Paving the Way Forward: Saudi Arabia's Fintech Strategy and Legal Landscape
Introduction
As part of the Financial Sector Development Program and the National Fintech Strategy (Fintech Saudi), Saudi Arabia's fintech landscape is rapidly evolving. This evolution is partly driven by the country's Vision 2030 initiative and the surge in digital transformation within the financial sector, aiming for Saudi Arabia to become a global fintech hub. The fintech landscape in Saudi Arabia is diverse and includes payments, finance, insurance, and open banking. This informative blog offers an overview of the Saudi fintech market, encompassing key players and the regulatory framework that shapes the fintech ecosystem in Saudi Arabia.
Covered in this blog:
Fintech Saudi
The fintech market in Saudi Arabia has experienced significant growth in recent years. The rise of fintech in Saudi Arabia has been complemented by increasing consumer acceptance and adoption. According to the latest annual report of Fintech Saudi, since the launch of the Fintech Saudi Initiative in 2018, there has been a 14.7 times increase in the number of fintechs, and 3.95 billion SAR has been invested in fintech companies in Saudi Arabia.
This growth can be attributed to several factors:
Government Initiatives: The Saudi Arabian government has placed a strong emphasis on fostering an innovation-driven economy. Vision 2030 aims to diversify the country's economy and reduce its dependency on oil, making fintech a key sector for growth.
Digital Transformation: The increasing penetration of smartphones and internet connectivity has fueled the adoption of digital financial services. From mobile banking to digital wallets, consumers are embracing innovative solutions to manage their finances.
COVID-19 Pandemic: The transition to digital payments and investments has gained momentum due to the COVID-19 pandemic, with consumers adapting to remote and contactless transactions.
Large Young Population: Saudi Arabia has a sizable population under the age of 30 that readily adapts to the changing financial environment and embraces fintech developments.
AI and Blockchain: Advancements in AI technology and blockchain contribute to the continued growth of the fintech sector.
Some Key Players
According to the latest Saudi Central Bank (SAMA) report, as of 2022, there are 30 licensed fintech companies operating in insurance, finance, and payments in Saudi Arabia, with an additional 15 fintechs operating in the Regulatory Sandbox. In total, there are 44 authorized and in operation, bringing the total number of fintech companies in operation in Saudi Arabia to 89.
Several key players have emerged in the Saudi fintech landscape, driving innovation and shaping the market. Some notable companies include:
STC Pay: STC Pay is a Saudi-based digital wallet that offers a wide range of financial services such as peer-to-peer payments, mobile top-ups, and bill payments. The platform has gained significant popularity in the country with over 7.8 million users.
Tamara: Tamara is a Saudi fintech startup specializing in "Buy Now, Pay Later" solutions. It enables customers to make online purchases and pay for them in installments, offering a convenient and flexible payment option.
Hakbah: Hakbah proclaims to be a fast-growing fintech company that provides a digital savings platform using Islamic principles. Users can save and invest in a Sharia-compliant manner, allowing them to achieve their financial goals while adhering to their beliefs.
Lean Technologies: Lean focuses on open banking solutions and aims to make it easy for developers to connect to their users’ bank accounts.
Raqamyah: Raqamyah is a crowdlending platform for SMEs.
Given the dynamic nature of the fintech landscape, other noteworthy players in this rapidly evolving environment include Paytabs Group, Hyperpay, and Hala.
Regulatory Sandboxes
SAMA - Regulatory Sandbox Framework
The regulatory sandbox framework of the Saudi Central Bank (SAMA) follows a pragmatic approach, allowing eligible fintech firms, startups, and financial institutions to test their innovative ideas and solutions within a controlled and supervised environment. This framework aims to create an enabling environment for the introduction of new products, services, and technologies while ensuring adequate consumer protection and risk mitigation.
By granting temporary relaxations and waivers of certain regulatory requirements, SAMA encourages participants to explore new business models, products, or technologies that have the potential to enhance financial services in Saudi Arabia. The framework extends to various areas of financial services, including banking, insurance, and payment systems.
The regulatory sandbox environment was launched in 2018 and has been recently updated to an always-open framework, meaning greater flexibility by enabling financial institutions, as well as local and international startups, to apply anytime throughout the year. In addition, SAMA is working with market participants, including banks and fintechs, to develop an integrated platform for Open Banking Solutions (see SAMA Open Banking Policy).
The applicability of the regulatory sandbox framework is contingent upon a few key criteria. First and foremost, participating entities must adhere to SAMA's eligibility criteria, which assess the entity's technical capabilities, financial stability, and commitment to consumer protection. This ensures that only trustworthy and competent entities are granted the opportunity to operate within the regulatory sandbox.
Participants operating within the regulatory sandbox are provided with time-limited exemptions and flexibilities from specific regulatory requirements, allowing them to assess their product or service viability and address any potential risks or concerns. However, it's important to note that exempted entities remain subject to key obligations related to consumer protection, anti-money laundering, and cybersecurity. This ensures that customer interests and market integrity are upheld throughout the sandbox testing period.
At the conclusion of the sandbox testing, successful participants are eligible for transitioning into the live market with their validated products or services. SAMA supports these entities in obtaining the necessary licenses and approvals required for full-scale operation, facilitating a smooth transition from the sandbox to the regulated marketplace.
CMA - Fintech Lab
CMA (Capital Market Authority) has the Fintech Lab which offers a sandbox environment related to fintech innovations in securities activities. Like the regulatory sandbox framework, the FinTech lab serves as a regulatory testing ground, enabling fintech entities to explore their innovative business models under specified criteria, time frames, and regulatory guidelines.
Supervised by the CMA, this experimental environment is designed to attract both local and international firms operating within the Kingdom. The lab provides a platform for testing and refining innovative business models within a controlled setting.
Applicants can obtain a FinTech ExPermit from CMA to participate in the Fintech Lab to deploy and experiment with the fintech products. The application is open to any person who intends to test a fintech product related to securities activities, which are not already regulated.
Several requirements needs to be met in order to be able to receive a permit, this includes e.g. the availability of adequate and appropriate resources and that the applicant must be fit and proper. CMA can impose additional regulatory requirements on the applicant and the fintech products, if deemed necessary.
The permit has a limited validity. Upon the expiration of the permit, the applicant can either deploy the Fintech product on a wider scale or execute an exit strategy.
Fintech Regulations
SAMA and CMA are the primary regulatory bodies overseeing the fintech sector, with the latter specifically responsible for monitoring capital market activities.
As a fintech company, one can obtain a direct license or be regulated in a sandbox environment under the condition that it adds to innovation and is not already regulated under the regulated framework.
Various regulations apply based on the specific fintech service or solution offered. These include:
Law of Payments and Payment Services and the implementing regulations: This law governs fintechs involved in payment services, encompassing the execution, transfer, or processing of payment transactions and instruments. It also covers e-money payments through payment platforms or instruments, as well as payment wallets in the form of electronic accounts or records. The law aims to enhance the integrity and efficiency of payment system infrastructures, while prioritizing user protection.
InsurTech Rules: These rules regulate solutions or services fully provided or designed through technology within the scope of Insurance Activities defined by SAMA.
Open Banking Framework: Although scheduled for release by the end of 2023, the regulatory framework for open banking by SAMA is yet to be published at the time of writing this blog. Open Banking involves a practice that enables customers to securely share their financial data with third-party providers, facilitating the development of new and innovative financial services and products.
Regulatory Framework for Equity Crowdfunding: This framework aims to facilitate financial technology innovations in the capital market. It enables companies with FinTech ExPermit to obtain the appropriate authorization to operate as a capital market institution. The framework also regulates share offerings through authorized capital market institutions engaged in securities crowdfunding.
In addition to these, it's crucial to consider other relevant laws and regulations such as Anti-Money Laundering (AML) and Counter-Terrorism Financing (CFT) Regulations and the Cyber Security Framework. These frameworks collectively ensure the responsible and secure operation of fintech services within the Saudi regulatory landscape.
In conclusion
Undoubtedly, the fintech sector in Saudi Arabia is thriving, propelled by governmental backing, technological progress, and evolving consumer choices. The market presents significant prospects for both startups and well-established entities. With an established regulatory framework, the anticipation is for ongoing innovation and expansion within the industry, heralding a transformation in the country's financial sector in the foreseeable future.
