Digitalising payments and payment systems have certainly facilitated convenience, speed, ease of doing transactions and inclusion. Fintech has come a long way with the implementation of digital financial services. A wide range of online and digital financial offerings owe it to Fintech for their existence. Fintech has been a major game-changer for financial inclusion and UAE holds the highest financial inclusion rate at 46 percent. Dubai has been leading the region in the adoption of financial technology innovation and services and has been building an ecosystem to enable financial innovation to grow and be adopted in this region. It is predicted by some sources that the investments in Fintech to reach more than 2 billion dollars by 2022. To make matters even more cost-efficient and purposeful, Dubai International Finance Center (DIFC) is enabling an ecosystem for financial services start-ups to grow and venture capital environments. This article wishes to delve into UAE's framework for operation and licensing of Fintech in the UAE, and to track a few recent developments in the field.

Regulating Digital Payment Solutions in the UAE

The United Arab Emirates Central Bank regulates the businesses in this sector and is generally called Stored Value Facilities (SVF), to balance the interests of the consumers while facilitating Fintech firms, payment service providers and so on. Issuing and operating an SVF in the UAE requires a prior licence from the UAE Central Bank in order for the company to operate an SVF for a single purpose. This is a positive and an important change from the previous requirement that mandated companies wishing to operate as retail payment providers to enter into a partnership with a commercial bank.

In response to the Fintech developments, the Central Bank of the United Arab Emirates (UAE) adopted the Stored Value Facilities Regulations (Regulation of 30 September 2020). The SVF Regulation repeals and replaces the SVF Regulation for Electronic Payment Systems (SVF) of 2016. The scope of the 2020 SVF Regulation now includes regulations on licensing, supervision, and enforcement of SVFs for companies licensed by the UAE Central Bank (CB) to provide SVFs.

Key highlights of the Regulation include a streamlined application process for licences, the inclusion of the regulation of licensing activities relating to crypto-assets and virtual assets, the ability to obtain a licence without having to cooperate with a commercial bank, the regulation of cross-border offers of SVFs in the UAE and the recognition of the e-KYC process for such business activities.

The regulations are concerned with the regulation of Fintech solutions and crypto assets as well and define SVFs and licensing in the first article. Licenses are to be obtained from the Central Bank, which continues to exist unless withdrawn, suspended, or revoked by the Central Bank. The regulations define Stored Value Facility in an exhaustive manner, as "A facility (other than cash) for or in relation to which a Customer, or another person on the Customer's behalf, pays a sum of money (including Money's Worth such as values, reward points, Crypto-Assets or Virtual Assets) to the issuer, whether directly or indirectly, in exchange for:

(a) the storage of the value of that money (including Money's Worth such as values, reward points, Crypto-Assets or Virtual Assets), whether in whole or in part, on the facility; and
(b) the “Relevant Undertaking”. SVF includes Device-based Stored Value Facility and Non-device based Stored Value Facility."

Part 1 of the Regulations delves into the licensing requirements and procedure involved, in detail. The first article here, while describing license as a basic requirement, also contains a provision prohibiting operation without a license. Licenses are required except for specifically excluded categories such as certain digital product purchase solutions/ bonus point schemes. As per Article 3, the Central Bank is bestowed with the function of oversight and licensing. The applicant must be a company registered in the UAE, excluding financial free zones, and must demonstrate that they'll comply with the requirements stipulated, including financial resource requirements, business requirements, technological requirements, corporate governance requirements and so on, listed under Part 2 of the Regulations. Here, it is pertinent to note that, while licensed banks are deemed to be authorised, they are expected to inform the central bank as well.

Before the application begins, there shall be a preliminary meeting and obtaining of application from the Central Bank. Subsequent to the completion and submission of the application, the procedure for approval begins. Here, the Central Bank might ask for required information and incomplete submissions might inevitably result in processing delays. Once the application is approved, as per the above mentioned process set out under Article 4 of the Regulations, the license shall be granted with a unique reference number and date of issuance. However, it may be noted that violations of these regulations can result in supervisory action and financial sanctions, as per Part 3 of the Regulations.

Financial institutions in financial-free zones that intend to conduct SVF-related business in the UAE, both onshore and offshore, must obtain a licence from the Central Bank. Securities and financial products regulated by the relevant financial services regulators in the offshore UAE (DIFC and ADGM) include bonds, derivatives, structured products, deposits, bonds and warrants but are not limited to them.

FinTech in Free Zones

In January 2017, DIFC launched the Fintech Hive accelerator program, which provides financial service providers with a platform to develop solutions for the financial sector. A unique fintech accelerator in the region that connects the DIFCs community of active companies with start-up Fintech companies from around the world, enabling them to develop, test and adapt their products and solutions to the needs of the regional financial services sector. With the introduction of the Dubai Financial Services Authority (DFSA) Centre, and the Innovation Testing and Licensing (ITL), it provides a controlled environment for companies to develop and test innovative Fintech ideas, subject to the regulatory requirements imposed on them by authorised companies. The Dubai Financial Service Authority (DFSA) Innovation Testing License (ITL) provides a regulatory framework for FinTech Hive participants whose products and services require regulatory oversight to develop and test under a limited license in terms of protection that is subject to regulation during the relevant testing phase. In this respect, FinTech companies can apply for an ITL, a limited class of financial services licenses that allows them to test new products, services and business models, comply with rules and appropriate testing, and be subject to regulatory requirements. In May 2017, DFSA and the Financial Services Regulator (DIFC) announced that FinTech companies can apply for a type of licence for financial services called an innovation test licence.

Sponsored by the Abu Dhabi Global Market (ADGM) and the Financial Services Regulatory Authority (FSRA), the two-year RegLab enables FinTech start-ups to test and develop new ideas in a secure environment to maximize the potential of young entrepreneurs while minimising the licensing procedures and costs. Under the RegLab framework, fintech participants have a two-year period to develop, test and market their products and services in a controlled environment with a viable business model before moving to the full regulatory and supervisory system. The FSRA RegLab framework applies to two categories of FinTech participants: FinTech products that are untested on the UAE market, who want to live and test their products in a controlled environment, and ADGM, who are attracted by the full range of regulatory requirements to market their FinTech product but want to continue to explore and develop their products within the confines of a RegLab.