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UAE experts warn investors about ‘under-regulated fintech’

Abu Dhabi Global Market’s Financial Services Regulatory Authority fined local subsidiary of fintech firm Wise $360,000 for breaching anti-money laundering requirements
  • Investing in fintech rose 249 percent year-on-year to $243m in H1
  • Convenience useful but money security bigger consideration

Financial technology (fintech) startups have been big business for investors and consumers in the UAE, but experts have raised concerns about whether they are under-regulated.

Fintech startup funding saw steep growth in the UAE in the first half of this year, accounting for a third of all deals, well above the Middle East and North Africa (MENA) average of 22 percent.

The UAE Venture Investment Report, by research firm Magnitt, states that, in terms of actual dollars, the amount of funding invested in the sector rose 249 percent year-on-year to $243 million in the first six months of this year.

The two biggest investments over the period included $54m for buy-now-pay-later platform Tabby and $50m for trading app Wahed. These investments attracted big players, such as Wa’ed, Saudi Aramco’s venture capital arm, and Abu Dhabi sovereign wealth fund Mubadala Investment Capital.

“The past few years have seen a rise in individuals taking ownership of their own finances or trying to find alternative ways to generate more wealth. With this, a huge amount of startups have entered the fintech industry that are often not regulated,” said Dubai-based Rupert J Connor, partner at Abacus Financial Consultants.

“We have seen huge amounts of funding being generated by the startups, which looks to give these companies credit or great PR, but the question will always be there… do we trust these platforms?

“We now have influencers, digital targeted ads and the media pushing many platforms, but individuals must do their own due diligence and do relevant checks. At the end of the day, anywhere you are sending your money needs to be trusted.”

Top industries by total funding (top) and by number of deals (bottom) in the UAE in H1 2022, according to Magnitt’s UAE Venture Investment Report

Trust issues

Regulation and trust have certainly become a concern. Abu Dhabi Global Market’s Financial Services Regulatory Authority (FSRA) announced this week it had fined the local subsidiary of London-based fintech firm Wise $360,000 for breaching anti-money laundering (AML) requirements.

The FSRA said it “found that Wise did not establish and maintain adequate AML systems and controls to ensure full compliance with its AML obligations”.

Wise said in response to a Reuters query that it takes its responsibility to protect its customers and prevent money laundering “very seriously”, and that neither the FSRA nor the company had identified instances of money laundering or other financial crimes.

“We have seen far too many companies fined for failing to properly comply with financial regulations, specifically anti-money laundering regulations,” said Keren Bobker, a Dubai-based independent financial advisor and senior partner at Holborn Assets, told AGBI.

“The safeguarding of customer money is a very important issue and I suspect that some of the problems is that many of the people behind fintech setups have never worked in traditional financial services, so don’t have in-depth knowledge of these matters, or are not aware of how seriously they are taken, quite rightly.”

Surge in downloads and payments

Despite reputational issues, usage of fintech apps in the UAE has risen in line with the investment.

San Francisco-headquartered digital advertising services firm AppsFlyer found that the number of mobile apps downloaded in the UAE in the first half of 2022 rose 22 percent, with fintech apps the most popular, with downloads rising 183 percent year-on-year.

The research also found that between March 2021 and February 2022, in-app purchases increased by an average of nine percent across the UAE, but in fintech apps this was up 277 percent year-on-year, compared to 41 percent for ecommerce apps.

While UAE consumers have embraced fintech apps, advisors have urged caution.

Bobker said: “We have seen an increase in fintech companies, but it is still early days, and they are not the answer to everything. For many, this is just another money-making bandwagon and while it can be tempting to use an app on your phone for apparent convenience, this is not the best way to handle all transactions.”

“While convenience is obviously useful, proper safeguards and your money being secure should be bigger considerations. Many fintech companies sell themselves on cost but, as with anything in life, price isn’t everything and you will often get what you pay for,” she added.

“Technology has made many transactions cheaper but cutting corners can be about the company saving, or making, money, and not always for the benefit of the customer.”

Personal touch

Connor also advocated that fintech apps can never replace the benefit of expert advice and a personalised approach.

“With savings apps and investment apps, individuals might think they have become their own financial adviser, but actual professionals have years and years of experience in the ups, downs, peaks and troughs of the financial markets,” he said. 

“There was a recent trend in many people investing in crypto and then losing a huge amount of wealth. In any savings strategy there must be diversification and only money that can be lost should be allocated to riskier assets.”

Remo Giovanni Abbondandolo, senior vice president for the MENA at global payments processing conglomerate Checkout.com, told AGBI that consolidation in the sector was fast approaching.

“In my opinion, if you’re a fintech, and you’re not profitable, it’s a challenging time at the moment,” he said.

“It’s also time to reflect and look at what’s really important as to the fundamentals of the company.” 

The MENA payments market has grown rapidly over the past decade, to include global fintechs and tech companies, alongside incumbent banks.

Local and global giants like Network International, Stripe, Rapyd, Amazon Payment Services, Hyperpay and many others, are part of the same online battlefield.

The Middle East and Africa online payment gateway market was estimated at $3 billion in 2020 and is expected to reach $21bn by 2028.

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