The Middle East is increasingly embracing fintech. The number of fintech startups in the region is predicted to reach 250 by 2020, and investment in technology-based initiatives and fintech developments is also on the rise.

While in 2016 fintech investment in the region totalled $18 million, last year that number was surpassed with a single $20 million contribution to a single payment solutions company, rising to $35 million overall .
But why is fintech experiencing such substantial growth in the Middle East? A key reason is the increasing recognition of the benefits of using technology to enhance transaction banking – including trade. Trade processes can be costly and slow, with paper-based tasks increasing labour costs and decelerating cash flow. Administrative, manual documentation required for trade operations can prevent staff from concentrating on more strategic priorities, further driving down efficiency. Such inefficiencies mean that the industry is experiencing increasing demands for digital change.

Cutting-edge technology can transform the trade space

Yet, this is far from a bleak picture. It is simply a call for change. And a number of new initiatives and developments offer the potential to generate the evolution required in Middle Eastern trade.

Artificial intelligence (AI) is one example. AI refers to simulated intelligence in machines that have been programmed to mimic human action and rational thought. As AI can be used to replace certain simple, paper-based, manual procedures with automation, it holds significant promise with respect to helping to streamline trade processes; improving transparency, reducing costs, accelerating cash flow, and – importantly – freeing staff to focus on more strategic operations, which drives up efficiency.

Moreover, with manual trade instruments often used as a tool to facilitate fraud, AI’s ability to automate trade services has the potential to enhance security. For example, PayTabs– a Saudi-based payment solutions company – features an AI data protection programme that has blocked over $400 million worth of fraudulent transactions. Given the global rise in attempts at financial fraud, such innovation could be particularly significant.

A new branch of AI known as “machine learning” has vast potential. Machine learning refers to the ability of applications to use statistical techniques and datasets to “learn” how to identify patterns and trends – and then apply this knowledge and understanding to then “think” in a logical way. Its practical functions are varied. For instance, machine learning enables algorithmic trading – basically, AI systems that make extremely fast trading decisions –and chat-bots and robo-advisors that can enhance banking experiences for clients.

Robotic process automation (RPA) is also innovating trade services. Currently, banks are exploring the use of RPA to automate simple, standard business processes. Not only do robots eliminate the manual burden of administration – saving time and money – they can also improve standards of accuracy as robots are not vulnerable to human error. RPA has been harnessed by BNY Mellon to streamline trade settlement by resolving inconsistencies, performing research on orders and clearing trade transactions.

Elsewhere, banks are increasingly leveraging application programming interfaces (APIs) to enrich the client experience. An API is a software intermediary that allows two applications to “talk to each other”. APIs can therefore be used by banks to enable systems to share information, creating digital ecosystems that connect different parties to provide value-added services.

Another important fintech initiative that has the potential to enhance trade is blockchain technology. A blockchain is a digitalised, decentralised ledger that is inviolable and transparent. The technology records digital information and adds it to its database in chronological order – allowing market participants to keep track of transactions without a central controlling body.

Trade services often involve ecosystems of external partners, with each independent participant further decelerating the process. As blockchain facilitates transactions under one system, ongoing developments aim to support faster trade operations. While blockchain holds a great deal of promise, it remains in the very early stages of development, and much is yet to be understood about how it could be successfully applied to corporate transactions.

The Middle East embraces fintech

Given the enhancements technology could provide, governments across the region are now implementing various services to support the region’s thriving fintech ecosystem. For example, the Bahrain Economic Development Board launched the Bahrain Fintech Bay earlier this year to support local fintech start-ups. It partners with large financial and non-financial companies to support the country’s digital transformation.

From a regulatory perspective, governments are also accelerating development through sandboxes, which permit businesses to test innovative products under a firm-specific licensing regime for a limited testing period.

Such sandboxes also allow governments to learn about new technologies and help shape regulations accordingly. A number of accelerator programmes featuring sandboxes have been launched across the Middle East. For example, in collaboration with Accenture, the Dubai International Financial Centre (DIFC) launched the FinTech Hive. The Hive offers 12-week programmes allowing fintech start-ups to experiment with their platforms .Elsewhere, in Lebanon for instance, there are currently eight incubators and accelerators that provide financial support and training to fintech companies.

The degree of receptiveness to fintech change varies across the region. Yet, with the Middle East’s trade landscape formed largely of family businesses –with long-established, traditional business methodologies – there is understandably a degree of caution by some with respect to implementing significant change and unfamiliar processes.

In order to harness the benefits technology offers and meet the needs of clients, banks in the Middle East should therefore re-evaluate their traditional models to bring value-added capabilities to clients, whilst also ensuring they are mindful of delivering a customised experience that supports the diverse expectations across the region.

Certainly, it is important to understand that employing cutting-edge technology for technology’s sake is not an optimised strategy. Banks need to assess what digital strategy works best for their clients, and prioritise how technology can add value accordingly.

Collaboration facilitates change

Fintechs are playing a key role in helping Middle Eastern banks digitalise their offerings. By working together, banks and fintechs can combine their strengths to create enhanced solutions for clients, combining bank security and expertise with fintech innovation and efficiency.

While a bank-fintech relationship is clearly beneficial, a number of challenges hinder such collaboration. Resources can be limited, and some regional banks prefer to concentrate their investments elsewhere. Fortunately, a tripartite relationship between local banks, global banks and fintechs –facilitated through correspondent banking partnerships – can help by facilitating widespread participation.

By working with fintechs, global banks can develop initiatives and digital solutions that can then be made available at a local bank level. This provides local banks with access to the initiatives necessary to enhance their operations. All parties benefit: local banks gain access to technology solutions to improve their trade processes, global banks benefit from unrivalled country-specific insights and expertise of local banks, and fintechs gain from the extended reach, resources and experience of banks.

The fintech landscape in the Middle East is gathering pace, and as client requirements continue to evolve, banks in the region must ensure they are able to adapt to the new, increasingly digital environment.

It is through collaboration – working closely with clients to understand their needs and how technology can add value; and aligning with a correspondent bank to harness the strengths of local-global partnerships –that banks in the region can ensure they are equipped to deliver the technology capabilities needed to enhance trade for clients across the Middle East.

The views expressed herein are those of the author only and may not reflect the views of BNY Mellon. This does not constitute treasury services advice, or any other business or legal advice, and it should not be relied upon as such.

About the author

Bana Akkad Azhari is head of Relationship Management MEA & CIS at BNY Mellon, a US-based worldwide banking and financial services holding company headquartered in New York City.