CAIRO - 20 May 2019: In a country where the population surpasses 100 million with a big portion lacking financial services while the rest need more efficiency, Fintech can provide solutions for all Egyptians. Fintech has been expanding in the country attracting more consumers and not just businesses. As many financial services like banking and equity crowdfunding are becoming digitized in some parts of the world, it is crucial to understand the status and opportunities of such technology in the North African country.
Significance of Fintech
Fintech is any technological innovation in the financial sector. Its scope includes several services such as cryptocurrency, digital cash, cybersecurity, smart contracts and blockchain technology which is a distributed ledger technology (DLT) maintaining records on a network of computers without a central ledger.
It also consists of open banking whereas third-parties get access to bank data in the purpose of building applications that create a connected network of financial institutions and third-party providers.
Insurtech facilitates the insurance industry. Regtech helps financial service firms meet industry compliance rules such as those pertinent to anti-money laundering and fraud fighting. Robo-advisors utilize algorithms to automate investment advice.
Unbanked/underbanked services target individuals ignored or underserved by traditional banks or mainstream financial services companies. Fintech is used by banks, corporates, small businesses, and consumers.
Founder and Director of AUC Venture Lab and Abdul Latif Jameel Endowed Chair of Entrepreneurship Dr. Ayman Ismail told Business Today Egypt that finance need specific expertise or knowledge and that Fintech is about either replicating a business model in a digital way or invent.
"There is more complicated rationale behind enabling technology than e-commerce," Ismail explains saying that basic financial knowledge of Fintech is crucial in addition to a very high understanding of regulations.
Current Performance of Fintech in Egypt
Only 14 percent of the Egyptian adults have bank accounts while the rest are unbanked. According to a paper titled “FinTech in the Middle East,” the most mature sectors within Fintech in Egypt are payment services, mobile cash, and smart wallets. The country has more than nine million wallets as 200,000 to 300,000 wallets being opened every month.
As for payments, there is a growing need for digital peer-to-peer transfer, bill payments, microfinance, payroll, pensions, social-security payments, merchant purchases, online purchases, and local and international remittances.
CBE is eager to move towards a cashless economy. Banks can apply to provide mobile wallets and to act as an issuing bank to take cash deposits in exchange for issuing electronic money, according to the report published in Clifford Chance.
Fawry is a Fintech pioneer when it comes to serving consumers. It was launched in 2008 providing payment solutions through ATM machines, mobile wallets, and retail points.
The World Bank Group and its partners selected Egypt, China and Mexico as the three pilot countries for its “Financial Inclusion Global Initiative”. The aim of the three-year scheme is to advance research in digital finance and accelerate financial inclusion in developing countries.
Opportunities and Market Needs
As for how to bark into the industry, the assistant professor highlights that the challenge is not in getting funding but in providing assistance for startups to achieve progress. Currently, the biggest opportunity is in mobile payments apps, Ismail clarifies.
That is because of the presence of a suitable infrastructure so that now the country has more than 10 million mobile wallets. "Fintech in Egypt is much outside the banking system than other countries. Mobile wallets would increase in Egypt within two years than bank accounts," Ismail states.
The expert says that the country would witness an expansion in digital products, credits and financial services by mobile operators. Ismail describes payments as first stage, while he anticipates that once regulations are set the second stage would include crowdfunding, digital lending, and micro-insurance.
However, the first stage still has a big room for growth. "Retailers want to expand their reach serving more customers as there is growing demand. Thus, there will be an increase in e-commerce and large retailers would resort to Fintech. Then, there would be a trickle down," the AUC Venture Lab founder explains saying that it hard to predict when the society would become cashless giving the example of WeChat which acquired more than one billion users in four years only.
Ismail recommends startups to "innovate and not replicate" stressing that "if real value is delivered to users - whether merchants or consumers - they would switch to Fintech."
Managing Director of Egypt for Information Dissemination (EGID) Maher Asham concurs that mobile payments apps lie on the top and that those who buy products online are likely banked.
"In rural areas, post offices located in towns are the only means to transact money. Fintech can give unbanked people valuable services such as paying back their loans and transferring money through kiosks spread everywhere," the expert suggests.
"China is way more ahead. Street vendors use QR code payments. When you travel there you have to put cash into mobile app to pay," Asham says highlighting that "Egypt falls behind in comparison with African countries like Kenya" where Fintech is not just exclusive to payments but extends to lending platforms as well.
Vice-president of Intercap Capital and Managing Director of Cartilage Capital Bassem Fouad suggests that Fintech can expand in savings and investment products. However, the former would surpass the latter.
The reason is that many citizens are unbanked not because they have low income but because they consider banks' interests as religiously invalid and because of thinking banks are unsafe fearing that their money can be confiscated. As a result, online saving can be more appealing.
Fouad further argues that citizens between the ages of 18 and 25 do not have the culture of saving suggesting it can be promoted via Fintech. He views that although payments are the most common service by Fintech in Egypt, savings should surpass them.
The financier complains that startups' mentality in Egypt is limited to payments. In addition, the country can enjoy a platform similar to Monzo, the first online bank worldwide having deposits £2 billion. Fouad suggests that if the concept is applied in Egypt, unbanked users can transfer their salaries into the account number. Given that people in Egypt are used to get high interest rates, e-banks can purchase T-bills to provide interests for their users.
As for investments, the expert suggests introducing digital equity funding such as the UK's most popular Seedrs and Crowdcube. Crowdfunding is highly needed by start-ups in Egypt, so that investment through Fintech can be made possible so as the platform would indicate the total sum needed and the minimum amount that should be invested. The share can cost as little as LE200. However, platforms should be filter well companies that need funding.
"The market shares of very established equity firms are being shrunk by Fintech startups working in equity crowdfunding," Fouad says. Banks also have fear of digital banking so they started to acquire Fintech platforms in that sector, he clarifies.
Fouad stresses that Fintech platforms should never fall in the trap of partnering up with banks, as they are their direct competitor. Examples in the UK are Seedrs and Crowdcube.
In Egypt, Fintech start-ups can work under the supervision of a governmental body in the launching phase, Fouad suggests saying that Revolut - a digital banking alternative service - has been operating under the supervision of the Skills Funding Agency (SFA) in the UK to ensure that the venture learnt anti-money laundering techniques.
"People can be encouraged to invest in start-ups," the financier suggests saying that citizens in the UK can enjoy tax reliefs when they invest in small, early-stage companies under the Seed Enterprise Investment Scheme (SEIS), and the Enterprise Investment Scheme (EIS)
"Egypt has highly qualified people who can work in that industry. However, around 10 to 15 percent of start-ups succeed. Funds surpass the number of innovators," Asham reveals.
The expert explains that funding is not a problem and that incubators require participants to spend all their days in training sessions which may not be convenient for those who work full-time and do not afford to dedicate all their time to start-ups.
Fouad disagrees on the first point saying that funding in MENA is very limited as the great majority of Fintech startups in Egypt replicate others founded abroad and they are of poor quality, Fouad said.
Asham, who worked for 11 years at Reuters being its MENA business development manager and runs subsidiaries of EGX and Nasdaq, highlights that high transaction fees are a deterrent to e-commerce. A case in point is the 2.5 percent charged by banks to merchants for card payments. He also shed light on the fact that Egypt prohibits purchasing watches and jewelry online in prevention of money laundering.
Asham stipulates the necessity of setting regulations necessary for providing services such as digital insurance, and online currency exchange which would eliminate the black market highlighting that Fintech businesses operating in the country are both local and foreign and that they can expand to other countries in the region.
"Egyptian society society will go cashless but that will take long. It can be accelerated by putting barriers against cash. For instance, a person can get arrested in the United States for carrying more than $2,000 in cash," Fouad says.