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The disruptive power of Fintech is being increasingly felt across the Middle East as governments look to diversify their economies and improve productivity through increased uptake of innovation and technology. This is creating immense opportunity for Fintech challengers and innovators. The GCC Finanicial Forum 2019 explored the implications of this evolution for financial services professionals, and for the future of their businesses.
Once again over 800 delegates from across the Gulf attended the two-day event, which featured speeches and interviews with international financial leaders and top regional policy-makers. Speakers addressed how Bahrain and the wider GCC region is adapting to change and supporting an evolving Fintech ecosystem, through a series of talks and panel discussions.
We were privileged to hear from global tech innovator and Apple Computer co-founder Steve Wozniak, who took to the stage for a keynote address, interview and town hall discussion. Wozniak told delegates that his driving passion was creating mobility through technology. It was why he built the Apple computer in the first place – so people could own their own machines at home. When questioned on life-changing new technology, Wozniak said the third-party App store changed his life the most: “Build a platform and then allow other people, who are smart, to use it.”
Euromoney was also delighted to welcome HE Shaikh Salman bin Khalifa Al Khalifa, Bahrain’s Minister of Finance and National Economy, and HE Mr Zayed R. Alzayani, Bahrain’s Minister of Industry, Commerce and Tourism as keynote interviewees at the Forum.
Highlights of the event included the traditional ‘town-hall’ session with HE Mr Rasheed Mohammed Al Maraj, Governor of the Central Bank of Bahrain, a headline interview with HE Mr Khalid Al Rumaihi, Chief Executive of the Bahrain Economic Development Board, and a talk from PwC’s Henri Arslanian on global trends in cryptocurrency.
“Technology is disrupting every sector in the world,” said HE Mr Khalid Al Rumaihi. Banks are being disrupted by customer expectations. They want a different experience in the way they engage with a bank, he commented. “We have to embrace technology to be relevant in the financial services sector.”
The two day conference also included a panel discussion on the reinvention of financial services, featuring panellists from J.P. Morgan, Ovamba Solutions and ARK Investment Management. Dedicated discussions were also held on topics such as responsible finance, women driving innovation in finance, open banking, and regulatory developments.
We asked panellists: just what is responsible finance? “It’s about democratising finance,” commented Inge Relph. “Making it transparent and accessible. And engaging people where their values lie. Change will come from the ground up.” Another panellist said the question we should actually be asking is what is irresponsible finance? One, a failure to prioritise financing for more important sectors of the economy. Two, a failure to provide financing in a more affordable way to embrace innovation. Three, a failure to be profitable for your shareholders. Maximising impact for your local economy is vital. As an investor, Irfan Khan from Yielders said it is about considering your ultimate consumer. And vice versa. It’s about consideration across the whole spectrum.
Women make up half of the GCC population, yet represent only 25% of the labour force. Limited participation and employment of women makes it challenging for them to access financial services fully. Fintech, both as a service and as an industry employer, is changing this dynamic. Speakers looked at a number of specific initiatives that have been introduced to increase inclusivity of women in financial services, as evidenced by Women in Fintech, Bahrain. It can also help decrease information asymmetry (including financial literacy and education), improve competition, and decrease the cost of lending to small businesses. Big data analytics, alternative credit scoring, account aggregation, financial service comparison and mobile banking, all have great potential to grow the GCC market.
On regulation, speakers discussed how it should be used more effectively to promote innovation. In particular, across the GCC. Promoting regulatory harmony across borders, the panel concluded, was a key to boosting the growth of SMEs. The panel also explored how governments can create a regulatory environment that actively encourages and fosters original ideas and technological innovation, as opposed to miring it in red-tape. But it also pondered questions about the sheer speed of technological change: was the pace of change so fast that regulation could never keep up – and what kinds of threats did this pose to the stability of the financial system? The panel concluded that the right kinds of regulations could do wonders to boost innovation, but that there was perhaps too much focus on regulatory sandboxes and not enough action.
Euromoney would like to thank our co-host the Bahrain Economic Development Board, and all of our sponsors, speakers and delegates, without whom the event would not be possible. We look forward to the next GCC Financial Forum in 2020, and to seeing you there.
Interview with ARK Investment Management
Ahead of The GCC Financial Forum 2019, Richard Banks, Consulting Editor at Euromoney Conferences interviewed Catherine Wood, Founder and Chief Executive Officer at ARK Investment Management on investment in disruptive innovation and the tech future of GCC Nations.
1) Please tell us a little about ARK. Who are you, what do you do, why are you different?
ARK is an investment manager focused solely on disruptive innovation because we believe innovation is key to growth. We aim to identify large-scale investment opportunities by focusing on public companies that are the leaders, enablers, and beneficiaries of disruptive innovation.
Despite its potential, opportunities resulting from disruptive innovation often are undiscovered or misunderstood by traditional investment managers who are too focused on sectors, indexes, short-term earnings and price movements. Through an open research process that cuts across sectors, industries, and markets, ARK seeks to gain a deeper understanding of the convergence, market potential, and long-term impact of disruptive innovation.
2) Could you please speak to your partnership with Nikko Asset Management?
We are honored and delighted to be partners with Nikko Asset Management, a firm with global presence and more than 30 years of experience managing assets throughout the Middle East. Nikko AM’s appetite for innovation focused investment solutions is well aligned with ARK’s conviction that innovation is key to growth. Through this partnership, ARK has benefitted from Nikko AM’s strong footprint across Europe and the Asia Pacific regions. As a result, we believe an entirely new market of investors has been able to access investment opportunities in our disruptive innovation strategies.
3) Your firm is based on the theme of investing in disruptive innovation. What is disruptive innovation and why is it something to invest in?
ARK believes that disruptive innovation is key to long-term growth of company revenues and profits and, therefore, focuses solely on investing in disruptive innovation. ARK defines ‘‘disruptive innovation’’ as the introduction of a technologically enabled product or service that should transform economic activity by creating simplicity and accessibility while driving down costs.
Despite its potential, innovation typically needs time and maturity before gaining mass market adoption. Consequently, with a focus on benchmarks, sectors, and short-term performance, traditional investment managers often minimize or misunderstand its potential. Through an open research process that cuts across sectors, industries, and markets, ARK seeks to identify innovation platforms with dramatic cost declines, strong price elasticity of demand, and convergence which spawns further innovation.
Today, we believe that artificial intelligence, energy storage, robotics, genome sequencing, and blockchain technology are innovation platforms leading the global economy into what could be the most transformative period in history. While we expect each of these innovation platforms to create multiple trillions in market capitalization and spawn further innovation, the deflationary boom that they are creating, particularly as they converge, is throwing off the meaning of certain economic signals, importantly the yield curve. Today, equity markets fear the impact of a “bearish flattening”, but we believe that a “bullish flattening” is underway as technologically-enabled innovation platforms and productivity gains evolve into a “deflationary boom” the likes of which we have not seen since the late 1800s. During the 50 years ended 1929, the yield curve was inverted more than half of the time as the disruptive innovation platforms of that day – the automobile (internal combustion engine), telephone, and electricity – unleashed periods of extraordinary real growth at low rates of inflation. The steepest inversions occurred during periods of the most rapid growth in real GDP. We would not be surprised to see this seeming “disconnect” during the next few years, but investors will have to extend their time horizons and their understanding of economic history to understand the economic impact of these profound technological breakthroughs.
4) What are the key sectors which you believe will experience disruptive innovation in the next five years? Why?
Not only will innovation stimulate substantial growth and create new markets, it also will disrupt sectors which historically have stoked high inflation. Global oil demand is likely to peak within the next few years as electric vehicles begin to scale and as autonomous electric taxi networks account for an increasing share of miles traveled. DNA sequencing will introduce science to health care decision-making in a way never before possible, minimizing the guess work and eliminating waste which, according to some estimates, could be 40% with some estimates reaching as high as 50%. At the same time, robots will serve not only as an antidote to labor shortages that are cropping up in the US, Japan, China, and elsewhere, but also should increase productivity, one of the most powerful forces against inflation.
5) Why are you different to a private equity or tech VC firm?
ARK aims to capture growth in the public markets. We aim to identify large-scale investment opportunities by focusing on public companies that are the leaders, enablers, and beneficiaries of disruptive innovation. We believe innovation investors have crowded into the private markets, while at the same time the public markets have increasingly gone passive. Thus ARK believes innovative public companies growing at exponential rates are the most inefficiently priced part of the equity markets.
6) Has the tech bubble burst?
The tech and telecom bubble put in motion five general purpose innovation platforms that are hitting tipping points, while cutting across economic sectors and converging to spawn more innovation. We identify the five innovation platforms as genome sequencing, robotics, energy storage, artificial intelligence, and blockchain technology.
Unlike the narrowly focused tech and telecom bubble which caused a capital spending sinkhole but no killer apps, these platforms have hit price points low enough to unleash demand, create new markets, encourage experimentation, and democratize access. The cost to sequence a whole human genome, for example, has dropped from nearly $3 billion in 20001 to less than $1,000 today and, according to our research, is on its way to $100 in 2021. As a result, the demand for whole human DNA sequencing is beginning to explode. Industrial robot costs are heading toward $10,000 and a payback period of six months, giving small businesses access to productivity enhancements never before possible. 3D printing is cutting costs by up to 75% and shifting power from large manufacturers to more entrepreneurial or creative designers, while drones are cutting delivery costs by up to 90% and distributing medicine to remote villages in Africa and Asia. Electric vehicles will be less expensive than gas powered vehicles in fewer than five years, and will continue to fall in price, giving more consumers the opportunity to experience 0 mph to 60 mph in fewer than 3 seconds and get to work for $0.26 per mile instead of the $3.50 per mile on average charged today by US taxis. Meanwhile, computing performance per dollar continues to improve at more than 40% per year, which has given birth to modern artificial intelligence (AI), and as blockchain technology proliferates the marginal cost of money transfers likely will drop to 0. A global digital currency, over which no government has control, could become the killer app of the century.
While the equity market may have narrowed in its focus for a time this year, the investment backdrop today bears no resemblance to the excesses that took place in the late nineties. Investors have been climbing a wall of worry since the market hit a “triple top” in 2013, the Fed has been tightening, and capital spending had been moribund until recently, adding to our confidence that capital flows into disruptive innovation have been discerning, certainly in the public, if not the private, markets.
The tech and telecom bubble did see the future, perhaps 15-20 years too early. That future is now and, if our research is correct, the payoff will last for the next 15-20 years.
7) What is your view on the tech future of GCC nations (Gulf Cooperation Council, political and economic alliance of six Middle Eastern countries—Saudi Arabia, Kuwait, the United Arab Emirates, Qatar, Bahrain, and Oman) like Bahrain?
Significant traction has been built around implementing blockchain and cryptoassets in GCC. The UAE is at the forefront of becoming the fintech hub of the east. “In 2016, the foundations were laid for Dubai to uncover startup companies that could help drive the way for the city to become blockchain-powered by 2020.” This will entail reducing the cost of processing residencies, correcting inefficiencies of passport documentation, and facilitating cross border payment transactions.
Contingent upon Dubai’s success, we believe other GCC members could follow suit, including Bahrain, which has a longstanding positive view on blockchain. In fact, a year ago, Khalid Al Rumaihi, the country’s chief executive of the Economic Development Board, called blockchain “a huge opportunity for Bahrain”. Abdulhussain Mirza, Bahrain’s minister of electricity and water affairs, also believes “blockchain’s ability to protect user’s data is a true mark of progress.”
We are beginning to see tangible initiatives taking place in the region, with no sign of slow down. Bahrain’s Institute of Banking and Finance recently launched a “Blockchain Academy”, providing courses on blockchain development, implementation, and strategy. The launch of the academy comes during the same time that its central bank published a comprehensive document on regulating cryptoassets.
In addition to blockchain and cryptoassets, we believe these nations may invest in electric vehicles as they reduce their reliance on oil. We also believe air taxis will become relevant as governments are funding and allowing regulations to test air taxi technology.