The new normal of digital banking post-Covid-19 is driving fintech growth in the UAE, where online payment platforms are improving accessibility to help resolve a pressing need for financial inclusion.
Cross-border payments are a necessity in the UAE where migrant workers make up 90% of the workforce. Outflows from the UAE reached $43.2 billion in 2020, second only to the US, according to the 2022 World Migration Report.
So, it’s no coincidence that the UAE has become one of the world’s top fintech centers with neo-banks, Open Banking, mobile wallets, and app-based international money transfers vying for the business of residents.
Cross-border payments are a necessity in the UAE where migrant workers make up 90% of the workforce. Outflows from the UAE reached $43.2 billion in 2020, second only to the US, according to the 2022 World Migration Report.
The UAE economy was traditionally based on international trade of oil and gas, but now the economic strategy has shifted to making the country into a global financial hub with robust banking services and innovative fintech technologies. Government-supported initiatives include the DIFC innovation hub, as well as the ADGM international financial center.
Global headwinds
Amid this positive momentum, a year ago the UAE was placed on the “grey list” of the Financial Action Task Force (FATF), the global anti-money laundering watchdog, for countries in need of “increased monitoring” of their AML/CFT regime.
The UAE succeeded in implementing many improvements and changes in one year, but it is still on the list. Some of these changes, naturally, are putting a lot of pressure on fintechs and bank executives. And that’s on top of the challenges now facing the entire global economy.
The UAE grey list status has created new challenges for financial institutions from fintechs to banks.
Renewed challenges for fintechs
The increased global scrutiny of regulators is creating a setback for fintech relationships that remain dependent on correspondent banking relationships and infrastructure to make cross-border payments.
The value proposition of fintechs is their ability to deliver on speed, cost, and accessibility.
For fintechs to fulfill this mission for their end-customers, they need to have favorable agreements in place with banks, holding their accounts, to settle and reconcile between balances to credit their customers, in order to lower costs. Banks realize the value of fintech relationships, and are open to doing business for certain types of payments that fintechs can do more cost-effectively, while they maintain revenue from the infrastructure.
Still, fintechs are traditionally considered less strict in customer due diligence (CDD) compared with banks and are perceived as higher risk. Within normal business relationships between fintechs and banks, pseudo-customers identities will not be apparent in bulk payments handled by banks, making it essential that fintechs effectively monitor transactions for suspected financial crimes and screen customers against watchlists.
Under the old normality, even if they had great technology, fintechs suffered from mountains of challenges, including barriers and expenses from the government, regulators, and banks. As a result, they only reached a fraction of their business potential.
With the negative headwinds from the FATF, fintechs must take action to ensure they continue to succeed and advance the new normal of digital banking.
They will need new tools to convince banks that their customers can be trusted.
Make AI a new normality
With trust now top of mind, there is a pressing need for fintechs and banks alike to implement smart tools for AML based on artificial intelligence and machine learning technology.
Fintechs adopting artificial intelligence tools will be better equipped to gather information on the financial background and transaction patterns of their customers.
In particular, by implementing smart AI-based AML controls via cloud, fintechs can save on setup costs and get to a high standard very quickly, within only a few months. This high standard will enable them to show banks they have an enhanced system that is at least as good as any rules system operated by banks, and in reality far better.
Real-time AI-powered screening of watchlists and sophisticated AI detection of known and unknown money laundering is a trust card that will serve fintechs as they grow and serve their customers in the UAE through relationships with financial partners.
They will have a huge jump in their credibility and open new channels, help UAE migrant workers send more money back home, and allow businesses the ability to have better, faster and cheaper service.
Ultimately, fintechs will have helped improve the quality of life for their end customers by making a social impact, and becoming key players in the new digital economy.
Written by: Yaron Hazan, VP Regulatory Affairs, ThetaRay
