International FinTech Review- UAE

I.Introduction

The FinTech industry within the United Arab Emirates (UAE) has experienced remarkable growth and transformation in recent years, positioning itself as a leading jurisdiction in the global financial landscape. Fuelled by a combination of government support, burgeoning tech-focused initiatives, and a robust financial sector, the UAE has emerged as a prominent FinTech hub in the Middle East and North Africa (MENA) and Gulf Cooperation Council (GCC) regions. Several matrices and statistics can testify to the UAE’s success in FinTech, including the 2021 AMF Finxar index report, wherein the UAE outshone its regional counterparts, achieving a leading score of 75% against the general index score of 43% for all members.¹THE ARAB REGION FINTECH GUIDE – SECOND EDITION | Arab Monetary Fund. (2021, July 27). Arab Monetary Fund. https://www.amf.org.ae/en/publications/arab-regional-fintech-workinggroup/ arab-region-fintech-guide-second-edition. Additionally, 60% of FinTech companies within the GCC region have a base within the UAE.²Investment surges in DIFC FinTech firms ahead of Dubai FinTech Summit. (n.d.). https://www.difc.ae/whats-on/news/investment-surges-difc-fintech-firms-ahead-dubai-fintech-summit. At this level of growth and progression, Mordor Intelligence predicts that the UAE FinTech market will grow at a 10%+ CAGR by 2028³Limited, M. I. P. (2023, March 17). The UAE Fintech Market is anticipated to register a CAGR of greater than 10% during 2023 – 2028 – Market Size, Share, Forecasts, & Trends Analysis Report by Mordor Intelligence. GlobeNewswire News Room. https://www.globenewswire.com/news-release/2023/03/17/2629503/0/en/The-UAE-Fintech-Market-is-anticipated-to-register-a-CAGRof- greater-than-10-during-2023-2028-Market-Size-Share-Forecasts-Trends-Analysis-Report-by-Mordor-Intelligence.html#:~:text=Hyderabad%2C%20March%2017%2C%202023%20 (,market%20size%2C%20and%20growth%20prospects..

The UAE is home to a myriad of payment service activities under the regulations mentioned in sections below. Recently, certain activities have experienced a great uptake within the region, standing out against other services, including SVFs, acquiring and aggregation, fund transfer, and remittances. Over and above these activities, open banking and BNPL have recently been experiencing the most popularity, driven by market demand, economic trends, and regulatory enablement.

I.Regulatory Regime

The UAE’s regulatory regime is effectively diversified, resulting in multiple regulatory agencies contributing towards FinTech growth and development.

1. Federal

At the federal level, the primary banking regulator is the Central Bank of the United Arab Emirates (CBUAE). The CBUAE is constantly creating and improving its regulatory frameworks to maintain pace with industry developments. There are several regulations governing payment services including the Stored Value Facilities Regulation 2020 (SVF Regulation), Retail Payment Systems Regulation 2021 (RPS), Large Value Payment Systems Regulation 2021 (LVPSR), Retail Payment Services and Card Schemes Regulation 2021 (RPSCS) and the Finance Companies Regulation 2023 (FCR).

1. Free zones

Further, the UAE financial free zones provide an alternative regulatory regime to the federal jurisdiction. The two financial freezones, the Abu Dhabi Global Market (ADGM) and the Dubai International Financial Centre (DIFC) issued their separate regulations covering inter alia financial, commercial, and corporate areas of law.

The DIFC’s financial regulator is the Dubai Financial Service Authority (DFSA). The DFSA’s regulatory framework for ‘Providing Money Services’ is provided under the Regulatory Law 2004, and the rulebooks issued thereunder. The rulebooks provide a single set of regulations for all financial services and activities, each covering a different regulatory aspect.

The Financial Service Regulatory Authority (FSRA) is the financial regulator of ADGM. The FSRA’s regulatory framework is provided under the Financial Services and Market Regulations, 2015, and the rulebooks issued thereunder. The rulebooks provide a single set of regulations for all financial services, with each rulebook covering a different regulatory aspect, quite similar to the DFSA’s regulatory framework design. Specifically, ‘Money Services Businesses’ are governed by distinct set of rules and requirements.

III. Licensing Framework

As stated before, each jurisdictional regulator is responsible for creating its own licensing framework at its own pace and discretion.

1. Federal

The CBUAE regulates FinTech activities through the various aforementioned regulatory frameworks and licensing regimes. Licensable activities under the CBUAE include service providers or issuers of Stored Value Facilities (SVF) (i.e., electronic wallets and prepaid cards) and retail payment services, including payment account issuance, payment instrument issuance, merchant acquiring, payment aggregation, domestic or cross-border fund transfer, payment token services, and card schemes. The emerging FinTech sector of open banking is covered under an Account Information Service Provider (AISP) and Payment Initiation Service Provider (PISP) licensing regime. Moreover, licensing for pay-later services like Buy-Now Pay Later (BNPL) is now available under the recently introduced ‘Restricted Licence Finance Company’ license. The CBUAE also regulates and licenses retail or large payment systems providers.

2. Financial Free Zones

The DIFC also licenses a broad range of payment services. These activities include money services covered under the ‘Providing Money Services License’ category, such as money transmission, providing or operating payment accounts, executing payment transactions, arranging money transfers, issuing a payment instrument, and issuing stored value. Within the emerging FinTech fields, the DFSA also licenses BNPL service providers (although limited to B2B models) and open banking by permitting AISP and PISP under the ‘Advising on or Arranging Money Services License’ category.

The FSRA also offers multiple licenses for payment services under the ‘Providing Money Services’ license such as providing or operating payment accounts, payment transaction execution, issuing payment instruments or stored value, money transmission or remittance, and currency exchange. Within the emerging FinTech fields, the FSRA provides licenses for BNPL service providers (although limited to B2B models) and open banking through a Third- Party Provider (TPP) licensing regime.

IV.FinTech Products

Various FinTech licenses are available with the CBUAE, FSRA, and DFSA. Many of these licenses are available across all three regulatory bodies, offering entrepreneurs and businesses a broad spectrum of choices and flexibility. Moreover, the free zones enhance their appeal by providing common law based legal system. The three regulators CBUAE, DFSA and FSRA have all issued regulations on the below mentioned products.

1. Stored Value Facilities

The SVF market has experienced tremendous growth, reaching 14 licensed SVF providers across the three jurisdictions. The growth can be attributed to many factors, most importantly being the dynamic and active nature of the regulators. All the three regulators have licenses for issuance of SVFs and DFSA and FSRA further have provisions for ‘issuance of payment instruments’ which can be leveraged for the purpose.

Some recent entrants and key players within the market include Noon Digital Pay, Noqoodi, and Emirates Digital Wallet.

2. Merchant Acquirers and Payment Aggregators

Another growing area within the payments sector is the services of merchant acquirers and payment aggregators which have namesake licenses under CBUAE’s RPSCS regime. Such products also have an option of getting recognised as payment account providers within the FSRA and DFSA regimes. New market entrants have been on a steep rise in 2023, many of which have been racing to obtain licenses from the CBUAE. The UAE now has 12 service providers within this sector, with several market players having obtained their CBUAE licenses just this year, including Checkout. com, Worldpay, and MyFatoorah.

3. Fund Transfers and Remittances

Fund transfers and remittances have also experienced great progress, mainly driven by governmental initiatives instituted by the CBUAE. The CBUAE has provisions for domestic and cross-border fund transfers along with stand-alone licenses for currency exchanges. The CBUAE managed to sign several collaborative initiatives with

the central banks of India and Hong Kong. Under these partnerships, the CBUAE seeks to enhance the cross-border transfer networks by leveraging each other’s unique expertise. Additionally, Al Etihad Payments, a subsidiary of the CBUAE, recently unveiled Aani, an instant payments platform intended to offer businesses and consumers real-time fund transfer and settlement. The DFSA further provides a license for money transmission services which can be used for fund transfer activities. FSRA has a separate activity for

V.Emerging FinTech Segments

While the abovementioned activities have become quite popular within the UAE, two key activities have been emerging in line with regional and global trends, namely open banking and BNPL.

1. Open Banking

Open banking is already well recognised within the UAE across the three jurisdictions. The CBUAE and DFSA developed an AISP and PISP licensing regime as early as 2021. Similarly, the FSRA in 2021 released its licensing regime for open banking service providers i.e. the TPPs. However, it would take some time for the regulators to issue their first open banking licenses. The DFSA and FSRA issued their first licenses in 2022 to Tarabut and Lean Technologies, respectively. On the other hand, the CBUAE is yet to issue a license in this regard.

Nonetheless, the open banking sector has experienced substantial growth from 2022 to 2023, now comprising six authorised service providers. Among these, two are granted licenses by the Financial Services Regulatory Authority (FSRA) as Third-Party Providers (TPPs), while the remaining four are licensed by the Dubai Financial Services Authority (DFSA). Moreover, while open banking is the initial step to a data-sharing regime, open finance is gaining popularity worldwide, with jurisdictions like Australia leading the way. The UAE’s regulators have noted this development and expressed their interest in expanding to Open Finance. In 2021, the ADGM collaborated with the MENA FinTech Association to publish a report exploring the importance of open finance and the unique opportunity it offers to the Arab region. The DIFC took a further step in 2022 by launching the region’s first open finance lab, which focused on educating market participants on the importance of open finance in a growing data-driven economy. Following this announcement, the CBUAE also added the expansion into open finance to the list of its initiatives under its FIT Programme. The enthusiasm for open finance from the regulators has evidently sparked the interest of open banking/finance service providers, becoming another catalyst in the exponential growth of licensed service providers across the UAE.

2. Buy Now Pay Later

BNPL is an emerging sector that has been influenced by global economic trends turning harsh and leading consumers in search of cheaper sources of credit. The BNPL model offers a convenient repayment solution and a cheap source of credit at zero interest and little to no fees. However, regulators across the world have noticed the potential for loan sharks to exploit this opportunity, especially for vulnerable and low-income persons. As such, BNPL has been regulated as a credit service in many jurisdictions to ensure that BNPL service providers are subject to the stringent consumer protection requirements, with the exception of some jurisdictions such as Kuwait, which has regulated BNPL as a deferred payment service.

The DFSA and FSRA had already taken the initiative to provide a licensing framework for BNPL service providers, limiting its availability only to professional clients.

However, the CBUAE made a significant regulatory development through the release of the amended Finance Companies Regulation in late September 2023, which introduced the concept of Short-Term Credit that may be offered under the ‘Restricted License Finance Companies’ license. The license enables entities looking to offer only Short-Term credit to apply for the limited license, which has lower requirements than the full ‘Finance Company’ license.

Following the issuance of the revised Finance Companies Regulations by the Central Bank of the UAE (CBUAE), there has been a noticeable increase in market enthusiasm, particularly among pay-later service providers. CAPITAL REQUIREMENTS & FEES

Each jurisdiction provides its own capital requirements and fees guided by the licensing design, range of service providers, and market opportunity to provide fair and non-cost restrictive access to the market.

1. Federal

Under CBUAE, the various FinTech activities are covered under several licensing categories with varying capital requirements. The initial capital requirement for each FinTech activity is provided for under the respective regulatory framework, ranging from AED 100,000 (~$27,273) to AED 20,000,000 (~$5,454,546). Some activities, such as SVF issuers and restricted license finance companies (for BNPL), also have variable capital requirements as part of their ongoing capital requirement, typically around 5% of the capital held or loaned. The CBUAE currently does not publicly express any licensing fees for its licensable activities; applicants are directly advised upon expressing their intention to apply for a license.

2. Free Zones

The capital requirements and fees within the DIFC for money services activities are covered under the DFSA’s Fees Module. The DFSA has a more diverse structure for its capital requirement, commendably taking into consideration the various financial structures and sizes of different FinTechs. The capital requirements are guided by the Base Capital Requirement (BCR) ranging between $10,000-$2,000,000, an Expenditure Based Capital Minimum (EBCM), and varying capital requirements such as a Transaction Based Capital Requirement (TBCR), Special Capital Requirement (SCR) and a Stored Value Capital Requirement (SVCR), where the highest is applicable. The licensing fees typically range from $5,000- $100,000 for all payment services and BNPL.

The FSRA provides the requisite capital requirements and fees for all FinTech activities under the Fees rulebook. The FSRA, in a similar fashion to the DFSA, also provides a wide capital requirements structure, and depending on the activity, it may be lower or higher in comparison to the DFSA requirements. The capital requirements are generally guided by a BCR that ranges between $50,000 to $2,000,000, an EBCM, and the varying capital requirements including the TBCR, SCR and the SVCR, where the highest is applicable. The licensing fees typically range from $5,000-$25,000 for all payment services and BNPL.

VI.Conclusion

The FinTech landscape in the UAE has witnessed substantial growth and strategically positioned itself as a leader in the global financial arena. The remarkable progress is attributed to a harmonious blend of government support, a tech-savvy population, and a robust financial sector. As the FinTech market continues to evolve, the UAE is poised to maintain its growth trajectory. The solid regulatory foundation and a commitment to innovation and collaboration position the UAE as a beacon of excellence in the ever-expanding global FinTech landscape.