In the second part series, Michel Assaad, vice president of Europe, Middle East and Africa strategy at Citi Bank, outlines the trends that have emerged in Egypt's financial technology (fintech) space over the past year. The views expressed below belong solely to him and not his employer.
The past 10 months have been eventful, exhausting and sometimes painful. With vaccines being rolled-out, there is finally hope and a tentative timeline to get on a bumpy road to recovery.
Regardless of the timing of the recovery, 2021 will be exciting and lively for Egyptian fintechs. In addition to the trends outlined in the first part of this feature which will continue to drive most of fintech activity in 2021, there are a few other areas that I will be following closely:
Initial public offering (IPO) volume went through the roof in 2020 in the US, raising a record $180 billion, driven by a very strong stock market performance. The story couldn’t have more been different in Egypt (it was a very slow year for IPOs) EGX30 index dropped by 22.3 per cent in 2020, causing a series of postponements to several high profile processes. Depending on the developments and road to recovery, we could see a number of high-profile IPOs in the financial services and fintech spaces in the new year. Ebtikar, the non-banking financial services platform, is planning an IPO, for a 25-30 per cent stake in the first quarter of this year. E-finance has also pushed its anticipated IPO to Q1 2021. There are also rumours that Banque Du Caire (BdC) might float a share of its equity on the EGX this year while Aman holding might be heading for an IPO in the next couple of years.
Banks are expected to step up their fintech involvement and investments
Banks have always played a leading and pivotal role in financial services. This is unlikely to change anytime soon but what has already changed is the speed with which banks are embracing and accelerating innovation (through acquisitions, partnerships, venture building and incubations and intrapreneurship).
We are at a stage where it is no longer optional for banks to go all in on digital. Banks that want to lead the market will have to do a lot more than just embracing digital. A few days before 2020 ended, NBE announced the acquisition of a 24 per cent stake in Aman, similarly, Fawry and Banque du Caire have set up a joint remittance service while Banque Misr has partnered with digital payments app, Masary.
This trend is likely to continue and accelerate. I expect more banks to speed up their involvement in fintech by launching new digital products, by acquiring existing fintechs that complement their offerings and by partnering with startups that are looking for a way to enter a heavily regulated market.
Digital banking has been at the forefront of the global fintech revolution for years, and by that, I mean truly digital neobanks and not traditional banking operations that have adopted a digital layer. Globally, independent banks, with no brick-and-mortar presence, have been very successful at acquiring customers at an accelerated rate due to their seamless customer experience. Notable examples include Chime and Sofi in the US, Revolut and Monzo in the UK, N26 in Germany, NuBank in Brazil and Tinkoff in Russia. Stand-alone digital entities launched by legacy banks have generally been less successful.
On the regional level, it is still unclear who will establish themselves as the main contenders in this space. Current efforts are predominantly led by existing legacy banks, but I expect much more dynamism in the future, especially with open banking making its way to the region (open banking in Egypt is probably on my 2022 watchlist rather than 2021.)
In Egypt, we still haven’t really dipped our toes in the water. There has been news and rumours of large banks building their digital brands and others that planning to, for example, NBE and Housing and development banks are in the process of applying for CBE digital licenses, while Banque Misr announced plans to launch a stand-alone digital bank.
The battle for leadership in this space will be fierce and will not be resolved in 2021 but I certainly expect, and hope for, some developments during the next 12 months.
Expected pick-up in lending activity, with micro-financing at the forefront
In recent years, the Egyptian state, through government, FRA and CBE initiatives, has been pushing for a more dynamic micro-financing space. The microfinance loan portfolio grew at a three-year compound annual growth rate (CAGR) of 54 per cent, reaching EGP16.5 billion ($1 billion) in 2019, and is expected to continue to grow at an accelerated rate in the next few years.
We have already seen a heightened level of activity in the first few days of the new year. Fawry’s microfinance subsidiary raised EGP310 million in debt to fuel expansion. Cassbana, micro-financing startup, has raised $1 million from fintech-focused fund DisrupTech Ventures and NCB Capital’s microfinance arm is working to get the required licenses in the next couple of months
Lending in general (including buy now pay later, microfinancing, money circles, factoring and others) will remain a very active part of the Egyptian fintech ecosystem.
The Mena region has started to become very attractive for global fintech players. How will that impact growth and ambitions of local startups?
Over the past couple of years, we have seen a large number of global giants expanding to the Middle East. If we focus on the payments space, Stripe, Adyen and Checkout.com have become very active in the region. Similarly, Revolut is pursuing a local banking licence in the UAE. These giants have, so far, targeted the Gulf region but Egypt will surely follow. Their entry to the local market will undoubtedly help accelerate innovation and exit opportunities but can also have a negative impact on local startups that might struggle to grow and compete with companies with huge resources, established operations and established business models.
Expansion of B2B fintechs beyond payroll and HR
If we look at the fintech landscape in Egypt, a large proportion of active companies are business-to-consumer (B2C), targeting individual consumers. There is, however, a growing focus on business-to-business (B2B) startups, but from a very small base. Perhaps the most active sub-segment of B2B is human resources (HR) and payroll services, including the likes of NowPay, Paynas and Dopay. I look forward to seeing a more diverse outlook for the B2B space where there is a lot of untapped potential.
Will Egypt ride the crypto wave?
We have recently witnessed a series of manic developments in Crypto: from Bitcoin nearing the $30,000 mark towards the end of 2020 to Paypal entering the cryptocurrency market – the two events are not completely unrelated. On the local level, the National bank of Egypt (NBE) signed a partnership agreement with Ripple to use blockchain in remittances while Egyptians seem to have gotten hooked on mining and trading bitcoin. There are still ambiguities on the legality of crypto in Egypt, but this is certainly an area where we will continue to see more interest and activity.
Regtech beyond E-KYC?
The regulatory technology (regtech) space might see a wave of dynamism in the new year on the back of the CBE piloting e-know your customer (E-KYC). The two leading startups in this space, Digified and Valify, have both on the automated E-KYC testing. Digified has also announced plans to raise funding to fuel expansion.
Insurtech has taken off in several parts of the world but not yet Egypt
Innovation and disruption have been largely sparse in the relatively big Insurance market in Egypt (EGP35 billion in 2018/19.) The market is served by 39 insurance providers and a large number of brokerage individuals and companies. If regional developments are a good indicator of what is coming, insurance technology will slowly disrupt the market but I am personally not holding my breath for much in 2021.
Promising look ahead
2020 will always be remembered as the year of Covid-19, with all its agony, pain and disruption. However, for Egyptian fintech, it is not all bad. It is the same year that got us the first Egyptian unicorn, the new banking and central bank law, and the accelerated adoption of digital practices. I have to admit that the process of writing this review has helped me realise how much has changed for Egyptian fintech and stressed how much potential there is. I am conscious that for every new launch mentioned here, there are ventures that never made it through the year. For every funding round there are startups that ran out of cash. The road will be bumpy, like it always has been, but the sense of optimism that I see in many people in the sector is encouraging.
Egypt has a huge talent pool that is increasingly excited to go into fintech. There are more and more startups taking on various challenges, one step at a time. Capital is beginning to follow (but is not yet where it should be.) And we finally have a regulatory environment that is moving forward and attempting to catch up with innovation. We would not have been able to say that a few years ago. The challenges however, are still enormous and we are beginning to scratch the surface in fintech but the direction of travel is promising.