When Tamara announced it had raised $110 million for its Series A back in April, it sent a wave of awe across the region. Not only was this the highest Series A round raised by a startup in the Middle East and North Africa (Mena), it was also the largest investment ever raised by a Saudi startup. The buy now pay later (BNPL) startup had, within the space of a few months since launch, attracted the ecosystem’s attention to Saudi Arabia and its vast financial technology (fintech) opportunity. 

Once a slow-moving ecosystem, Saudi Arabia has burgeoned into a dynamic landscape for entrepreneurs, offering them greater access to funding and friendlier regulations. The fintech sector, in particular, has grown from just 10 startups registered under the Fintech Saudi initiative in 2018, to a total of 155 in 2020. From January to May this year, fintech startups based in Saudi Arabia raised almost $130 million, a whopping jump compared to the $23 million raised by the sector from 2015-2020.

“I am sensing a huge appetite from all participants in the ecosystem to improve the circumstances of establishing strong startups on Saudi soil, which has led to heavy investments to pour into the Saudi market, especially in the fintech space,” says Abdulmajeed Alsukhan, co-founder and CEO of Tamara. He adds that part of this growth is attributable to the pandemic and the subsequent growth of online shopping in the country, when consumers were forced to pay online, instead of relying on cash on delivery (COD), which the Saudi Central Bank swiftly banned out of fear of spreading Covid-19. 

Government attention and support for the fintech sector has grown across Mena. Fintech has become part of the critical infrastructure for the development of a digital economy, and in a part of the world where almost half of the population do not have a bank account, fintech is seen as a panacea for financial inclusion. Government regulations however, vary from country to country.

Bahrain is widely acknowledged for having the most fintech-friendly regulations, Egypt has some of Mena’s most sophisticated fintech startups and while the majority of the financial startups in the region are based in the UAE, Saudi Arabia is increasingly making attempts to become the fintech frontrunner in Mena.

The Fintech Saudi initiative, launched in 2018 by the Saudi Central Bank previously known as the Saudi Arabian Monetary Authority (SAMA), in partnership with the Capital Markets Authority (CMA) has played a pivotal role in this leap forward. The initiative is tasked with “transforming Saudi Arabia into an innovative fintech hub with a thriving and responsible fintech ecosystem” according to its website. As part of its mandate, Fintech Saudi facilitates the licensing process for startups, it connects entrepreneurs with investors, service providers and banks and has an accelerator programme run by Flat6Labs.  

“Decision-makers in Saudi Arabia are aware of the challenges facing the sector to grow and serve the Kingdom’s 2030 Vision,” says Nejoud Al Mulaik, director of Fintech Saudi. "The regulatory framework of the fintech ecosystem is continually developing as a result of testing certain activities within the regulatory testing environments, which the regulators use to amend or develop new regulations."

There are currently two regulatory testing bodies in Saudi, the FinTech Lab launched in 2017 by the CMA to design, develop and promote fintech regulation and the SAMA Regulatory Sandbox which was launched in 2019 to provide startups with the platform to test their products, services and business models.

“The sandbox period was a trial period for us, for the regulator, and for everyone in the market,” says Maher Loubieh, the chief strategy officer at Riyadh-based Hala, which offers payment solutions for merchants. Hala was one of the first fintech startups to obtain the full SAMA licence in 2020 and is also a Wamda portfolio company.

“It was a learning experience and the nice thing about the regulator is that they really open the door for us to think with them and to propose to them any new idea that we have. It was an open channel of discussion throughout the sandbox period and it stayed this way until the regulations came out,” he adds.

Loubieh says the regulatory frameworks in Saudi are among the best in the region, due to the flexibility and freedom they have given startups.

“They [the regulations] are not bank-led, they are more fintech-led, which means that fintechs can operate in isolation from banks, so they don’t need to be partnered with banks, they can really operate freely. That’s a major move that doesn’t happen with a lot of regulators around the region,” he says.

Open banking, the catalyst for fintech innovation

This fintech-led approach was highlighted when SAMA announced at the beginning of this year, its intention to launch an open banking regulatory framework in the kingdom. Open banking demands greater financial transparency from incumbent banks and other traditional financial service providers. By sharing and enabling access to their data, it allows third-party providers to build financial applications and services like neobanks, for their customers.

Globally, open banking has progressed in two ways: regulators forcing traditional banks to embrace it and work with fintech startups as is the case in the European Union, or as we see in the US, incumbent banks opting to partner with open banking providers to keep pace with innovation.

While there are scattered initiatives across Mena to support fintechs in the open banking space, incumbent banks are largely hesitant to share their data. Open banking regulations in the region are therefore lacking, with the exception of Bahrain which launched an open banking framework back in November 2018, and now, Saudi Arabia.

In a policy paper, SAMA described open banking as playing a “pivotal role in the further development of the kingdom’s financial sector…[and] in this journey towards innovation and financial inclusion”.

“The open banking policy is a natural progression for any regulator who [is] really progressive and building regulations, because this is the door to open the market for innovation, and without that, you cannot really innovate in the fintech space,” says Loubieh. “This will allow everyone to access the data that is needed to innovate in many forms, whether in terms of credit scoring, managing different accounts, giving personal finance tools, so I think this is a major shift in the way that regulators think.”

For Alsukhan, open banking “is an essential part of industry development in the region”.

“It will upgrade the level of innovation and competition by using data that already exists to underwrite financial products at a lower cost targeting lower-income institutions and people,” he says.

Once open banking licences are established in Saudi Arabia, it could well be the game-changer the country needs to become the region's biggest fintech market. While Bahrain already offers the framework, its small population of just 1.6 million, renders it too small a market to make it lucrative. The Abu Dhabi Global Markets (ADGM) and Dubai International Financial Centre (DIFC) have also made clear their interest in open banking, but the country’s onshore versus offshore jurisdictions presents a hurdle for licensing.

Saudi Arabia on the other hand has one governing body for financial institutions which eases policy execution. The country is also the region’s behemoth and the market that almost every startup wants to access. With a population of 36 million, 70 per cent of whom are under the age of 35, an internet penetration rate of 95.7 per cent, and a gross domestic product (GDP) per capita of $23,000 according to the World Bank, Saudi offers startups the ability to scale and grow.

However, it is not without its challenges, especially in the fintech space.

Challenges

Saudi Arabia’s fintech landscape is still young and nascent. It does not have the deal flow we see in Egypt, the advantage of Bahrain’s long experience in financial markets, nor the pull of the UAE’s ecosystem, whose financial landscape is also further ahead in terms of crypto and blockchain regulations.

Talent is also a big issue. A report from Fintech Saudi shows that hiring qualified talent was the main obstacle for 40 per cent of fintech startups, followed by regulations at 37 per cent, then access to customers/customers testing at 28 per cent.

“There is a gap in Saudi Arabia, like most of the other countries in the region, between the education system and work requirements. Universities need to bridge this gap by preparing students for the labour market in different tech spaces,” says Loubieh, adding that he gives introductory lectures in universities to explain the fintech industry and motivate young students to take this path, as part of Hala’s community duty.

The country’s startup ecosystem is still young and attracting talent requires hefty salaries that most startups cannot afford. It still lags behind Dubai as a hub for global companies and talent, while processes tend to be more laborious and time-consuming. Riyadh and Jeddah both lack the quality of life that has proven to be so crucial for attracting talent and that is visible in the makeup of the fintech sector in the country. According to Al Mulaik, 80 per cent of the fintech startups operating in Saudi Arabia are headquartered in the kingdom and are founded primarily by Saudi entrepreneurs.

But, the government has made its intentions very clear – it wants a diversified economy where entrepreneurs, startups and innovators should be able to flourish. If it continues to progress in its current trajectory, Saudi Arabia certainly has the potential and capacity to become the region’s fintech frontrunner.  

“Saudi Arabia is the best market for fintech for many reasons, such as the spending capabilities of the population, the advancement of the financial sector, [and] the progression of the regulator,” says Loubieh.