The United Arab Emirates' supportive regulation, buoyant domestic economy and consumer appetite for more sophisticated financial services are spurring the growth of the fintech sector.

The nation's economy is on track to continue its strong momentum from 2023, even though risks remain around the ongoing Israel-Hamas war, according to an S&P Global Market Intelligence report. The UAE's open banking shared data framework will soon become fully operational, and customers are keen to use tech for services such as stock market investment.

Against this backdrop, UAE-based financial technology companies raised $128.4 million in funding last year, bringing the total since 2021 to $567.8 million, Market Intelligence data shows.

These new companies join a financial services sector dominated by First Abu Dhabi Bank PJSC, Emirates NBD Bank PJSC and Abu Dhabi Commercial Bank PJSC. Most disruption to conventional financial services has been related to consumer banking.

"It's the biggest part of most banks' operations and each individual customer requires several different services — they want to borrow, make transfers and payments, settle bills and so on," said Asad Ahmed, managing director at Alvarez & Marsal in Dubai.

This leaves many entry points for fintech companies, which take a specialist approach to the consumer rather than a universal one.

"First it was remittances and then transfers; banks face a lot of competitive pressure in payments," Ahmed said. "Next it might be micro-loans and loans, trade finance and mortgages ... Almost all parts of the value banking chain have specialized fintechs innovating."

Funding rounds

Last year's biggest UAE fintech investments included a $25 million seed round for payments startup Fast Technology Services FZCo., according to Market Intelligence data. Digital lender Flow48 and AI-based wealth management company Kairoswealth also raised $25 million each, and digital wallet company myZoi Financial Inclusion Technologies LLC raised $14 million.

"UAE fintech is in its infancy — there's still a lot more interconnectivity to come," said Mark Chahwan, CEO and co-founder of Abu Dhabi-based Sarwa Digital Wealth (Capital) Ltd., the investors of which include Abu Dhabi state-owned funds Mubadala Investment Co. PJSC and ADQ.

Sarwa customers can invest in mutual funds, trade individual stocks, exchange-traded funds and cryptocurrencies, and earn interest on cash deposits.

"There has been a lot of government investment into getting banks to a certain level of infrastructure compatibility that will enable fintechs like us to perform money transfers more easily," said Chahwan. "Instead of taking days, [they] should take seconds."

Supportive regulation

So-called regulatory sandboxes enable companies to live-test new products and services, while other regulatory reforms have supported intellectual property rights and clarified consumer and data protection laws, law firm White & Case wrote in a March 2023 note. It also highlighted reforms to the UAE's foreign ownership, social and immigration laws that have served to encourage tech entrepreneurs to move there.

Generally, the UAE regulatory environment has been very conducive to supporting fintech, at a time when Gulf nations are competing against each other to attract fintech talent, according to Rahul Bajaj, director of MENA equity research at Citi in Dubai.

Upcoming changes to the UAE's open banking framework — whereby fintechs can more easily access bank customers' data — may push things further forward.

At the moment some banks seem reluctant to open up their architecture, which would make it easier for customers to move money around, according to Chahwan. For example, today you still must log into your bank app and go through multiple steps to send money.

But those requirements will cease this year once open banking goes from pilot to fully operational, and that will make it easier for the likes of Sarwa to acquire new customers, he said.

In the UAE, the central bank regulates financial services, while the Securities and Commodities Authority regulates capital markets. Both Abu Dhabi and Dubai have offshore financial centers that fall under the auspices of their own regulators, and Dubai has also launched a Virtual Assets Regulatory Authority to govern companies involved with cryptocurrencies and non-fungible tokens.

Healthy competition

The population is expected to swell: Dubai aims to more than double its population to 7.8 million by 2040. The buoyant economy will lead to more activity in financial services and open the way for more products for the incoming population, said Bajaj.

The market growth suggests there is enough space for banks to coexist with fintechs, and lenders are not especially worried by the competitive threat, Bajaj said. Some banks have struck partnerships with fintechs and may opt to make domestic acquisitions in the future, he said. Major foreign investors in UAE banks include Vanguard Group Inc., Columbia Management Investment Advisers LLC, Amundi Asset Management SAS and Kuwait Finance House KSCP.

Some banks have developed offerings similar to Sarwa's, such as equity fund investing. According to Chahwan, they have historically considered that such services would not work in the UAE, due to an assumption that ordinary people do not want to invest in stocks, and so have tended to focus on ultra-high net worth customers.

Emirates NBD's retail banking and wealth management division's assets under management grew 28% in the first nine months of 2023, which the bank attributed to expanding its digital wealth platform. Customers can now trade more than 11,000 equities worldwide and about 232 mutual funds could be bought and sold instantly on the platform.

Banks might also benefit from the central bank in December tightening rules related to buy-now, pay-later (BNPL) services. Companies providing short-term credits must be licensed. Those that lack a licence may partner with a licensed finance company or bank.

The UAE's largest bank, First Abu Dhabi, launched BNPL services in 2020 via a partnership with UAE fintech Tabby.

First Abu Dhabi, Emirates NBD and Abu Dhabi Commercial Bank all declined to comment to Market Intelligence.