Introduction to FinTech: A Middle East Perspective
Innovation and technology-related topics are likened to an alphabet soup of acronyms and buzzwords. To help lift the veil and demystify these topics, we have produced a series of short articles to assist that examine these topics through the lens of a Middle East lawyer. These articles are intended as an introduction to in-house legal counsel based in the region.
FinTech, short for Financial Technology, describes tech-enabled products and services that improve or "disrupt" traditional banking services. It is not a new concept but the pace at which new and upcoming financial services of the 21st century are being created is new.
Where once financial institutions only focused on back-end technology solutions, they are now focusing on front-to-back processes driving improvements to and disrupting traditional financial services, ensuring that the customer experience is enhanced from the outset.
Financial institutions are investing significant amounts of money in FinTech solutions globally and regionally in a number of ways, most notably by collaborating with FinTech startups or by setting up challenger banks.
In the MENA region, FinTech startups have sprung up in 12 Arab countries, yet three in four startups are based in the UAE, Lebanon, Jordan or Egypt; the UAE being the most dynamic hub. FinTech is in a frontier phase in the region but with significant government support particularly in the UAE. FinTech startups1 offerings include bill payments, mobile, online and wallet-payment solutions; lending including crowdfunding, peerlending and loan comparison platforms; international money transfers; wealth management; insurance solutions and block-chain based services.
FinTech startups' collaborative offerings can be integrated into a bank that strives to become more responsive to changing consumer demands and rising technologies. Some noteworthy examples include Ahli United Bank and Warba Bank's partnership with Ajar Online, a startup that allows tenants to pay their rent via a mobile app and Boubyan Bank's partnership with Tap Payments as part of its strategy to provide the best payment systems to its customers. HSBC has also partnered with the DIFC's FinTech Hive (an accelerator programme that offers both startups and more established FinTech firms the opportunity to develop, test and modify their innovations in collaboration with seven global and regional financial institutions) to identify technology innovators that can help banks become more digital and seamless in their operations.
We have also seen the emergence of a number of successful challenger banks in the region including those established by Emirates NBD (Liv), Mashreq (Neo), Commercial Bank of Dubai (Now) and Gulf International Bank (Meem). Each bank has a unique digital offering to the market whether it’s the launch of futuristic customer stores with touch-screens and virtually no paperwork, a digital lifestyle banking app or branchless banking. All such offerings ensure that banks remain relevant to their customers and pass through the benefits of reduced costs and increased efficiencies to their customers.
With the expected increase in new technologies entering the market over the next few years, the time in which services are offered and transactions are completed will also improve, ultimately reducing the need for hard cash. The high-speed pace at which we will become accustomed to will become the norm; consumers' expectations in this regard will increase which in turn highlights the dependency that we will have on the technology working, being available and being fit for purpose.
Key legal considerations
From a legal perspective, it is crucial to pay attention to contractual provisions when negotiating contracts with third party technology service providers and FinTechs. Contractual provisions will need to be robust and drafted to cater for such dependencies including:
Appropriate service levels and performance obligations and liability The willingness of suppliers to commit to performance assurances is likely to depend on their risk/reward profile with the allocation of risk between the parties needing to be balanced appropriately. Suppliers typically prefer to provide the technology on an "as is" basis, with a limited availability service level, excluding warranties regarding performance of the services and limiting their liability. This is unlikely to be acceptable to financial institutions however. Stronger commitments and remedies for suspension or failure of the service will be required as the risk to financial institutions of systemic issues with banking-related infrastructure and services could be material from a financial and reputational perspective. Top priority risk areas for financial institutions include security and confidentiality of data and, if trade-related infrastructure is used and trades settle incorrectly or not at all, the right to remedies will be paramount as will be a workable and clearly defined step-in and exit plans (see below).
Intellectual property (IP) Traditionally, financial institutions would expect any IP in software developed for them to be owned by them or in the alternative, to have equivalent rights in the form of a licence. FinTech providers on the other hand will no doubt want to capitalise from the commercial benefits generated from the technologies. With the creation of new technologies, shared ownership models can also be considered and may be appropriate in certain circumstances. Ahead of shared ownership models being agreed, specific rights with respect to IP still need to be worked through on a case-by-case basis.
Step-in rights and exit plans To the extent that the services are performed at unacceptable levels, it is important to be clear on what rights financial institutions have to step-in for business continuity purposes (to the extent this is practicable). In addition and most importantly, exit plans need to ensure that the transfer back to the financial institution or a replacement supplier of the data, assets and/or people happens in an orderly, timely and agreed manner.
Compliance with financial services regulation As financial institutions are governed by their local regulators, the contract must contain provisions which allow the relevant financial institution to be compliant with the standards imposed on them. This includes, for example, the right to audit or request records from the supplier either on its behalf or on behalf of the regulator, the right to exert control over the supplier and the right to achieve operational continuity.
There is no denying that FinTech in the region is rapidly emerging, and with it the associated legal issues. It is important to remember however that the contractual provisions are not too dissimilar to what we would typically see in software licence and development agreements. There are a number of risk-based issues that will need to be carefully considered when entering into relationships with FinTechs however these are exciting times, not only from a technology perspective but a legal perspective. As an industry, we need to ensure that innovation is encouraged and through experience and time, we form a legal and regulatory framework that helps financial institutions and FinTechs understand the acceptable perimeters in which to operate.