Egypt’s banks increase focus on consumer opportunity

Egypt’s banking industry and Cairo’s Natural History Museum have something in common, according to some in the country’s burgeoning fintech sector. “Dinosaurs” is how the founder of one startup firm describes some of the less innovative local lenders, when talking to Euromoney. But some of those dinosaurs are more evolved than they appear.

Egypt’s fintechs want more from the banks – more support, more partnerships and more funding – and there are clear signs that the industry is starting to deliver. Egypt’s financial sector, not traditionally distinguished by its speed, is evolving fast. It needs to, as the digital transformation of consumer finance in the country is well underway.

The pandemic accelerated the adoption of fintech solutions worldwide, but Egypt’s government was already making good headway in its push for a cashless society and the provision of digital financial services before Covid-19 hit. Its 2019 FinTech & Innovation Strategy gave shape and purpose to reform; and an entire chapter of Egypt’s new 2020 banking law focused on payment service providers and technology. The main regulators have made a serious effort to level the playing field for financial startups.

“The central bank and the Financial Regulatory Authority have both upgraded their regulatory framework to be more accommodating for digital payments and fintech firms,” says Sherif Samy, chair of the Egyptian FinTech Association and non-executive chair of the country’s largest private-sector lender, Commercial International Bank.

The numbers paint a vivid picture of the resulting growth. There were just 27 Egyptian fintechs in 2019, but by the end of 2021 there were 112, according to the central bank’s inaugural FinTech Landscape Report which was released in February. Investment has soared – albeit from a low base – rising from $25 million in 2019 to $159 million in 2021. The average ticket size of a fintech deal in 2018 was only $300,000; by 2021 it had reached $5 million.

As is often the case in a new market, payments and remittance providers are easily the largest group of fintechs in Egypt. With supportive new regulation and a pandemic-driven aversion to physical proximity, cashless payments have soared. Fintech pioneer Fawry processed E£6 billion ($326.5 million) in digital transactions in 2021, an increase of 232% on the previous year, the firm announced in January. Consumer finance, meanwhile, has also enjoyed strong adoption.

“Growth has been great over the past two years on both the payments and the lending side,” says Mostafa Balbaa, co-founder and chief executive of queuing platform Dor-e. “But especially on the lending side and particularly with the increase in inflation.”

Inflation in Egypt hit 5.9% in December, according to the central bank. As that figure has crept upwards so too has the appetite for buy-now-pay-later (BNPL) lending. Typically promoted as zero interest – although often containing fees – these loans are extremely popular.

Credit cards are the obvious alternative, but the majority of the population do not own one. Fintechs have managed to cut their onboarding process down to less than 24 hours and, in many cases, approval takes minutes. This is in a country where approval for a bank loan can take days and several trips in person to the lender.

Startup Lucky – a leading provider of credit products – raised $25 million in Series A funding in late March. The firm offers its eight million registered users the option to pay in instalments of up to 60 months and reports 250% year-on-year growth in gross merchandise value. Fawry recently announced it would enter the BNPL space in 2022.

“This rapid onboarding process has really helped the lending boom in the last couple of years,” says Balbaa. “Salary advance lending is the same.” These payroll loans, as a collaboration between fintechs and companies that want to make the service available to employees, largely bypass the banking sector. There is no need for an I-Score from the Egyptian Credit Bureau, just the borrower’s ID and phone number. Credit checks at a bank typically require several different departments to collaborate and process the request, which takes days.

Despite the undeniable growth in nimble startups with the ability to access a huge pool of customers thirsty for small-scale credit, Egypt’s new generation of fintechs are not taking significant market share from the banks – at least not yet.

“In more advanced economies, fintechs are making a dent in the bank’s market, but this is yet to be seen in Egypt,” says Samy. “One of the reasons may be that we still have a sizeable part of the population that is unbanked, hence there is room for both banks and fintechs to grow with more financial inclusion.”

Another factor is Egyptian banks’ perennial focus on the bigger fish – lending to the government and large corporations. When it comes to small-scale consumer finance, the banks’ approach over the last few years has been less than enthusiastic.

Executives from older generations bemoan the lack of attention paid to individual borrowers and small companies, which has contributed to a neglect of small-scale consumer finance and left the fintechs unchallenged. This same lack of focus has made it hard for banks to support startups even when it clearly makes sense for both parties.

“We have many fintechs come and say: ‘We want to bank with you,’” says one Cairo banker. “However, our policies made it impossible to bank them, these are policies designed for a very different environment.”

Here, time is a factor for Egyptian lenders. There may be room now for both banks and fintechs to grow without competing. But, as Samy notes, this will change in just a few years as Egypt’s non-bank financial sector catches up. The best estimate of Egypt’s unbanked population in 2019 was 67%. In its recent FinTech Landscape report, the central bank put the figure around 50%.

Egypt’s aspiration to become a globally recognized fintech hub across the Middle East and Africa is pulling in talent. The cost of building a new platform is significantly cheaper in the country than in other regional economic hubs like Dubai and the population of just over 100 million – the highest in the Middle East and north Africa region – offers the prospect of scale before taking a product cross border. This is key for fintechs with an eye on lucrative foreign markets like Saudi Arabia and Turkey.

The country’s banks are keenly aware of the potential competition that they face from fintech firms and would rather head this off through a mixture of partnerships and outright investment. There have been many recent collaborations on payment cards, where banks handle settlement and transfers for consumer finance startups. Banque Misr partnered with fintech Paynas in 2020 to offer a special Visa card for small and medium-sized enterprise employees and, late last year, Lucky signed an agreement with FAB Egypt allowing it to offer an FAB-Lucky Visa credit card to customers. But increasingly, lenders say they are looking to fintech to help broaden their reach and offer products in areas like supply chain financing and consumer loans.

“We view fintech from two perspectives,” says Todd Wilcox, Egypt chief executive at HSBC. “The first is partnership: who offers solutions that they can easily bolt on to our operations, solutions that we might struggle to build ourselves and that can extend our reach.” The second, says Wilcox, is fintechs as clients and customers.

Global banks like HSBC already have experience forming fintech partnerships in other markets and their reach makes them attractive to fast-growing startups. Egypt is soon to welcome another global lender, Standard Chartered, which received in-principle approval for a fully-fledged Egyptian banking operation in January. The firm has enthusiastically partnered with fintechs in Asia, including a recent 10-year partnership with Singapore-based consumer finance startup Atome, which operates Asia’s largest BNPL platform.

“When looking at partnerships, there are plenty of untapped opportunities even in mature markets,” says Mohamed Abdelrazek, regional chief information officer for Africa, Middle East and Islamic banking at Standard Chartered. He expects the “influx of support” for Egypt’s fintech sector – from both the government and the banks – to continue to grow and is optimistic on the opportunities for fintech collaboration.

Among Egyptian lenders, Banque Misr is at the forefront of fintech adoption. The firm has incorporated a new entity – Misr Digital Innovation – which is preparing to launch the country’s first digital bank. This will compete with traditional banks across the product landscape, but when it comes to startups, chairman Mohamed El-Etreby tells Euromoney the focus is on partnerships.

“Banque Misr partners with more than 60% of fintechs in Egypt, including startup fintechs and others across payments, microfinancing and insurtech,” he tells Euromoney. “Banque Misr’s strategy isn’t to compete with fintechs but rather to cooperate.”

Nowhere is this influx of support from financial institutions clearer than in investment and funding. The central bank’s fintech report surveyed startups on the challenges they face. A recurrent theme was an absence of debt financing from banks and long-term investment in general. “Fintechs can have a nice app, easy to use, convenient for customers, but there is always the funding issue,” says Balbaa. “There needs to be more bank lending to the fintechs to help them expand.”

While Egypt’s banks can be criticized for their focus on larger clients to the exclusion of SMEs, the risk associated with lending to fintechs is undeniable. Nimble and innovative they may be, but clearly not all of them will survive. Two factors that should help prompt banks to provide more debt funding are that fintech operational capital needs are often relatively modest and the fact that fintechs are classed as SMEs.

The most high-profile example of banks’ commitment to funding fintech came in mid-March, when three of the country’s largest lenders – Banque Misr, National Bank of Egypt and Banque du Caire – announced their collaboration in a new fintech fund. Global Ventures, an emerging market venture firm, will operate the Nclude fund with an initial $85 million. The fund’s first four investments included Lucky, payment gateway Paymob and salary advance lender Khazna, and El-Etreby tells Euromoney the bank is also building its own incubation programme to support early-stage startups.

“For banks, it ultimately boils down to a buy-versus-build decision,” says Eslam Darwish, fintech partner at Global Ventures. “Either partner with companies specializing in building tech infrastructure and fintech startups with complementary solutions or build their own, which is time consuming and expensive.”

Just one week after the new Nclude fund’s official announcement, HSBC Egypt said it had developed a dedicated lending initiative for tech entrepreneurs. “This is specifically to support Egypt’s most promising technology founders who need a global banking partner to help them scale up and connect to international opportunities,” says Wilcox.

Historically, a young Egyptian firm operating in a nascent and uncertain market would not have had banks knocking down its door to offer financing. But increasingly, bank executives recognize real maturity and capacity for growth in many of Egypt’s fintech companies. For one thing, many have come through the venture capital or accelerator funding route, which leaves them in robust shape. “We’ve sat through pitches from firms where you see the right governance, the right financial and legal expertise and the right business plan,” says Wilcox. “That’s when you think, we should bank them.”

The lack of funding for SMEs has become a clear focus for the central bank over the last few years, to the extent that the regulator asked banks to allocate 20% of their loan portfolios to smaller clients by the end of 2020. This has not happened and banks are under pressure to make progress. At hand is a credit guarantee corporation that can insure 70% to 80% of a loan. “The fintechs are companies without hard assets to pledge as collateral and not a huge volume of receivables,” says Wilcox. “This facility helps banks get more comfortable with lending.”

As the fintech offering grows, however, it is not just the individual banks themselves that are sitting up and taking notice. The entry of large state-owned platforms into the payments space brings both competition and new opportunities for collaboration. The Egypt Banks Company – whose shareholders are a group of leading commercial banks along with the central bank – formally launched its InstaPay platform in March. This gives the banking sector its own secure, instant payments app. The previous month, Egypt Post – with almost 4,000 branches and over 20 million customers – launched its “super app” Yalla. This new platform also offers payments, in addition to saving and investment functions.

Fintech association chair Samy notes that Egypt Post already has savings in excess of E£200 billion and that a “sizeable number” of its customers are not existing bank clients. “It could be a force to reckon with,” he says.

Some fintech executives even suggest heavyweights like Yalla and InstaPay could spell the end for existing payment startups. But a regulatory focus on interoperability together with widespread access to mobile platforms will ultimately benefit fintechs focused on lending and other products. New regulations approved late last year now allow customers to make instant payments between accounts on their mobile phones. As the central bank continues down the road of reform, a playing field long tilted in banks favour is becoming increasingly level.

“The regulator is moving us towards open banking and that’s another big jump that flattens the field for fintechs,” says Wilcox.