Rayan is an Investment Partner at Outliers Venture Capital. Prior to joining Outliers, he was a Senior Manager on the Corporate Development team at Careem which was responsible for closing the Uber acquisition of Careem as well as the former Assistant General Manager of the UAE. Rayan holds an MBA from INSEAD and a BBA and BA from the University of Massachusetts. In his free time, he is an avid photographer.
Connect with and message Rayan Dawud on his MAGNiTT profile
We’re just over two weeks into 2021 and ‘FinTech’ is already the buzzword of the year for the MENA tech ecosystem. While the region is no stranger to the sector, we’ve seen breakout players emerge over the past two years in Buy Now, Pay Later, payments, wealth management, and real estate to name a few. Unfortunately, the growth of local FinTech has been limited due to the absence of open banking regulatory frameworks, resulting in missed opportunities for startups, banks, consumers, and broader tech ecosystems. However, we’ve reached a tipping point with Saudi Arabia leading the way as it uses FinTech regulation to position itself for leadership over the MENA tech ecosystem.
What is Open Banking?
The term ‘open banking’ requires some explanation: it’s an initiative that allows for the secure transmission of account data (authorized by the customer) to a third-party service provider. In other words: banks are granting access to customer data for FinTechs and building out their own technical infrastructure to support this. Have you ever imported your credit card spending data into Mint.com? Open banking. Are you planning to link your Robinhood or Transferwise accounts to your bank? Also, open banking. Use cases extend to Financial Institutions (FIs) and their younger FinTech siblings across the UK, US, Europe, and SEA.
FIs have been sharing customers’ data with third parties for well over a decade and with regulators for even longer. Naturally, with the sharing of consumer data, data privacy and security are top of mind for financial regulators. We’ve seen an evolution globally over the past five years in how various global markets have approached the implementation of open banking frameworks:
United Kingdom - August 2016: The Competition and Markets Authority (CMA) issued a ruling ordering the nine biggest UK banks to allow licensed startups direct access to their data.
Singapore - November 2016: The Monetary Authority of Singapore (MAS), in collaboration with the Association of Banks in Singapore (ABS), published the Finance-as-a-Service: API Playbook.
European Union - January 2018: The European Commission issued the Payment Services Directive 2 (PSD2) which mandated that 1) FIs provide third-party service providers (TPP) access to customer data via open APIs; and 2) FIs and their TPPs implement related data security controls.
Hong Kong - January 2018: The Hong Kong Monetary Authority published its Open API Framework.
Bahrain - October 2020: The Central Bank of Bahrain (CBB) launched the Bahrain Open Banking Framework.
There’s one market which, at first glance, appears to be missing above: The United States. No, it’s not an oversight; to-date the US has not formally issued a regulatory framework for open banking for a number of reasons. In lieu of such regulation, US Regulators have issued non-binding guidelines, but FIs have taken it upon themselves to proactively engage in data-sharing with FinTechs to offer their customers new products and services.
Middle East regulators
Although other markets moved earlier, the Middle East regulators are catching-up. Last week, The Saudi Central Bank (SAMA) published its Open Banking Policy document and a timeline to its full launch, committing to go live in the first half of 2021.
While not a complete regulatory framework, and not the first of the region, this step is significant. As the largest market in the region (with a population of 24M under the age of 30), the Kingdom has put its progressive outlook towards FinTech on display and joined its global counterparts in supporting competition in the Financial Services sector; a step that protects both consumers and the future of the country’s FIs. Gone are the days where the UAE and even Bahrain were the only viable markets for FinTech founders to consider for their headquarters; Saudi Arabia is poised to break away as a leader and its smaller neighbors are sure to follow.
What does this mean for the region?
At the highest level, this is reflective of the country’s commitment and investment in its transition to a knowledge-based economy. Saudi Arabia has seen a 55% YoY increase in direct venture funding in its ecosystem; this does not include investments by local fund of funds like Jada and Saudi Venture Capital Company. However, venture dollars require time to build ecosystems; one way to optimize the process is to provide companies a supportive regulatory environment and while offering access to the largest MENA market (in terms of GDP).
To grow the ecosystem as a whole, it’s wise to begin by laying the foundation for startups in a high-growth, high-impact sector such as FinTech. According to the same MAGNiTT report cited above, FinTech investment was up 19% YoY in 2020 and is the third most funded sector regionally; all of this is with very limited licensing activity. Looking more broadly at the opportunity, the region is flush with banking and capital markets talent and financial services have remained more or less undisrupted since the establishment of the large regional banks. The growth of young, mobile populations has resulted in pent-up demand for payments, neo-banking products, and digital brokerage services to name a few. After patiently watching their neighbors in the UAE, Egypt, and Bahrain host FinTech success stories such as Fawry, Sarwa, BitOasis, and tabby, Saudi Arabia has responded with more progressive regulation and their own up-and-coming FinTech superstar: Lean Technologies. Based in Riyadh, Lean is the region’s leading open banking platform.
A counter-argument to this might be that other governments are soon to follow the Kingdom’s lead to level the playing field and retain their positions in the regional ecosystem. While this is plausible in theory, regulation takes time and no matter how quickly they launch regulatory frameworks, other governments will not be able to offer access to a (more) homogenous market of 35M people.
There’s still a considerable amount of work to be done. The Saudi regulatory framework must be put in place and regional banks must begin engaging with players like Lean to understand technical best practices of open banking employed globally. However, by accelerating the development of an open banking regulatory framework and coupling this with investments in ecosystem stakeholders, the Kingdom is signaling to the regional FinTech and broader tech ecosystems that they are open for business. Add to the mix the seemingly weekly announcement of social and economic reforms in the Kingdom, and Riyadh is starting to look like the Miami of the MENA tech ecosystem.
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