With experience as a lawyer and as Head of AML & Compliance for a number of banks in Europe, Simon has first-hand experience of the issues faced by MLRO’s and has also worked closely with regulatory authorities and both private and public bodies to advise on regulatory changes and new legislation. Simon is now focused on DX’s expansion to the UAE, which has taken priority following the strong growth they have seen in MENA.
Connect with and message Simon Dix on his MAGNiTT profile
The rate of growth in FinTech within the MENA region has picked up significantly in recent years. With over 300 million people ready to trade, save, send, or spend, it’s not surprising. Even less so given the set of needs that many residents and workers in the region need and the ability of many FinTechs to offer suitable solutions at a fraction of the cost of many of the incumbent banks. It’s a story we’ve all seen before.
In order for FinTechs to sustain growth and develop effectively, there are three pillars (beyond the standard corporate needs) that are essential, need to be focused on, and are often easily overlooked when compared with the wider tech startup ecosystem.
Feras Jalbout, Founder and CEO at Baraka previously commented, “The MENA FinTech market is going through a really interesting transitionary phase – on the one hand, it’s projected to top $2.5B by 2022, and on the other, it’s still relatively nascent compared to global standards, which means huge untapped potential for new entrants. The UAE has done well to leverage its geographical connectivity to the rest of the region by investing significantly in creating its own FinTech marketplace for early and growth-stage startups.
"You can see all the elements coming together – from an evolving regulatory framework to supportive government accelerators, financial institutions starting to integrate home-grown tech, and regional investors backing local startups. We’re even seeing solid partnerships forming between FinTech companies here. It’s the regional opportunity and collaborative environment that makes this the right place and the right time for FinTech founders.”
1. A regulatory framework that is supportive of innovation
At DX Compliance, we recently applied for our commercial license within the DIFC, for exactly this reason. We had already been experiencing the commercial pull in the region, but the level of engagement shown by the DIFC and DFSA in fostering early-stage companies and providing feedback was impressive.
Companies will prefer regulators that are open to innovation. Innovation brings risk. The risk of FinTech is something that most organizations are well aware of. One highly interesting thing about the UAE is that there are more financial regulatory authorities than you’d expect, this is a result of the Free Zone structure, such as the DIFC and ADGM, who each have their own financial regulator largely based on common law and international standards.
This provides companies in the region with a strong ability to innovate, gain feedback, and higher chances of gaining access to regulatory sandboxes (the MENA region has 9 sandboxes) or similar. As these organisations are also under pressure to be competitive and increase innovation and economic performance, their KPI’s are often more clearly aligned with an early-stage FinTech than you’d typically see in many older, larger regulatory authorities.
2. The correct tools for efficient compliance & governance set-up
The tide and attitude toward compliance have dramatically changed over the past few decades. Over the last 12 months, it has also become a key focus of early-stage investors to make sure that a strong level of scalable compliance measures is in place. Some of the most basic processes include a regulatory reporting framework and AML. Compliance with Anti-Money Laundering regulations is hugely important and goes far beyond the onboarding or KYC. The reason it is so important to the authorities relates to the integrity of the financial system and the direct effect that integrity has on foreign direct investment. The reasons it is important to investors is due to the reputation of a FinTech startup which is essential to scale a business and as board members and executives will not only be levied with large fines but may also end up with personal criminal liability.
Using AML compliance as an example, one of the most commonly made mistakes which have cost companies, such as Revolut millions in resources and problems over the past 5 years, is to focus all efforts on the on-boarding and KYC processes, forgetting that the strongest obligations and indeed the biggest weakness is tackled in the on-going due diligence, in having systems in place to detect potentially suspicious behaviour and show you where the risk involved in these processes lies.
So why is compliance a challenge? Well trained compliance professionals are not only expensive, but they’re also not scalable and they remain... human.
Enter RegTech (Regulatory Technology). 2020 has been a huge year of growth for RegTech providers, but it is more than a back-office enabler, it is innovation both in of itself and in what it creates. There is a strong co-dependency between successful FinTechs and using RegTechs that provide solutions designed for them. FinTechs are also uniquely positioned in their clearly cultural understanding of how to use their data and get the most out of the data they have.
The ecosystem has 300 million consumers, strong networks, and a clear openness from both consumers and businesses to work with modern solutions and try new technologies to make the MENA region a fantastic opportunity for FinTechs. The increasingly strong ecosystem with programmes such as FinTech Hive and Hub71 also ensures that companies have a strong ecosystem within which to find their feet and grow.
Additionally, it is important is to assess where the ‘heavy lifting’ is likely to occur in the coming 6, 12 & and 24 months and to understand how likely it is for that to change in order to meet and support your strategic needs for the business. Are you expanding to offer payments to a potentially high-risk country? Are you due to launch a product that has an inherently higher risk of being used for laundering money? Choosing a technology partner that doesn’t just deploy software, but is in a position to understand the needs you have and is willing to take the time to assess those with you is key.
3. The importance of early-stage funding
Many tech startups experience a similar journey when looking to attract early-stage funding - “Come back when you have customers.” This may be easy for a range of business models, but for a number of reasons, it can be extra challenging for many FinTech startups.
- Many FinTech startups, whether offering lending, payments, investment products, or similar, simply require funds early on in order to operate. This doesn’t change the fact that customer discovery, prototyping, and gathering user feedback can all be done prior to taking on a large amount of capital. Nevertheless, in order to have money that can be transferred, sent, hedged, or held otherwise, a minimum amount of capital is often required to satisfy basic commercial needs.
- There are, for many areas of the market, clear regulatory requirements surrounding the level of capital required by licensed entities, particularly when operating consumer-facing/B2C business models. This means that without a strong ecosystem of early-stage Pre-Seed/Seed funding, a significant number of FinTech startups will struggle to take off, also having an adverse effect on the pipeline of investments available at later stages of the journey. This effect can spiral, leaving an ecosystem becoming less and less attractive for investors and startups.
MAGNiTT's FinTech Venture Report found that 88% of all investments in MENA-based FinTech startups were at the early-stage in 2019. This jump coincides with increased activity by accelerators who provide mentorship, market access, guidance, and their first ticket. Ideally, a strong level of very early-stage funding needs to be established and to continue in order to support FinTechs in the region, focusing specifically on helping those companies to tackle their early milestones and win those early gains.
Despite the impact of COVID-19, by October 2020 MENA VC investment has exceeded full-year funding in 2019. Access the numbers and get more data in our October 2020 Dashboard.