Digital Boom in Saudi Arabia

Posted on 04 April 2023

Saudi Arabia has ranked fourth globally in its level of preparedness in digital systems on the back of its sturdy regulatory framework, the latest report from the UN revealed.  

The Kingdom ranked second in digital system preparedness among the G20 members, according to the report published by the International Telecommunication Union, a UN agency that deals with information and communication technologies, reported Saudi Press Agency.  

How has digital transformation impacted the financial sector?

According to Fintech Saudi, a body created by the central bank (the Saudi Arabian Monetary Authority, or SAMA) and the Capital Market Authority to monitor financial innovation, Saudi fintech financing rose 11% to $402 million through August 2022.

Foodics, a restaurant payment management system, closed the largest Series C funding round at $170 million. After raising $110 million in 2021, buy-now-pay-later platform Tamara received $100 million in Series B. Mastercard invested $36.7 million in payment processor HyperPay. Numerous megadeals will be announced in 2023.

Megadeals like Gulf Capital's 2018 $267 million acquisition of Geidea, an electronic payment provider, or Western Union's 2021 $200 million investment in STC Pay, one of Saudi Arabia's largest e-wallets, show that Saudi Arabia is catching up to neighbouring countries like the UAE and Bahrain. STC Bank, backed by Saudi Telecom, debuted in 2021.

Enormous change over the previous decade

According to Magnitt research, venture capital financing in the kingdom increased 270% in 2021 and fintech businesses made up 19% of transactions. Local money underpins early-stage rounds for payments and lending startups, but other industries like wealth management and insurtech are growing quickly. 

According to a late 2022 assessment of 100 Saudi fintechs by global entrepreneurs network Endeavor and Riyadh-based asset management business Impact46, Saudi firms are still modest, averaging $2 million for seed investment and $19 million for Series A capital.

They will need greater checks to build up in a few years, which may attract additional foreign investors.

Saudi Arabia, one of the most conservative and insular nations, is undergoing an extraordinary shift under Crown Prince Mohammed bin Salman. Vision 2030 seeks to diversify the economy away from oil, which accounts for more than three-quarters of exports, by growing other industries including tourism, logistics, entertainment, sports, mining, real estate, and financial services.

In 2018, Saudi has 10 fintechs; in 2022, 147. The monarchy expects 525 financial tech enterprises to provide 18,000 employment and $3.5 billion in GDP by 2030. The Saudi cabinet authorised a new fintech road plan in May 2022, following the royal vision. Open banking should launch later this year, fostering innovation and reshaping the financial culture (see sidebar).

Saudi Arabia is the MENA region's biggest economy... with a tremendous lot of opportunity for investment depth. The coountry has the sixth-largest Arab population at 37 million. Saudis are youthful (two-thirds are under 35) and connected, with 93% using cellphones, 74% having bank accounts, and 72% having credit or debit cards. E-commerce and mobile bill payment are utilised nationwide, and people are eager for further IT investment.

Banks and SMEs

Technology is transforming Saudi finance. Although digital transactions grow, bank branches and ATMs are shrinking nationwide. Point-of-sale (POS) terminals grew by 46% in September 2022. This directly challenges bank operations.

According to Saeed Assiri, chief digital officer of SABB, an HSBC Group partner, although the key engine of income is lending, this may change in the foreseeable future as the competition in this segment intensifies massively.

In 2021, the bank used incubator programmes, collaborations, and a $26 million in-house fintech fund to invest in five to 10 early-stage firms.

Most banks work with IT businesses like SABB. Neoleap and Emkan Finance, subsidiaries of Al Rajhi, the kingdom's second-largest bank, and AlinmaPay, Alinma Bank's 2020 digital payment platform, are examples of lenders investing in new digital channels.

Saudi National Bank, the kingdom's largest bank, partners with POS supplier Cashin and Banco Saudi Fransi with Shariah-compliant supply chain financing platform Lamaa for certain items. Most Saudi banks fund tech centres and innovation challenges.

Saudi fintechs serve bank customers, unlike those in the Arab world and Africa, which target unbanked communities.

Assiri argues Saudi Arabia has underserved consumers, not unbanked ones. For instance, all banks provide corporate accounts, cash management services, and trade solutions, but SMEs have distinct demands. banks don't provide that. Assiri sees an opportunity in fintech to target that particular niche.

Banks are rushing to discover new supply chain financing, payment service, and lending solutions to meet government plans to boost SMEs' share of the loan portfolio from 5.7% in 2019 to 20% by 2030.

33% of fintechs target "underbanked SMEs," according to the Endeavor-Impact46 Saudi Arabia fintech ecosystem map. The paper states that Vision 2030 aims to close the gap between SME credit demand and conventional bank availability.

Challenges ahead

Saudi Arabia's digital revolution is slow, but governmental determination, institutional support, and financing are helping. All financial sector participants struggle to find competent workers in open banking, machine learning, product development, data analytics, and software engineering. 82% of Endeavor and Impact46 respondents cited "tech talent availability" as a challenge. Managerial talent shortages were also cited. Another issue was retaining talent.

The country's "Saudization" labour policy requires IT enterprises to employ locally for compliance and cybersecurity officers, even if some corporations are searching outside to fill openings.

Three in four responders find regulatory compliance challenging. The government's rigorous, unpredictable, and time-consuming fintech licencing structure may deter businesses. The hefty compliance cost tends to weigh most adversely. Half of entrepreneurs questioned spent over $100,000 on compliance. The survey authors say these challenges are not exclusive.

The kingdom's Personal Data Protection Law was amended in March 2022 to require fintechs to retain customer data locally. The modified legislation encourages digital sovereignty, but harsh weather threatens Saudi data centres, causing technical difficulties.

Notwithstanding these hurdles, Saudi Arabia may become a regional fintech hotspot, drawing investors and growing its enterprises overseas. As of late 2022, roughly half of Saudi fintechs have operations in another country—typically Bahrain, Egypt, Kuwait, and the UAE—but other entrepreneurs had bigger aspirations.

In December, Saudi Arabia's PayTabs purchased Turkey's biggest social commerce network, Paymes, for an unknown price. Tens of Arab firms, including Egyptian Paymob and Emirati Pemo, stated they will enter the Saudi market in 2023.

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