Fintech: The journey from disruptor to normaliser

Contrary to popular perception, financial technology (fintech) has been around for a while, but only in recent years has it appeared to take over. Since the launch of the first credit card with a magnetic stripe in the 1960s, fintech – the ever-growing integration between digital technology and finance that enhances financial services offered to businesses and consumers – has grown up and out.

Fintech – also interchangeably used for firms that provide creative financial solutions – has leveraged various aspects of consumer life – from mobile payments to investment opportunities – effectively revolutionising how consumers manage their finances. A once-distant platform reserved primarily for back-end systems of financial institutions, fintech – the once disruptor, now normaliser – encompasses a variety of consumer-facing applications. Trading stocks, furnishing mobile payments, transferring funds or managing your insurance (often on your smartphone) has never been this easy.

In essence, fintech has grown in momentum and usage and unsurprisingly, global trends reflect the same – according to Ernst and Young’s Global FinTech Adoption Index 2019, surveying more than 27,000 consumers across 27 markets, China and India both boast an 87 per cent fintech adoption rate while Russia and South Africa tie in at close second with 82 per cent. Meanwhile, the global fintech adoption rate in 2019 stood at 64 per cent, which means that every two out of three people have used it in some way. Regionally, the MENA fintech market will reach a value of $2.5bn by 2022, according to research company MENA Research Partners.

In terms of categorisation, as the EY’s index noted, two key fintech offerings exist: disrupted and invented. A disrupted fintech service is one that’s been historically offered by incumbents such as foreign exchange trading and automotive insurance. Service providers have simply leveraged technology to disrupt the traditional way by including enhanced capabilities, convenience and cost-effectiveness into their offerings.

An invented service, however, is one that didn’t exist earlier but is now possible by virtue of technology and alternative business models (such as peer-to-peer lending, mobile phone payments). While some concepts are niche, others have what it takes to overhaul entire financial subsectors, the index identified.

“Fintechs are great disruptors and also change agents who have brought transparency, lower costs, fast access to cash and a better customer experience to the financial sector. But the real revolution is ultimately about how you can work with the wider financial ecosystem,” says Craig Moore, founder and CEO of crowdfunding platform Beehive.

Crowdfunding platforms
With startups clambering to enter the market, gathering the money needed to convert ideas to life remains a perennially herculean task. But many entrepreneurs who were often seen beating a path to their bank’s door for raising capital now hold the option to careen towards crowdfunding which has taken funding – and networking – to a new level.

Crowdfunding offers a smart way to package innovative ideas and tap into a pool of investors. Most importantly, entrepreneurs can validate their product offerings faster, gain insights from experts and customers, and connect with potential stakeholders, all thanks to such platforms. According to US-based research site Statista, transaction value in the crowdfunding segment is expected to show a compound annual growth rate of 12 per cent between 2020-2023 to reach $11,985.6m.

“After the 2008 banking crisis, there was a lack of financing options for small businesses that banks deemed too risky to give loans to. Crowdfunding has filled that gap. Before Beehive came to the UAE, small businesses had to try and borrow from local banks, which had incredibly high interest rates (around 25 per cent), and often unexpected fees too. Crowdfunding uses a number of investors to fund a request by an SME,” explains Moore.

“The best thing about peer to peer lending is that it’s mutually beneficial. The investors lending to firms can make returns of up to 10 per cent, which is considerably higher than leaving money on deposit at a bank or buying savings bonds. SMEs get faster access to finance, lower rates on finance, no early repayment charges and a simple application process.”

In 2017, the Dubai Financial Services Authority (DFSA) enacted rules to create a robust crowdfunding ecosystem. Bahrain followed suit shortly after, issuing crowdfunding regulations. In H2 2019, the Saudi Capital Market Authority granted “experimental permits” to a few fintechs allowing them to create equity crowdfunding platforms.

As regional governments promulgate alternate funding options, offering viability to startup communities, crowdfunding fuelled by disruptive technologies could percolate further. Innovative funding alternatives – such as the initial coin offering (ICO), that uses digital currencies to fund startups – could watch the crossover between crowdfunding and developing technologies such as blockchain grow from strength to strength.

Blockchain all the way
Ingenious and ingenuous, blockchain has helped resurrect cardinal concepts of democracy and transparency in transactions. In simplest terms, blockchain is a time-stamped, immutable record of data that is managed by a clique of high-powered computers – nodes – and owned by none.

As the name suggests, data is packaged into blocks bound to juxtaposed ones to form a chain. Since it is governed by no sole authority, the shared digital ledger of activity is updated in real-time and is available for all to see.

Embedded within the very nature of blockchain’s linking technology is its probity – the chain has a series of blocks containing data and a pointer to the previous block in the list. While a regular pointer alludes to the place where information is stored, a hash pointer indicates where something is and what it’s value was.

That said, features that render this technology as trailblazing are not restricted to transparency and decentralisation alone, but also the fact that blockchain carries no transaction cost.

Percolating across industries, blockchain can not only transfer information and money, it can also sideline business models, processes and middlemen that gain a fee for transacting any process. A simple application of the technology would be the purchase of an e-book: instead of purchasing it online, a book could be routed in an encoded form from an author to a reader. The author in return would receive all the money, not just royalties, eliminating middlemen such as online platforms.

In the financial space, the benefits of the blockchain application are far-reaching, the changes more imminent. Given that the entire financial ecosystem is built on charging a small amount of the customer’s money for facilitating transactions, the concept of a safe, time-stamped digital ledger sans transaction fees, once widely implemented, will coax banks to rethink their digital strategies and change fundamentally – bankers could potentially be relegated from sentinels to advisers.

“The limit to where blockchain can be deployed is difficult to define because anything that has a trade cycle, where you have intermediaries and clearing houses and custodians could benefit from the technology,” elaborates Nicholas Wright, sales director, MENA region at Saxo Bank.

“This includes capital market transactions where fund managers, brokers, custodians, clearing houses and exchanges all reconcile. Blockchain can also be utilised well for compliance purposes, such as automating parts of the KYC (Know Your Customer) process which can be a significant administrative burden for financial services institutions.”

On a government level, the UAE is also leveraging technology for creating greater, cross-border trade efficiencies. Dubai Chamber of Commerce and Industry (DCCI) and Dubai Future Foundation (DFF) announced the Digital Silk Road project – a Dubai 10X initiative – to use blockchain technology to strengthen the global trade system and eliminate trade barriers.

“It’s been pleasing to see blockchain initiatives being supported throughout the region, particularly with the establishment of the Global Blockchain Council, set up by the Dubai Future Foundation. This shows that regional leaders are embracing the technology and recognising that blockchain is an obvious fit for the Middle East,” adds Wright.

Additionally, the peer-to-peer nature of the blockchain technology integrated with payment transfer has formed the impetus to drive the concept of cryptocurrencies. After all, what’s better than to transfer money without stopping over at a bank.

Bitcoin
Post the 2008 financial crisis that prompted a general sense of consumer mistrust, the banks that survived changed their strategies while new players jumped onto the scene, including cryptocurrencies.

The widely-known digital currency, bitcoin, marked a decade in October 2018 with its debut whitepaper Bitcoin, A Peer-to-Peer Electronic Cash System published in October 2008, and its first-ever transaction recorded in January 2009.

Leveraging blockchain technology, bitcoin is also built on a decentralised network but unlike banks, anyone can create a bitcoin wallet by simply downloading a digital wallet app. Traditionally, banks created frameworks that customers had to adhere to, to ensure the smooth running of their transactions and accounts, but this process is eliminated in the world of bitcoin as no central authority governs it. Simplistically, anyone with access to the internet can procure, send, and store a bitcoin.

Furthermore, the concept of bitcoin has only scaled in recent years, kickstarting on May 22, 2010 – when programmer Laszlo Hanyecz purchased two Papa John’s pizzas for 10,000 bitcoins, worth around $30 at the time. Today, more and more businesses around the world are cottoning onto the digital currency, treating it as a valid payment method. While companies such as US travel agency Cheapair, tech giant Microsoft, European Norwegian Air, and others have joined the cryptocurrency bandwagon, football clubs (Watford Football club, S.L. Benfica Football club) have also adopted its usage.

In the UAE, Dubai-based blockchain startup Arabianchain Technology launched a cryptocurrency exchange – Palmex – to enable customers to buy, sell and trade digital currencies in 2018. Palmex also became the first in the MENA region to receive a regulatory sandbox licence – a framework that regulates the development of the fintech industry. The same year, a digital currencies wallet and trading platform, Bitex UAE, was also launched locally, offering multiple cryptocurrencies.

On the retail side, music streaming app Anghami allows bitcoin payment for its subscription fee while Dubai’s Fam Properties began accepting cryptocurrency payments in 2020.

Mobile payment solutions
Meanwhile, the rise of digital payments has given birth to a plethora of payment systems designed to integrate seamlessly with mobiles, in-apps, and browsers. This has prompted banks, tech giants and fintech firms to offer digital wallets allowing users to make payments electronically. Today, digital wallets enable users to store important documents including credit card details, IDs, and driver’s licences in one location such as a mobile phone, facilitating online payments as well as quick in-store payments.

Credit card companies such as Visa and MasterCard offer device wallets that can hold several cards directly linking them to a customer’s bank account. Companies such as PayPal and Paytm are offering P2P (peer-to-peer) wallets that can help perform direct account-to-account transfers, obviating banks from the process.

Regionally, the mobile payment industry in Middle East and Africa is expected to record a CAGR of 17.8 per cent to reach $434.5bn by 2025, according to Research and Markets. In the UAE, Apple Pay, Samsung Pay, Google Pay, Emirates NBD Pay, FAB payit, Etisalat Wallet and Beam Wallet are a few wallets currently in use.

As fifth generation cellular network technology becomes prevalent, the consumer’s holistic transaction experience will improve considerably, encouraging people to rely more on mobile payments. In essence, 5G’s speed and capacity will facilitate faster downloads, low latency in transactions and better cloud connectivity. This will invariably increase the number of real-time transactions and help deliver innovative, consumer friendly mobile services.

“We will see 5G’s speed enable e-commerce players, consumer tech companies, fintechs, and virtual banks to offer a dazzling array of services that could overwhelm many incumbent banks. Regulation protects incumbents today, but the potential of moving at 5G speed means non-banks may combine various technologies to provide even better security and consumer protections,” opines Alaa Elshimy, managing director and SVP, Huawei Enterprise Business Group, Middle East.

“Huawei offers its 5G knowledge and capabilities to all organisations that want to use digital banking and open APIs to create a broad financial proposition — from payments to investments to lending — that is connected to e-commerce, telecoms, and other consumer-facing businesses.”

2020 and beyond
For as long as there has been money, there have been technologies ensuring money is used in new and innovative ways. In a world that is adopting artificial intelligence (AI), digital cash and automation at incredible speed, it is necessary for companies to not only digitise but to disrupt and rethink simultaneously as well.

As fintech infiltrates further across industries, automation is expected to form a large part of it. As it stands today, automated software programmes are performing human tasks such as rendering investment advice and trading stocks. Robo-advisors – online financial advisors that use technology to help manage people’s finances — such as Betterment ($10bn in assets under management) are also on the rise, effectively removing human wealth managers – the middlemen – from the equation.

As technology-driven innovations such as robotic process automations and conversational interfaces power ahead to become the new normal — research firm Gartner has predicted that this year, chatbots will provide 85 per cent of customer service interactions — fintech will continue to expand fore and aft, buoyed by engaging business models, efficiency and low overheads. So, would it be correct to say that the best of fintech is yet to come? Arguably yes.