As the economy moves further along in the digital space, the fintech ecosystem is growing with it, creating untapped opportunities that will help companies innovate, integrate and accelerate into the future.
In an interview with ITP.net, Daniel Kimerling, founder and managing partner at VC firm Deciens, discusses the factors driving the fintech evolution in the upcoming years, such as the rise of embedded fintech, which is set to enable companies to participate and compete in financial services, driving competition and innovation. He’s also answering questions on Dubai’s start-up ecosystem and open banking.
What is embedded fintech, and where do you see it going in the region?
Embedded fintech is kind of a catch-all term for a variety of ideas that really starts with the idea that financial services are an enabling technology.
Financial services have become more transparent and deeply embedded into other commerce environments. We have a number of investments in this theme, such as embedded banking solutions, embedded insurance solutions, and embedded asset management solutions.
Embedded finance tends to go hand in hand with the idea that rather than selling financial services directly, we will often sell them indirectly, and rather than selling financial services to CFOs for example, software developers become a very important constituent in the distribution of financial services.
What is your regional outlook on embedded fintech?
With such a young and tech-savvy population, it’s clear that demand for financial services will continue to grow quickly. From a demand-pull perspective, embedding financial services is the future in the region, and we’re just in the beginning days of its actual implementation. Currently, we’re in the phase where we’re building financing infrastructure in order to offer more people embedded financial services.
The regulatory structures, especially in Europe, have been very pro-embedded financial services, and the reason is that in many European markets, there’s an explicit mandate for the regulators to increase competition in financial services. Therefore, if there is a regulatory mandate to increase competition, one way that can be expressed is through more embedded solutions.
Will embedded fintech require its own regulatory framework?
The needs of financial services are pretty constant…there’s a strong need to make sure that the financial system is not being coopted by a variety of negative actors and there’s a need to reduce fraud, and a general desire for customer protection – I don’t think it is any different for the case of embedded fintech.
Is there a world where fintechs integrate with the traditional banking system or how do you foresee all of that panning out?
Consumer expectations are changing…they are very technologically savvy and demand 24/7 services. I think whether banks and fintechs integrate their services depends on whether this would be the best way to meet these evolving consumer needs. Some banks will be able to evolve, some will not, and they’ll have to partner. However, it doesn’t seem that we’ll be back to the traditional way of doing business… the future is likely to be digitally led.
Countries such as Saudi, UAE, and Bahrain have started moving towards open banking. How important is open banking becoming for the region?
Open banking and embedded finance are inextricably linked, because open banking is the mechanism by which you can embed banking and by extension, other financial services. So without API-powered open banking platforms, there is no embedded financial services. Open banking is a necessary precursor as it’s one of the core technologies.
Are there any challenges for open banking that still need to be addressed in the region?
I think the thing about open banking, and any traditional banking, is that it’s sold by banks to CFOs in a very old boys club kind of way. However, open banking requires you to sell banking over API to developers who understand how to sell the service and understand how to interact with regulatory partners in a digital way.
For open banking to be adopted in the region and globally, it will require a mindset shift and pushing boundaries. Open banking also goes hand in hand with an increase in desire for competition, which creates both risks and opportunities for incumbents. Oftentimes, those incumbents have entrenched interests, making it difficult to manage the role of promoting competition in alignment with open banking.
Currently, sustainability focused technology is hard to scale and make accessible for everyday consumers. How can we help scale these technologies and make them affordable for everyday businesses?
A few factors play a role in this, such as the existing funding gap and crossing the valley of death for sustainability start-ups, which is a period in the life of a start-up in which it has begun operations but has not yet generated revenue.
One method is using project financing rather than using equity capital for example to manufacture robots. If you can use project finance then it lowers your cost of capital and should lower the cost of industrial equipment to consumers. Another factor would be getting to a place where it requires less custom hardware and using more modular and off-the-shelf hardware in the scheme.
The Dubai ecosystem for start-ups is still relatively young and nascent, but is growing rapidly. From a VC perspective, what is your take on the UAE’s start-up ecosystem?
The infrastructure is strong and is present…it’s poised to be very special because I think the UAE is the gateway to the Middle East and Africa. If you want to build a company that services the Middle East and Africa or if you want to deploy capital into those companies, then there’s no better place to be.
