Last July, Egypt’s central bank laid out its licensing and regulatory framework for digital banks, generating strong interest from digital finance companies, fintechs and existing lenders.
After all, the licences offer a chance to access a market of over 100 million people – the largest in the Middle East and North Africa – unencumbered by traditional banking sector bureaucracy.
Almost a year later and the market is still waiting for the first licences to appear. Industry figures say around 10 banks have applied for a digital licence, but everyone expects Misr Digital Innovation (MDI) to be the first recipient. Banque Misr created MDI in 2020 with the express purpose of launching Egypt’s first digital bank.
An executive who has been working with MDI expects the bank to receive a licence in May and start operations before the end of the year. In addition to waiting for licences, applicants will also want to see some necessary regulatory changes made.
Perhaps the most important is electronic know-your-customer regulations (E-KYC). At present, central bank-regulated entities, which include digital banks, still need to use physical documents for KYC. Non-banking financial institutions (NBFI) including fintechs are regulated by the Financial Regulatory Authority (FRA) and are already allowed to use E-KYC.
Analysts say that for many lenders – state-owned banks in particular – digital licences will be essential. These banks have operations that are too big and too mired in cumbersome physical processes to fully digitise. Setting up a digital bank from scratch is not an easy task, but it offers a clearer route to the efficiency and agility that full digitisation offers.
This is not the case for everyone, however. “We get challenged on why we don’t pursue a digital licence,” says Todd Wilcox, CEO of HSBC Egypt. “The answer is we don’t need it – we can do digital without setting up a different entity with a separate licence.”
Fintech partnerships can give us capabilities we wouldn’t otherwise have and I see that as a great opportunity.
HSBC adopted digital processing across its entire wholesale portfolio in 2023, decreasing the need for manual payment processing by over 75%. In its retail operations, around 80% of clients are registered on its digital platform, which processes over 3 million transactions.
Collaboration between banks and fintechs also provide a way for the two sides to benefit from one another’s competitive advantages. “I would rather partner with a fintech company to extend the services that we can offer,” says Wilcox.
HSBC has partnered with several local fintechs to provide trade and payment solutions for firms that operate in the supply chain of existing HSBC customers. “We’ve bolted [fintech services] on to reach clients that we can’t cover,” he says. “Fintech partnerships can give us capabilities we wouldn’t otherwise have and I see that as a great opportunity.”
The Egyptian financial ecosystem is increasingly populated by new players with new kinds of licences. EFG Hermes announced in March it had secured approval for an NBFI venture that will provide financing products to Egyptian SMEs.
MNT-Halan, a fintech focussed on Egypt’s unbanked, obtained the first independent electronic wallet licence last year and has a rapidly-growing loan book of over $500 milliion equivalent. Much of its loan growth is SME-led.
But there have been fintech failures as well as successes, which will give the digital banks in waiting sleepless nights. “Banks often have two main concerns when they launch an online product,” says a former fintech CEO. “One is that no-one signs up, the other is that too many people sign up.”
One of the biggest success stories is consumer payment app Telda. The firm received a licence to issue prepaid cards in 2022 and now has over 500,000 cards - more than some banks. Several fintech competitors, however, tried to emulate Telda’s trajectory and flopped. In the Egyptian market, much depends on user experience and consumer reviews - predicting success is hard.
These dual concerns illustrate just how quickly digital finance is moving in Egypt, and this pace of change will put pressure on digital infrastructure and regulation. Cybersecurity is one example. Payments fintech Fawry – which is considering applying for a digital banking licence – had its testing environment hacked in November. “The pace of development in fraud and cybersecurity has been quite extraordinary,” says Wilcox.
Local subsidiaries of international firms like HSBC and Standard Chartered have the advantage of global scale, but for smaller banks making sure their systems are resilient and up-to-date can be a challenge.
The central bank and FRA are already cautious, and require banks and fintechs to host data locally. But as cloud-reliant AI spreads across Egypt’s financial sector, this local requirement could become an issue.
The largest lenders are likely to find local vendors willing to provide cloud services because their scale makes the contract profitable. Smaller digital lenders, however, may struggle. The former fintech CEO says the market is keenly aware of the tension between surging demand for cloud services and regulatory vigilance.
For Egyptian consumers and firms, access to finance and payment solutions has never looked better. Banks and fintechs, meanwhile, are preparing for a new wave of competition.