By M.R. Raghu, Managing Director, Marmore MENA Intelligence
Fintech refers to companies that use technology to deliver financial services to consumers. Information technology and software firms supporting and facilitating the financial sector firms more so termed as bank technology service providers are also a form of Fintech companies. The other type of Fintech companies are tech-startups and small innovative firms replacing the regular financial intermediary, the ease of accessibility to which can cause disruptions for mainstream banks and banking system. For the mainstream financial institutions, the former type is a complementary service, and on the contrary the latter group pose threat their business.
The latter group of Fintech companies are now the focus of financial service organisations across the world, due to its disruptive nature of tearing down existing business models and creating new and efficient means of providing the same services to consumers. The growing prominence of these companies can be assessed by their growth in investments in these companies. From 2009 to 2014, the total global investment in Fintech stood at US$24.7 billion, and in 2015 an estimated US$40 billion was invested into Fintech, representing a year-on-year growth of 228%.
Implications of Fintech on Islamic Finance Industry
The financial sector is filled with old legacy systems and deep rooted traditions where complacency often prevails. These conditions make the industry particularly favorable for disruption allowing software and technology to potentially play a huge role in making existing financial services more efficient. However, the value propositions presented by these novel digital technologies threaten the status quo of the banks and financial institutions eco-system. According to PWC, consumer banking and payments segment are most susceptible to the disruption caused by Fintech in the near future followed by insurance and asset management. Almost 28% of banking and payments and 22% of the insurance, asset and wealth management business is expected to be at risk due to the disruption caused by Fintech. And, Islamic banks and financial being a part of the eco-system are equally vulnerable to this disruption.
In fact there are several reasons to believe that the Islamic finance institutions, due to its infancy state, face a larger threat from the evolution of Fintech. The Islamic finance industry is weighed down by lower levels of digitisation compared to the conventional counterparts. Islamic banks still have lower customer penetration in mobile banking compared to conventional banks, thus requiring Islamic banks to pour in more resources in its digitisation efforts to catch up. According to the Boston Consulting Group (BCG), over the next five years corporate banks that remain digital laggards could see profits drop by as much as 15 to 30% relative to their digitally fast-moving competitors.
The Fintechs especially those with focuses on the retail market will gain ground and eventually build sustainable as well as scalable businesses. Failure by the banks to respond in five major retail banking businesses — consumer finance, mortgages, finance to small and medium-size enterprises, retail payments, and wealth management, could translate into 10% to 40% of the revenue being risked by 2025 for both Islamic and conventional banks. Additionally, the Fintech companies are also likely to cause reduction of prices and compression of margins.
Islamic Finance and Fintech: Current Scenario
Fintech’s penetration into Islamic finance is still in early stages with very few participants. However, the potential disruptions to traditional Islamic finance cannot be underestimated, both from the perspective of the consumer, and for the development and spread of the Islamic finance industry. From a consumer perspective, Fintech provides more choices that suit individual needs at competitive cost and easier access over internet, mobile devices and social media.
But the biggest potential impact of Fintech on Islamic finance would be the wider outreach of Islamic financial services as an alternative to conventional finance, especially in markets where it Islamic finance has yet to evolve beyond a concept. However, traditional Islamic finance providers will face more intensified competition with Fintech eating into their margins. IFIs may also end up with reduced deposit and investment portfolio, as online investing options for consumer increase. This will force IFIs to offer services via digital channels, and standardise offerings to customers. Some IFIs may also collaborate with Fintech companies, which would allow them to focus on their core specialisations.
Overall, Fintech would contribute positively to the evolution of Islamic finance, and increase the range and reach of its products and services. Crowdfunding and P2P lending also provide the platform for Musyarakah- and Mudaraba-based equity financing, which have not been very successful in the traditional IFI environment.
Some of the Islamic finance players that have ventured into Fintech include Abu Dhabi Islamic Bank (ADIB), Dubai Islamic Bank (DIB), and National Bonds (a Shari’a-compliant savings and investment firm). ADIB has teamed up with IBM to build a digital studio that will work on digital innovation projects across the bank, including mobile banking iOS apps build on IBM’s Bluemix cloud platform and IBM Mobilefirst. The bank seeks to increase its presence in the Fintech space, and will be using Bluemix to work on the next generation apps for cognitive computing and analytics. Using IBM Mobilefirst, financial advisors in the bank can access and manage client portfolios from their iPads.
Dubai Islamic Bank (DIB), the largest Islamic bank in the UAE, announced the introduction of the Visa payWave cards, which uses contactless payments, and allows customers to conduct transactions quickly. Visa payWave cards carry multiple layers of security, and only work when the card is within 4 cm of the card reader. In addition, the payWave terminal can only process one transaction at a time. This technology eliminates the need for PIN numbers and signatures for purchases below AED 300, and reduces significantly the average customer queuing time, allowing merchants to effectively serve more clients.
Customers can simply wave the card against the POS terminal or tap-and-go. Each DIB Visa payWave-enabled card contains a tiny microchip that sends payment information to a contactless card reader via short-range radio frequency waves. The information does not contain the cardholder’s name and includes an encrypted security code that is unique to each transaction. Visa payWave can be found on both credit and debit cards, and can also be enabled on a mobile phone.
In Malaysia, a key market for Islamic finance, a wholly-owned subsidiary of Raeed Holdings Sdn Bhd (Raeed), which is a consortium of six Islamic Banks in Malaysia, launched a Fintech initiative known as Investment Account Platform (IAP). IAP Integrated started its business in 2015 as an internet based multibank investment portal. The portal facilitates intermediation by the Sponsoring Banks to match financing requirement of ventures with investment from retail and institutional investors via investment accounts.
The UAE’s Dubai Multi Commodities Centre (DMCC) Commodity Murabahah Trading Platform (CMTP) and Nasdaq Dubai Murabahah Platform developed by Dubai in collaboration with Emirates Islamic (EI) and Emirates Islamic Financial Brokerage (EIFB) are some of other prominent Fintech initiatives. The Nasdaq Dubai Murabahah platform uses wakala based certificates which enables Islamic financial institution to offer cash financing to customers in a quick and efficient manner.
Fiserv Inc., a global provider of financial services technology solutions, announced that UAE’s National Bonds has selected AML Risk Manager for the effective detection, investigation and resolution of financial crimes, and to ensure regulatory compliance. AML Risk Manager will provide the organisation end-to-end transaction lifecycle management capabilities ranging from profiling and monitoring, through to case management and reporting.
Another development in this space is introduction of Liwwa – a Jordan-based Shari’a-compliant P2P lending platform that focuses in the Middle East. It is an online credit marketplace, where borrowers can access capital while investors earn regular monthly returns on their investments. Borrowers can apply for small business loans online in ten minutes or less. From there investors are permitted to invest directly in the small business loans that appeal most to them. Recently, the company closed an impressive US$2.3 million funding round to build up their ability to assess an applicant using technology, rather than using traditional credit ratings that have made most banks in the region ineffective at growing SMEs.
Fintech: An Opportunity!
Despite many arguments that suggest Fintech as a threat to the Islamic banking and finance industry, it also presents equal opportunities to exploit and proliferate across various fronts such as customer acquisition and experience, enhancing operational efficiency, strengthening delivery channel and improving margins by reducing costs.
Technology has the potential to drive change in the Islamic finance industry, especially for the 2.3 million SMEs located in the Middle East and North Africa (MENA). Fintech companies are using innovative solutions to make access to financial services more efficient. Despite the fact that 76% of enterprises in MENA have a bank account, only 26% reported having a credit from a financial institution. Given this low credit penetration at the corporate level in Muslim countries, Fintech can be the solution to narrow the credit gap, which is estimated to be more than US$140 billion. SMEs that find it hard to obtain bank funding from IFIs can could look to Fintechs to fill that gap, via Sharia-compliant P2P lending and crowdfunding platforms.
Push for Digitisation:
The evolution of Fintech and the digitisation of banking business means that banks will have to completely reinvent their business model. Digital banking is the preference of millions of technology savvy millennials who represent almost 35% of the GCC population and are more receptive to new ways of consuming financial services. The future of retail banking in emerging markets will increasingly be predicated on mobile/smartphone applications and this has prompted the push for digitisation in Islamic banks. As a result, the boards of most of the 40 systemically important Islamic banks have approved expenditure on digital initiatives between US$15 million and US$50 million over next three years. The IFIs are well aware that failure to act could cost up to 50% of their retail banking profit in next few years.
Fintech Companies can broadly be classified into two different types, namely competitive and the collaborative. Competitive companies pose a direct challenge to the financial services institutions. But on the contrary, the collaborative segment, offers solutions that complement the position of existing market players. The IFIs can seek to leverage from similar supplemental collaborations. Given, the lower penetration levels of IFIs in most markets, they tend to have a smaller network of branches and hence, smaller distribution channel to market their products and services. However, partnership with the right Fintech player would allow IFIs directly access to customers. These financial institutions can also reduce costs as less expenditure in supporting infrastructure is incurred.
M.R. Raghu is the Managing Director of Marmore MENA Intelligence, a research firm with focus on providing insights on MENA region.
 World Islamic Banking Competitiveness Report 2016 by EY
 World Bank
 US Census
 World Islamic Banking Competitiveness Report 2016 by EY