As financial technology, or fintech for short, has steadily disrupted banking and finance around the world in the last few years, its localization varies greatly from country to country depending on the governing regulatory framework.
In Egypt, this has meant that fintech startups looking to enter the market have to rely on partnerships with well-established banks. In other words, they are forced to offer their innovative solutions through the main players in the very market they are trying to disrupt.
There are a lot of services and transactions startups are not allowed to cover on their own due to the country’s rigid banking regulations, such as accepting deposits, an essential element to a lot of financial services. In this context, partnering with a bank becomes an essential part of any fintech startup business model.
While this represents its own set of challenges and opportunities, a sort of symbiotic relationship has developed between the two ends of the fintech industry.
Incubators have played the middle-man and part of their mentoring to the startups now involves matching major banks with nascent fintech companies.
“There are a lot of disruptions in this field, but Egypt is a bit behind because we have a conservative regulatory system,” says Ayman Ismail, an assistant professor of management and Abdul Latif Jameel Endowed Chair of Entrepreneurship at AUC, and the founder of the AUC Venture Lab (AUC V-Lab) incubator.
Whether using beacons in banks to identify customers as soon as they walk into a branch, utilizing virtual reality (VR) to provide customers with relevant information without forcing them to wait in line, or using blockchain technology to enable cash transfers from smartphones, the fintech industry goes far beyond merely digitizing individuals’ wealth.
The global banking scene has witnessed the emergence of over 1,000 fintech startups, of which only about 50 emerged from the MENA region, according to a recent report by Arabnet, a regional events, media and research company focused on digital business and entrepreneurship. Of those 50 startups, about 72 percent were born in the United Arab Emirates (UAE), Lebanon, Jordan and Egypt.
“We started seeing fintech startups in Egypt when the Central Bank of Egypt (CBE) started updating their regulations around mobile payments, mobile wallets and microfinance,” says Ismail.
While fintech investment on a global scale reached about $50 billion since 2010, it came in at $5.3 billion in the fourth quarter of 2016 alone, as per a study by management consultancy Accenture. The MENA region has seen the smallest portion of these investments with only 1 percent of the total, according to a report by the global firm Boston Consulting Group (BCG).
As a fintech startup, you’re too small for the bank to see you.
A similar report by global auditors KPMG International estimates that global investments reached $8.4 billion in the second quarter of 2017, making the year an all-time high.
On a regional level, the industry rallied to become one of the fastest growing industries, prompting startup incubators and accelerators to foster emerging companies aiming to add to the field.
The local market
While many parts of the world race toward a cashless economy, Egypt lags behind for a number of reasons.
On the one hand, news of digital carrier billing platform TPay acquiring its competitor DCBEgypt this year is a positive sign, following a $100 million majority stake acquisition of electronic bill payment platform Fawry by a consortium of international financial investors in 2015
On the other hand, Egypt’s digital adoption in the banking sector lies at 64 percent, among the lowest rates in the region.
AUC V-Lab’s Ismail says that “conservative” banks in Egypt are not making it easy for startups to flourish.
As a startup, “you are too small for the bank to see you,” says Alain Hajj, founder of payment service provider PayMob.
The company has two lines of business. On one side, it provides mobile money infrastructure for banking and telecom operators, and on the other, it offers merchants different payment acceptance solutions as well as cash management services.
When the company first launched in 2015, the founders found difficulty in establishing trust with the big banks, partly due to their young age. It also took a while to educate banks on how to find mutually beneficial dynamics with startups.
“Regulations do pose challenges for startups, but there’s always a workaround,” says Hajj, and one straightforward way to overcome obstacles is to partner with a bank.
“Whichever sort of electronic transaction you wish to perform, it needs to go through a bank so that the CBE can monitor what’s happening,” he adds.
The numbers indicate that banks can profit from joining forces with fintech startups. As an example, blockchain technology alone could lead the world’s largest banks to bring down their annual infrastructure cost by between $8 billion to $12 billion by 2025, according to the Accenture report.
Seeing the value behind fintech, some accelerators and incubators in the region and in Egypt launched programs dedicated specifically to fostering fintech startups. In Egypt, among the first to take on this initiative were AUC V-Lab and startup accelerator Flat6Labs Cairo.
The accelerators themselves have partnered with banks to provide these mentorship and incubation activities and have since graduated several cycles of startups.
In 2016, AUC V-Lab partnered with Commercial International Bank (CIB) to launch a fintech accelerator. Earlier in the same year, Flat6Labs began its partnership with Barclays Bank Egypt on its 1864 Accelerator focused on fintech.
Willie Alamein, managing director at Flat6Labs Cairo, says startups should not be dissuaded from working with banks.
“We do not advise them [startups] to change what they are doing because at some point, the regulator will pay attention to the benefits they can get from startups,” Alamein says.
Accelerators can step in and help bridge this gap while mentoring startups on how to overcome the obstacles banks present.
Similarly, Ismail says AUC V-Lab provides fintech startups with insights on how to navigate the regulatory constraints and how to go about operating within that process while connecting them with banks.
For some banks, the potential is clear, and so they are more willing to take a leap of faith and work with the more agile, innovative startups to expand their customer base.
“Banks in general are conservative organizations, so it is much easier for them to partner with a startup. The bank can provide the heavy-lifting process that is required and the startup can take on the innovation,” Ismail explains.
Through the partnership between CIB and AUC V-Lab, the bank came in with deep industry knowledge and the startups brought in their innovative and disruptive solutions through an array of services.
“We are giving [banks] a chance to interact with the fintech space so they can maintain their innovative edge,” Ismail adds.
One of the objectives of CIB is increasing financial inclusion, as well as having access to innovative startups that they can help incubate, promote and even invest in on the long-term.
While Egypt’s banked population is still at a considerably low 10-13 percent, fintech may be the key to growing the segment of the population that has access to financial products.
Although none of MENA’s most funded fintech startups are based in Cairo, the country has dozens of companies steadily making their foray into the market as the global trend sees customers increasingly preferring to use mobile banking applications.