Fintech has been the subject of significant interest from entrepreneurs and investors alike in the past few years, and this interest shows no signs of waning just yet.

The opportunity to lead fintech development in the region did not pass unnoticed as the Abu Dhabi Global Market (ADGM) sprang into action and began laying foundations that would not only enable fintech startups to set up and operate, but would also launch the UAE to the forefront of regional fintech innovation.

To develop Abu Dhabi as the hub, ADGM, this year, set out a proposal for a fintech regulatory framework in the UAE, which establishes a Regulatory Laboratory (Reglab). This would allow fintech startups to operate in a contained and cost-effective sandbox before they can be integrated into the wider economy and operate as fully-fledged firms. This is due to the unique risks that accompany fintech startups such as the threat of cybercrime and the potential effect on financial stability.

As fintech grows, so does the need for a supportive regulatory environment. Such an environment should not only guide the growth of startups, but also ensure that they are well-integrated into the existing economic landscape.

This is especially true for startups in the fintech domain which must be accommodated while keeping the stability of the financial services sector in mind.

With fintech investments growing at phenomenal rates (75 percent in 2015), it is worth noting that a sizable portion of these investments are now being deployed outside North America, most prominently Europe and Asia-Pacific.

Regionally, a few fintech startups have managed to take root by capitalizing on the existing gap between traditional financial services and the needs of consumers today.

One such gap is SME lending, which stands at 4 percent for GCC banks compared to the 18 percent seen in middle-income countries. Coupled with high smartphone penetration, this set the stage for Crowdfunding platforms (Zoomaal) and Peer to Peer lending (Beehive) to fill this space.

Some other sectors seeing fintech activity include online payments (Payfort), Digital Currency (Bitoasis), and Investment Management (Finerd).

While the pace of fintech development is picking up with the opening of industry accelerators like the 1864 Accelerator and Payfort’s Fintech Factory, the successful growth of regional fintech hinges on a few key factors; most prominent of which is regulation.

The UK makes for an interesting comparison because of the supportive stance the government has taken with regard to fintech, demonstrated by their backing of independent industry organization Innovate Finance and their aim to be a global fintech hub by 2020.

The aim of this comparison would be to explore some of the regulatory facets that facilitate the development of a healthy fintech ecosystem. This can help highlight areas of regulatory deficit that could be problematic for entrepreneurs, consumers, or governments.

Helpful regulation

Three regulatory components that are helpful in the development of a sustainable fintech ecosystem are:

1.   Sandboxes: A regulatory sandbox is crucial to ensuring the continued safety and sturdiness of the financial services sector as they allow fintech startups to operate and test products or services in a contained environment for a limited time.

This test run can help determine how suitable a startup is to operate on a broad scale and as part of the existing financial services sector, in addition to allowing fintech players to operate free from the burden of complying with all financial regulations.

Initiatives like the ADGM Regulatory Laboratory and the sandbox created by the UK’s Financial Conduct Authority, would ensure that fintech startups can carry out their operations without causing undue disruption or instability, and those deemed successful can be integrated into the financial services sector.

2.   Cybersecurity initiatives: The coupling of technology and finance may not be perceived as the most secure undertaking, especially amongst those who have exclusively used traditional financial services.

Therefore, it is imperative that governments guarantee cybersecurity to provide peace of mind to consumers and facilitate the shift to fintech services.

The UK has taken large strides in this field through programmes like Cyber Essentials Accreditation Scheme (2014) which sets out a minimum standard of cybersecurity. This allows organizations to showcase their defences and raise consumer confidence.

Moreover, the National Cyber Security Programme (2015) established the National Cyber Security Centre and details the government’s initiative to invest in cybersecurity and intelligence. While the UAE does have the National Electronic Security Authority that is tasked with setting cybersecurity strategies, additional initiatives guaranteeing the security of fintech and ensuring that startups are on par with global cybersecurity standards are needed.

3.  Incentives: To spur the growth of fintech and increase the likelihood of adoption, governments may provide tax incentives to individuals who do use these new services.

The UK launched an initiative to encourage the adoption of fintech, specifically P2P lending, called the Innovative Finance ISA (IFISA) in 2016. IFISA is a new type of individual savings account aimed at consumers using P2P services and guarantees tax advantages for the interest and gains consumers accumulate by making loans through their IFISA.

Measures such as this encourage the adoption of P2P services as well as promoting competition in the traditional banking sector.

While tax incentives are not directly applicable to the UAE due to their lack of a federal income tax, initiatives to incentivize the adoption of fintech services could be in the form of subsidies to SMEs that use fintech solutions, or allowing full ownership (for non-Emirati founders) outside of the designated free zones.

The UAE is already one of the region’s most attractive countries for startups. However, the innovation cannot be left to startups alone as new regulations would be vital to facilitating these startups’ growth and integration.

Taking pre-emptive steps in the domain of cybersecurity and incentives can prove to be useful down the line as the startup ecosystem grows.

The UAE can emulate and modify proven steps the UK has taken to develop their own ecosystem and become the fintech hub they aim to be.