Biggest Challenges and Opportunities for Saudi Fintechs in 2022
Boosted by the Saudi Vision 2030, the financial services sector is being disrupted at an accelerated rate thanks to the rise of Fintech startups across many verticals.
As of 2021; the number of fintechs active in Saudi Arabia continues to grow. According to the Fintech Saudi Annual Report 2021 has seen a 37% increase in the number of active fintechs from the last year.
Talent and Recruitment
Recruiting digital talent to design, develop, and enhance digital financial services requires relevant expertise, background, skill, and, of course a deep understanding of the customer needs.
The Fintech Saudi annual report highlights this quite clearly as 38% - 40% of fintechs in Saudi Arabia consider talent and recruitment to be their biggest blocker when it comes to accelerating the pace of their growth.
Finding the proper expertise was cited as one of the primary barriers to recruiting personnel by 88% of the financial services companies polled by Fintech Saudi.
Recruiting such talent can be quite expensive due to their scarcity in Saudi Arabia - which led fintechs to acquire talent from abroad in popular IT outsourcing countries such as Jordan, but outsourcing presents a host of new challenges as well for the unprepared.
However, the financial services industry is changing at an alarming rate, which means that talent requirements can suddenly change as well, halting the smooth flow of software delivery. Which brings us to...
Technology and Product Development
To thrive in an increasingly competitive and digital economy; financial institutions need to design, develop, and deliver innovative digital financial products, services, and experiences to customers that seek convenience and security above all.
Historically, the necessary skills were mostly in the financial services field (finance, accounting, risk, compliance, and so on). The increased usage of technology in financial services has altered the dynamics of the industry's essential abilities.
So, what are the key technical and soft skills identified for the transforming financial services industry in Saudi Arabia?
Blockchain, robots, and artificial intelligence are all maturing technologies that will see fast growth in their usage in financial services in the next few years. The increased usage of such technology in financial services necessitates a larger demand for technical personnel capable of evaluating, implementing, and monitoring the use of such technologies. This includes the requirement for skill in:
- Infrastructure Specialists: Cloud computing, APIs, Distributed Ledger, and Blockchain to name but a few.
- Risk Management: Network Security, Cybersecurity, and Compliance.
- Application Development: Data Science, Software Engineering, and User Experience (UX) Design.
Individuals with soft skills who can utilize technology to innovate and adapt swiftly to technological developments will also be required in the future of financial services:
- Emotional Intelligence (EI) and Communication: Collaboration, customer knowledge, and the ability to articulate complicated challenges and solutions are all required.
- Problem Solving and Creativity: Innovation, and the use of technology to address issues on a continuous basis.
- Flexibility and Industry Adaptability: A strategic requirement for continuous digital business growth is the capacity and capability for ongoing learning.
Fintech startups and financial institutions must be capable of being flexible enough to adapt quickly to the disruption and emerging technologies. This is where engagement models such as Managed Teams and IT Staff Augmentation have become strategic capabilities.
Compliance with Regulations
In Saudi Arabia, a number of legislative and infrastructure changes have also occurred, including the publication of new fintech activity legislation, the introduction of SARIE, the Instant Payment System, and the permission by the Council of Ministers to license two local digital banks: STC Bank and Saudi Digital Bank.
The introduction of laws covering a variety of various fintech activities, as well as SAMA's Regulatory Sandbox and CMA's FinTech Lab, has given the investment community the confidence and certainty to devote more capital to fintech startups.
The Kingdom's venture capital liquidity has expanded as a result of government measures such as the relaxation of foreign direct investment laws and the establishment of the Saudi Venture Capital Company and the Jada Fund of Funds.
However, navigating and compliance with regulations is a global challenge for both fintech startups and traditional financial institutions alike - as the fast rate of technological development is putting regulation to the test, especially given the multi-year gestation periods for public policy, legislation, and regulations in most major markets.
Top management and leadership at financial institutions have regularly expressed a wish for regulation to be more fluid and dynamic, supporting the concept of a shift from regulation to supervision. That is, rules that are principle-based and technology-neutral in a way that can be stable and long-lasting, while simultaneously being supplemented by a greater emphasis on oversight and recommendations.
The impact of obsolete regulatory standards can further be worsened by the fact that FIs are subject to a separate set of regulations and supervision than start-ups and FinTechs. FIs are governed using an entity-based approach rather than (or sometimes in addition to) an activity-based set of standards, despite the fact that the financial services value chain is quickly disaggregating and repackaging.
Learn more about the challenges facing financial service digital transformation here.
Access to Customers
Gaining access to customers and conducting customer testing is challenging, embracing Open Banking in Saudi Arabia will lead to certain benefits that address key obstacles like financial literacy and inclusion.
Key benefits of Open Banking include:
Open Banking will allow financial institutions and fintech startups to compete in their efforts to design and tailor personalized experiences for their customers at more competitive prices - ultimately leading to a higher level of customer satisfaction.
A robust and competitive financial market in Saudi Arabia will force financial institutions and service providers to develop new products and services - enhancing the value proposition of financial institutions and service providers in the industry, which in turn will help create new revenue streams.
Open banking will mean that a wider audience of the general public will have access to credit which will also contribute towards the improvement of financial health and awareness in Saudi Arabia.
Efficient Banking System
SAMA’s analysis concluded that embracing Open Banking will transform the banking system in Saudi Arabia as financial institutions and fintechs can collaborate and build partnerships easily and as such more customers can instantly share their bank data with 3rd parties securely.
During 2021, the Saudi Central Bank (SAMA) has analyzed, designed and implemented their plans for Open Banking in the kingdom and plan to go live in 2022.
Saudi Fintech Funding
Despite unprecedented levels of fintech investment in Saudi Arabia, the median deal size in 2021 is $2.7 million, compared to the global median deal size of $7.3 million. This suggests that there is still tremendous space for expansion in the size of fundraising rounds for Saudi fintech startups. The median deal size is projected to rise as fintechs flourish and raise larger rounds.
The Saudi fintech industry has had various liquidity events, most notably the sale of 15% of STC Pay to Western Union for $200 million in 2020 and the $267 million acquisition of payments platform Geidea by Gulf Capital in 2019.
As more fintech businesses grow and garner larger investments, more investors and founders will be able to sell shares and obtain liquidity.
The openness of the Saudi capital market to technology-focused enterprises raises the likelihood of fintech companies conducting Initial Public Offerings (IPOs), which is expected to boost the expansion of liquidity events. As has been demonstrated in other countries, this will allow successfully departed entrepreneurs and investors to reinvest funds back into Saudi fintech startups.
Going Forward: Fintech Investment Opportunities in Saudi Arabia
Aside from payments, 2021 has witnessed an increase in loan investment.
This includes Series A investments in Forus, an Islamic debt marketplace, Lendo, an invoice financing provider ($7.2 million), and Raqamyah, a crowdlending platform ($2.3 million). Early stage investment has also been made in other fintechs, including pre-seed investments in accounting software VoM ($0.7m) and personal financial management solution Wafeer, as well as seed investments in savings platform Hakbah ($1.2m). These investments show a developing fintech industry, which will create investment possibilities in a wide range of fintech sub-sectors in the future.
The implementation of Open Banking in Saudi Arabia beginning in 2022 is also projected to accelerate the development of the next wave of fintech activity and boost the growth of fintech activity in areas such as Open Banking APIs and embedded finance.
Our team at Sitech is proud of our ongoing collaboration with leading IT solutions provider Saudi Azm. Our partnership has contributed towards the progress of Vision 2030 when it comes to delivering innovative digital transformation products and services on a national scale with Saudi's banks and ministries.
Sitech enabled numerous fintech startups such as Kema and Sanaam to deliver innovative digital products and services faster at managed cost - with no disruption to their software development lifecycle thanks to our agile Software Managed Teams model of software delivery.
If you are looking to accelerate the pace of your digital transformation and business growth - we can help you deliver real results.