Chris Hafner of Grovelands on the Middle Eastern promise for fintechs
Chris Hafner is the executive director of professional services firm, Grovelands. Here he speaks on the opportunities available to the fintech industry across the Middle East and Africa reigon.
Fintech’s ability to reach the unbanked and reduce cash transactions, alongside appropriate government and policy changes, hold great promise for the emerging markets in the Middle East and Africa.
Financial technology in the shape of digital banks are at the ready to deliver services on digital platforms in markets with high mobile penetration rates, with some at more than 100%. Enter these perfect marketplaces in the Middle East and North Africa (MENA).
Digital banks focus on digitisation of financial transactions by delivering basic banking services at the lowest possible costs. Whilst this is not a primary focus for fintechs, the unintended consequence of digitisation of financial transactions is demonetisation.
In the developed world, some digital banks such as the app-only Starling Bank in the United Kingdom, have struck partnerships with the Post Office so as not to leave out the ‘cash society’, yet in India, which is one of the world’s largest emerging markets, demonetisation has been a large part of the government’s anti-corruption strategy for a few years now.
Indeed, a fundamental transformative ingredient for fintech’s prosperity in the MENA region is anti-corruption.
For example, despite Egypt having the highest population in the Arab world, only one third have a bank account. The nation also scored 35 out of 100 on the Corruption Perceptions Index (CPI) issued annually by the Berlin-based Transparency International. While the World Bank Financial Inclusion Index may show high levels for some Middle East countries, this excludes the high levels of immigrant labourers who do not have access to these services.
India’s Prime Minister Narendra Modi used a demonetisation strategy to reduce the country’s corruption to advance its economic prospects, but countries in the MENA region could more positively focus on financial inclusion through supporting policy and investment in fintech start-ups. Financial Inclusion is another fundamental and transformative ingredient in the recipe for improved socio-economic outcomes, entrepreneurship and rates of innovation in emerging and evolving markets.
In the last year, Dubai announced a plan to triple its financial hub in an attempt to attract Fintech entrepreneurs to the region as it strives to be the financial centre of the region through the Dubai International Financial Centre, which opened in 2004.
Given the recent and unprecedented mergers and acquisitions (M&A) activity in banking in the region (coupled with the fact that there remains few and far between really experienced players in the Middle East M&A marketplace) the incumbents will require significant help, investment and focus on transaction support and post-merger integration. This will ultimately create an opportunity for fintech start-ups to focus on the unbanked and unmet customer needs while the incumbents focus on transaction execution and integration. There is a unique opportunity here for successful fintechs and for me, this mirrors the opportunities created when M-Pesa was first launched by the Kenyan mobile network operator Safaricom in March2007. M-Pesa quickly captured a significant market share for cash transfers, and grew to 17 million subscribers by December 2011 in Kenya alone.
The broader technology ecosystem holds the promise of being truly transformative. Beyond the impact of digital payments and associated demonetisation, true transformation will come from the broader ecosystem which includes telecom providers, governments and artificial intelligence technologies.
Digital identity initiatives in Uganda and Kenya are examples where micro-lenders can gain some assurance of repayment. Similar to wage garnishment in developed economies, those with outstanding payments due from a microloan can have a portion of their mobile top-up redirected to the lending party by the telecom operator. These types of assurances or guarantees will help create greater confidence in microloan lenders and continue to support entrepreneurial efforts in the region.
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Artificial intelligence is another area where financial services can be expanded in the region.
According to World Bank Group’s 2018 Data Book on Financial Inclusion, 39.9% of the population in the MENA region live in rural areas.
Using technology to improve data collection and machine learning algorithms to make credit decisions, we can expedite the lending process, better manage risk and lower lending costs. This is a must, especially given the smaller size of the loans against the current cost to service such small loans. Using computer vision technologies, asset backed loans can be processed faster and at a lower cost. Take a picture of your motorbike against which you want to borrow and the algorithms determines its potential value, combined with a digital identity and fintech, loans are almost instant.
The fintech opportunity for growth extends beyond the MENA region. Given the expanding Islamic population in developed markets such as Australia and the United Kingdom, there exists an opportunity for an all-digital, app only Shari'ah-compliant offering.
Therefore, MENA-focused fintechs would do well to consider expanding outside the region as they have the intelligence, education and expertise to service the need.
FIVE things fintechs must do to keep investors onboard
New investors flocked to the stock market during the COVID-19 pandemic. Thirty-eight percent of investors said they had never had a brokerage or similar account before opening one in 2020.
Low or no-fee trading options have helped accelerate the trend – nearly half of new investors said they accessed their account primarily through a mobile app. As FinTechs, how do we create the trust needed to keep new investors in the market and create a fruitful customer experience for them?
The financial industry does a disservice to individual investors if we merely offer tools that focus on making money quickly, an approach that usually backfires. Instead, the surge of interest presents an enormous opportunity for those who want to help more consumers use financial technology to educate them on responsible spending, saving, and investing in order to achieve financial wellness current fintech tools have welcomed individual investors in the door.
Now, it’s time to focus on education and improving their experience going forward. There are several ways those of us in fintech can step up to shape the future of retail investing so that it works better for everyone, starting with the following areas.
Equal access to financial wellness education
Financial health should be available to everyone — but today, not everyone has the educational resources to achieve it. One study shows that only 3.9% of students from low-income schools were required to take a personal finance class. What they aren’t learning in school or from family members, fintech companies can provide on their platforms.
The companies should move from solely offering financial services to a more responsible model of education, advice, and prescriptive choices to help consumers develop better habits and make wiser financial decisions. Not only can they empower consumers and bridge historical wealth divides, but they can also stimulate growth by opening up new consumer segments.
Just as we’ve come to expect that our fitness routines are tailored to our individual bodies, we’re also ready for finance tools that go beyond one-size-fits-all solutions. But only six percent of financial institutions say they’re using the kind of technology that allows them to deliver a deeply personalized experience. Fintech tools need to reflect that financial success looks different for each of us.
For one consumer, it may mean providing guidance on how to pay off student loans early; for another, it may mean prescriptive actions that enable them to stick to a budget for the first time; for a third, it could look like prioritizing environmental, social and governance (ESG) investments, so that her portfolio aligns with her political beliefs.
Now, we are seeing financial technology beginning to meet the demands of personalized finance in a substantial and meaningful way.
The rise of AI-Powered Advice
Big-picture advice and predictive guidance used to be a feature of high-end financial advisory firms — a perk only available to those who could afford it. But thanks to rapid advancements in data analytics and artificial intelligence (AI), that kind of holistic advice is now more accessible than ever. AI-driven robo-advisors can parse many different streams of financial information, delivering customized answers to key questions: Is it time to buy a home, or is it smarter to keep renting? Can I afford to take out another student loan?
Intelligent connectivity powered by AI can anticipate consumers’ needs and next steps, making proactive suggestions that guide them along the path to financial wellbeing. Fintech companies can also help consumers identify when their financial picture becomes too complex for a robo-advisor, and help them find a human financial advisor to meet their needs.
Focus on financial mental health
New investors are quickly finding that the market can be overwhelming. That’s not surprising, financial anxiety is common and studies show that financial stress can have an impact on mental health for some.
It’s not enough for fintech companies to give retail investors access; they also must provide the guidance and support that help consumers manage their financial well-being. Educational tools can ensure that consumers are well informed about their options.
Predictive analytics can anticipate consumers’ questions, serving them key information and insights before they ask. Features that emphasize a comprehensive notion of financial well-being, rather than short-term wins and losses, can also help ensure that consumers are keeping their eyes on the bigger picture.
Gamification for good
The surge of gamification apps has done an impressive job making investing as engaging as playing a video game or joining a social media platform.
Much of the current use of gamification emphasizes short-term thinking, but there’s also an opportunity to help consumers think more broadly about their overall financial picture. One example is peer benchmarking, a feature that enables help consumers to see how their financial habits compare to those of friends and fellow consumers.
Gamification can also be used to incentivize making smaller, smarter choices — for example, rewarding saving over making an impulse buy.
The future of fintech is about more than just broadening access to the markets. It’s about making sure more individuals have access to the tools that can help improve their financial well-being—in the ways that suit their own circumstances and needs. The potential to act within their own set of individual priorities, with their long-term financial wellness in mind is much more empowering to a consumer than simply relying on short-term, high-risk investments.