’s young population is driving diversity, there can be a deep-seated reluctance to change in the crucial decision-making generation – which is a direct result of unfamiliarity with new, innovative technology.

Yet, the benefits that can be gleaned from technology are becoming ever-clearer. And banks are exploring ways in which digitalisation can enhance trade.

Banks driving change

Unmatched in industry experience, client reach and operational knowledge, banks are helping to drive fintech exploration in the Middle East. A key way in which they are doing this is by engaging with fintechs, which is a win-win scenario.

For banks looking to offer value-added capabilities to their clients, leveraging fintech offerings can be hugely beneficial. Indeed, not only do fintechs have the technology expertise and understanding to leverage new digital capabilities, unlike banks they are far less constrained by regulatory demands, and free from legacy systems. Fintechs have therefore been able to innovate more freely.

And for fintechs, collaboration with banks can be invaluable due to banks’ substantial client base and wider reach, trusted reputation and insights into the intricacies and regulations of the corporate finance industry, and capital. Because of this, there has been a considerable uptake in collaborative efforts across the region.

One of the most visible ways this can be seen is through the rise in incubator/accelerator programmes. Whereas in 2008 there were no new accelerators in the Middle East region, in 2015, 16 new enterprises were established. Furthermore, 55 per cent of those accelerators reported an interest in investing in fintech over the subsequent 12 months.
Without doubt, the region is ramping up its interest in fintech, and increasingly, locations are being established as “fintech hubs”. For example, Abu Dhabi is at the forefront of the Middle East fintech drive. Facilitating its own bout of leading fintech innovation, the international financial centre Abu Dhabi Global Market launched its “sandbox” in 2016 – an environment where companies, including fintech start-ups, are able to explore new concepts, launch and operate for up to two years under “loosened” regulations.

Elsewhere in the Middle East – specifically, in Lebanon – a lack of financing for fintech initiatives is being addressed. Lebanon’s central bank, Banque du Liban (BDL) has initiated a US$400 million entrepreneurship investment stimulus called Circular 331, designed to invigorate financial innovation and endorse companies pursuing new fintech drives.

As fintech activity in the Middle East gains traction, banks in the region are playing a growing role in helping to propel new digital developments forward to positively impact the trade landscape.

Ultimately, trade is integral to overall economic prosperity. And by effectively applying fintech developments to trade finance relationships and transactions, banks can not only positively impact the trade industry in the Middle East, but also the wealth of the region as a whole. – TradeArabia News Service