Saudi Arabia is attempting to create a fintech ecosystem from the ground up with the active support of the government. Fintech innovation is part of Saudi Crown Prince Mohammed Bin Salman’s Saudi Vision 2030 to transform the Saudi economy away from its reliance on oil to a more technology driven modern economy. The government reinforced its plans by creating one of the world’s largest sovereign wealth funds, with an estimated asset size of $2 trillion. The fund will be deployed to transform the economy and create employment.

The Saudi government showed its clear intent to support fintech innovation by creating Fintech Saudi in 2018. Saudi Arabia has seen fintech innovation before, but typically fintech companies created in Saudi Arabia prefer to relocate elsewhere when they needed to scale. This tendency to relocate was driven by the lack of infrastructure, talent, and supporting regulations. Fintech Saudi’s motive is not only to ensure that more fintech startups are created in Saudi Arabia but also to ensure that they stay in Kingdom when they grow. Fintech Saudi was launched by the Saudi Arabian Monetary Authority (SAMA) under the Financial Services Development Programme. So, which are the forces behind the fintech innovation in Saudi Arabia? How does fintech innovation in Saudi Arabia differ from the UAE? What are the challenges and the prospects for fintech startups in Saudi Arabia and how do they fit into the Vision 2030 plan?

In a report published to mark one year of Fintech Saudi’s operations in April 2019, Nejod Al Mulaik, the director of Fintech Saudi notes the key milestones reached in the development of the fintech community. This include the launch of the fintech regulatory sandbox, the first Fintech Tour, and the release of the Fintech Access Guide. The April report by Fintech Saudi identifies 20 fintech startups in Saudi Arabia. As reported by International Finance in June, SAMA had licenced an additional 14 fintech startups in the middle of this year. 11 of the 20 Saudi fintech startups identified by Fintech Saudi in its April report are in the payments space. A majority of the 14 fintech startups licenced by SAMA in June were in the lending or payments spaces.

Tech entrepreneurship the cornerstone of Vision 2030
Entrepreneurship, especially involving technology, is a cornerstone of Vision 2030 and a critical lever for achieving goals such as finding new sources of economic growth and employment, according to Nawaf Al Sahhaf, the CEO of Badir Program, a tech incubator allied with the elite King Abdulaziz City for Science and Technology, which is actively nurturing Saudi startups including fintechs. “Over the last few years, the Saudi government has recognised the potential of entrepreneurs and invested heavily in creating a startup ecosystem by implementing large scale public programmes focusing on supporting startup technology companies,” Sahhaf told International Finance.

Ammar Bakheet is a leading Saudi entrepreneur and founding partner and CEO of Raqamyah platform, which was one of the Saudi companies to receive a fintech licence from SAMA early this year. “Saudi Arabia is pushing for fintech adoption by Saudi banks and financial institutions. The sandbox team are acting as enablers for new companies to come and offer fintech solutions to the market. I have to insist that this role of the Saudi government is very positive,” Bakheet told International Finance. Raqamyah is one of the fintech startups planning to operate in the peer-to-peer (P2P) lending space for SMEs.

A key motivation for innovators in the fintech space in Saudi Arabia is the government’s efforts to move toward a cashless economy. Bakheet told International Finance that Raqamyah platform is inspired by the fact that the government is very keen to encourage fintech startups to provide fintech solutions for underserved segments like SMEs as the government believes it is very important for the SMEs to play a bigger role in the economy. In fact, the Saudi Vision 2030 seeks to raise the contribution of SMEs to the GDP to 35 percent from 20 percent currently. It underscores SMEs and startups as an important pillar of the economy that will support innovation, create jobs, and drive exports.

Payments ripe for disruption
Typically, payments innovation is one of the first frontiers of fintech innovation in nascent fintech ecosystems globally. Islam Al Bayaa, head of advisory at KPMG Al Fozan and Partners, told International Finance that Saudi Arabia is also likely following the same model. “Although Saudi Arabia is probably not currently as developed as some of the recognised fintech centres, but given the young, tech-savvy population, there is potential for rapid development in the Kingdom. Globally we are seeing trends both where tech is migrating from initial payments offerings to other broader offerings and vice-versa from other offerings to include payments platforms. These trends are likely to emerge in Saudi Arabia also,” Islam Al Bayaa said.

The potential for payments disruption is immense in Saudi Arabia as currently less than 20 percent of the payments transactions are digital and given the government’s target of achieving 70 percent digital payments transactions by 2030. Network International is a fintech payments company that has been included in SAMA’s fintech regulatory sandbox this year. Samer Soliman, managing director of Network International for the Middle East, told International Finance, “The Kingdom of Saudi Arabia is one of the largest payments markets in the Middle East and Africa and we see great opportunities there over the medium term. Digital payments adoption is low at the moment, only around 15 percent of transactions, but the government has initiatives in place to drive this up to 70 percent by 2030. When you couple that with the largest GDP in the region and a large population under 25, you can see excellent potential in the Saudi market.”

Nawaf Al Sahhaf, the CEO of Badir Program also told International Finance that in fintech, payments innovation is a priority given the government’s goal for achieving a largely cashless society by 2030. The opportunities for fintech innovation in payments are also because of the legacy challenges in the banking system in Saudi Arabia. At present the majority of debit, prepaid, and acquirer processing is processed onshore by banks to meet regulatory requirements – in fact only credit cards can be processed out of the country. The banks use legacy infrastructure and, following the trend across the globe, many of them are keen to outsource this function to avoid major investment in upgrading their systems as they have to meet growing demand. This outsourcing trend will also help drive payments innovation in Saudi, as the banks increasingly look to fintech companies to acess sophisticated products, said Soliman.

Currently payments fintech startups in Saudi Arabia are looking for ways to disrupt existing payments services with their own propreitary technologies, given that a market of the size of Saudi Arabia which is heavily cash dependent is primed for disruption. “Looking at the banks, at the moment, 80 percent of all processing is insourced across the Middle East and Africa and that’s particularly true in Saudi Arabia. You will see the benefits of payments technology like Network International’s coming through as banks increasingly seek to outsource these functions, avoid the considerable capex involved in upgrading their own systems and benefit from the economies of scale that fintech companies like Network International can offer,” said Soliman. Alongside this trend on the merchant side, is the government’s plan to build out a digital payments economy and move two million SMEs into taking digital payments by 2030. “These two trends mean technological advancement across the Saudi payments ecosystem is inevitable,” added Soliman. One of the factors driving payments innovation in Saudi Arabia is the surge in ecommerce transactions. Rising ecommerce inevitably drives payments innovation in countries with low digital payments penetration and young populations like Saudi Arabia.

Fintech ecosystem relies on collaboration
The collaborative model of fintech disruption in which established banks and financial institutions collaborate with emerging fintechs instead of solely competing with them is also set to take root in Saudi Arabia. This is because banks have a significantly high cost structure and conducting small transactions, say in the sub SR1 million category, is not cost effective for banks. Says Raqamyah’s Ammar Bakheet, “ Collaborating with fintechs helps banks fill the gaps as well and overall it is a win-win situation for both. They can now target segments they were not targeting earlier.” Bakheet adds, “Take our company for instance, our ledgers could have banks, financial institutions, individual lenders. You may ask why banks will like to partner with us and lend when they can do it themselves? In the words of a CEO of a bank – there are things that we do not know or are not willing to do, but now more than ever if there are other people doing it, we should be willing to partner with them and do it.” Sahhaf of Badir Program backs up the fact of the collaborative relationships in the financial industry. “Digital transformation continues to be a key focus within the financial industry. We are witnessing a more pronounced collaboration between banks and the fintech community as they are working actively to partner and collaborate to create new structures, products, and services,” he adds.

Scopeer, a Saudi fintech startup, is the first crowdfunding platform in Saudi Arabia. Again, the main target of Scopeer is to fill the funding gap in Saudi Arabia by providing alternative financing options for SMEs and startups. The CMA last year granted fintech experimental permits (ExPermit) to Scopeer and another fintech startup Manafa Capital to create equity crowdfunding platforms. At its launch, Scopeer had said that it plans to attract up to 10,000 investors, funds, investment firms and qualified investors, as well as individual investors who can invest up to SR20,000 in a company. Two disruptive fintech startups that have come out of Badir Program’s cohort are Tammwel and Qoyod. Qoyod sells cloud-based accounting software to startups and SMEs using a SaaS subscription model. With 600 SMEs onboard, the startup helps local businesses cover their accounting and bookkeeping needs as well as allows them to meet the unique statutory requirements of the Kingdom. The Badir Program incubated fintech startup Tammwel is an online platform that helps loan seekers to compare providers in terms of interest rate and credit score in order to help them get the best financial solution. Currently, Tammwel has more than 50,000 customers.

Is there enough talent for tech startups in Saudi Arabia?
Most of the infrastructure and regulatory requirements being met, the other key need for the fintech startup ecosystem in Saudi Arabia to flourish is the human capital base. Although there are growth and job opportunities in the market, Saudi startups might struggle to hire for technical skills according to Badir Program’s Sahhaf. “The exponential growth in the number of tech startups emerging across the Kingdom has made competition for talent extremely high. Central to the concern of the industry’s talent shortage, all companies regardless of their size reveal that the key issue lies in filling vacancies with qualified local candidates as there are some jobs hardest to find talent in Saudi Arabia such as programmers, cybersecurity specialists, system architects, and engineers. In fact, the talent crunch is not just a concern in Saudi Arabia, but a global problem,” adds Sahhaf.

Seeing the sunny side up, Islam Al Bayaa of KPMG tells International Finance that the government and tertiary institutions are committed to improving the human capital in the technology space and the government’s efforts should provide the solution. According to a Gulf News report, 58,726 Saudi students were studying in the US in 2018. The largest segment of students in the US were studying engineering and IT (22,240). Ammar Bakheet is of the opinion that the impact of the returning technology educated Saudi students is already being felt in the tech startup ecosystem in Saudi Arabia. “I see nationals coming back home after studying in the US and other countries who are willing to work in startups. To give you an example, we as a startup were looking to hiring people for the role of credit and financial analysts. We received 70 applications in response to an advertisement of which 25 to 30 were of students who had graduated at a foreign university and had come back home.”

The UAE startup ecosystem is different

Most of the startup innovation in Saudi Arabia is driven by Saudi nationals compared to the expatriate driven innovation in the UAE. While UAE startups attract more foreign funding, Saudi startup funding seems to be more national driven. UAE has free zones and other enablers that helps it to attract foreign investors and multinationals. Saudi Arabia’s Vision 2030 is focused on seeing a new pool of talent and new Saudi corporates dominating the future economy. The government’s decision to send large numbers of students to foreign universities over the last seven to eight years dovetails with this fact. With regard to funding, Saudi startups are beginning to attract the attention of foreign venture capitalists with the Saudi government is opening up the market. KPMG’s Islam Al Bayaa says, ”As is indicated, it’s a different model in Saudi Arabia. This probably gives rise to some strengths and weaknesses when compared to the UAE model. But what’s more important is that we expect to see tailored models in the Kingdom developed by Saudis for Saudis.” Islam Al Bayaa expects the trend of foreign funding to develop quickly in line with economic transformation in Saudi Arabia as barriers like regulations improve. He also says that foreign investment is not be the only solution. According to Bayaa, domestic funds will invest in Saudi startup ventures if the structures are right. Badir Program provides funding avenues through personal networks, angel investors, and crowdfunding for its cohort of startups. “While Saudi Arabia is heading in the right direction in creating a robust entrepreneurship ecosystem, it needs to up the ante in making local startups visible and appealing to venture capitalists all over the world,” says Sahaff.

A breakout Saudi fintech startup is a matter of time
How does the future look like for fintech innovation in Saudi Arabia? The recent regulatory reforms have focused on reducing the roadblocks to tech entrepreneurship. Another significant boost to the sector has been the rise of accelerators and incubators across the country. The country has over 40 business incubators and several accelerator programmes, 50 per cent of which have some form of government affiliation. Overall, the startup ecosystem in the Kingdom has become much more structured in recent years and is expected to grow with the support of government and private sector players, says the Badir Program’s Sahhaf. Badir Program, which is now present in eight cities in the Kingdom is focused on its KPI of creating 600 startups and 3,600 jobs by 2020. According to the 2019 Global Entrepreneurship Monitor report, around 76.3 percent of the adults in Saudi Arabia see good opportunities to start a business – the second highest out of 49 countries analysed. What are the chances of a breakout global or regional startup emerging out of Saudi Arabia? A break out global Saudi tech startup may already be here – Foodics, a foodtech startup started with the support of the government by two Saudi entrepreneurs offers a cloud-based all-in-one restaurant management system. Started in 2014, Foodics today has global clients in countries such as Thailand and Turkey. A global Saudi fintech startup could be next.