Saudi Arabia presents big opportunities for fintech-driven disruption given factors that contribute to a high volume of cash in circulation (which we discuss below), poor credit access and the limited reach of the traditional banking sector, which historically has been much more focused on servicing larger corporates.
With 2021 start-up funding 50% higher than the previous four years combined, and fintechs accounting for more transactions than any other sector, we take a detailed look at the fintech opportunity in Saudi Arabia, the current state of the fintech ecosystem and startup funding trends.
Financial depth in Saudi Arabia lags many other emerging markets
In several key areas, the reach of the financial services industry in Saudi Arabia is worse than elsewhere in the emerging markets world. Formal credit penetration is low, and this extends to specific products such as credit cards. Even relative to other urbanised economies, the size of the country’s bank branch network is small. Much of the expatriate population has no, or limited access, to the banking system.
These factors contribute to a relatively high volume of cash in circulation. Given these characteristics, Saudi Arabia presents many opportunities for fintech-driven disruption.
Saudi Arabia’s fintech ecosystem is small, but fintech density is adequate
In absolute terms, the fintech landscape of Saudi Arabia is smaller than in the larger emerging markets, reflecting the country’s modest population (35mn). However, the country’s fintech density (ie fintechs per mn individuals) still surpasses many EMs. But many of these firms are quite small (as evidenced by the proportion of early-stage deals, and the results of our proprietary industry survey) and the overall fintech ecosystem is yet to mature.
Saudi Arabia's fintech product mix is skewed towards payments and lending
Saudi Arabia's fintech ecosystem is less diversified than in other markets. Payments and lending firms together account for 61% of the total fintech population – and for emerging markets as a whole, we estimate this figure to be 49%.
Another sector where Saudi fintechs are more active is fintech software solutions. The 12% we observe in Saudi is well above the 5% for global EM. Blockchain is the next largest sector, followed by investech and insurtech.
In our view, as we have seen elsewhere, the mix of fintech activity in Saudi Arabia is likely to diversify away from payments and lending over time. On this basis, investech and insurtech could experience the fastest growth, as these sub-sectors are currently under-represented relative to peer fintech systems. Digital banking also holds strong potential, given currently low financial penetration and the potential for servicing lower-income individuals.
Financial inclusion is a major goal of the Saudi Financial Development Programme, which is part of the Saudi Vision 2030 reform programme. Accordingly, we think the regulatory environment for fintechs over the coming years is likely to prove favourable.
Saudi Arabia's startup funding broke records in 2021; fintech is a top recipient sector
Saudi Arabia experienced a stellar 2021, with record-breaking venture capital investment of US$548mn, according to Magnitt, compared to US$148mn in 2020 and an aggregate of US$361mn in 2017-20. The number of deals rose 54% yoy to 139. Notably, more activity was witnessed during the second half of the year, when two-thirds of investments were deployed, which suggests this positive momentum could continue into 2022. The largest single transaction was the US$125mn funding round for enterprise software firm, Unifonic, accounting for almost a quarter of Saudi Arabia’s 2021 total.
Fintechs accounted for 19% of all transactions, more than any other sector. However, its 17% share of value was surpassed by both e-commerce and enterprise software. The e-commerce share of value was boosted by the Sary (US$106mn), while enterprise software was boosted by the Unifonic transaction highlighted above.
The average transaction size for fintech funding deals last year was US$3.4mn. The largest deal was closed by Rasan (a software solutions provider to the banking and insurance sectors) at US$24mn, accounting for around a quarter of the sector’s total.