Egypt offers fertile environment for fintech industry

When Saeed Talaat left his internship in Dubai with Emirates NBD Bank, he planned to return to Egypt to start a ticket-purchasing platform. The startup idea was one he and his friends had entered in a digital banking competition in 2016 during their last year at the American University of Cairo.

Things didn’t turn out exactly as he planned. Back in Egypt, they were told the ticket platform was risky and too dependent on its linkage with Facebook to be viable.

“We started doing more research on financial services and payment issues,” Talaat told Al-Monitor.

Their research led them to Egypt’s educational system. The country has over 50,000 schools and around 25 million students, the vast majority of whom pay their fees or tuition in cash. “The market was huge and we saw there was no digital integration or payment,” Talaat recalled.

Talaat and his partners saw the opportunity and created Klickit in 2017. The company facilitates online school payments by charging users a small commission for each transaction while licensing their software to educational institutions to manage the payments.

Talaat says growth has been strong and Klickit is currently operating with a positive cash flow.

According to the young CEO, there is massive room for growth. “The adoption rate is still very low. Online payments are only 10% to 15% of each educational entity. So we are working to educate people.”

Klickit’s story is one small example of Egypt’s burgeoning fintech ecosystem. Over the past few years, a number of startups, from mobile wallets and payment sites to microcredit and buy-now-pay-later services, have sprung up. This has been a notable year for the industry.

Cairo was recently ranked as Africa’s leading fintech ecosystem by Startup Genome and the popular Egyptian fintech company Fawry achieved the status of becoming the country’s first "unicorn" business with a $1 billion valuation.

“Egypt is on the map when it comes to fintech investment,” Eslam Darwish, a partner at Global Ventures VC, told Al-Monitor. “The next opportunity for fintech is coming from the developing world and Egypt has the infrastructure and size to support the market.”

A number of factors contribute to the opportunities in Egypt’s merging world of finance and technology. The country’s median age is roughly 24 years, it has a mobile penetration rate exceeding 100% of the population and with more than 80% of its 100 million citizens still unbanked, the market is severely underpenetrated.

 “We are coming at several inflection points today,” Walid Bakr, a well-known Egyptian investor, told Al-Monitor. “The gap is huge across the industry and there is finally the political will to advance the agenda.”

Like so many MENA region countries, the lines between the private sector and state are messy in Egypt, and the political will Bakr mentions is seen as a major contributor to the excitement around the ecosystem.

Ayman Ismail, a professor at the American University of Cairo and founding director of the AUC Venture Lab program, told Al-Monitor, “Fintech was picking up slowly until three or four years ago. The government has decided they want to push digitizing the sector in a more aggressive way.”

President Abdel Fattah al-Sisi has taken a serious interest. He chairs the National Payments Council, the main goal of which is to increase electronic payments, and the government has been pushing the banking sector to embrace financial technology.

There has been a flurry of activity around digital payments alone. The Central Bank of Egypt (CBE) is currently working to distribute point-of-sale (POS) systems throughout the country with the aim of having 1 million POS machines in three years’ time.

Ismail said the step is crucial for the nascent industry to grow and provide more sophisticated solutions and products later on. “Digital payments are the foundation of doing anything in fintech. You have to start with mobile payments.”

On the regulatory front, Darwish said that the CBE has been responsive to the changing landscape. “Looking across the region, the CBE has been very proactive in this space in terms of embracing new fintechs. They are adopting regulations to fit today’s reality.”

To this end, the CBE has created a sandbox where fintech startups can test business practices under a regulatory framework. This September, Egypt’s new banking law came into effect specifically addressing digital payments and banking.

“The law is a massive step in the right direction. Once the payment law came out, there was a sense of encouragement. Now everyone is waiting for the executive regulations and licensing framework to come out,” Bakr told Al-Monitor.

Perhaps just as much, if not more than investors, the Egyptian government is hoping these efforts pay off as it seeks to harness fintech for solutions to the challenges in the Egyptian economy.

The informal economy in Egypt is believed to be roughly half the size of the country’s declared GDP and contain 63% of Egypt’s total labor force.

“Digitalization is one of the fastest ways to formalize the informal economy. Globally the story is around financial inclusion, but a big part is also integration. Once you are digital, you become more visible,” Ismail said.

Mirette Mabrouk, director of the Middle East Institute’s Egypt Program, told Al-Monitor that while the Egyptian economy faces a host of serious challenges, the current focus on fintech is well placed.

“You can’t ignore an issue that is up and running and requires immediate attention and will help give your economy an edge,” she said. “Really what the government needs to do is set up the ecosystem and get out of the way. So it makes perfect sense to push this now.”

Asked about the role fintech may play in the informal sector, Mabrouk said, “It’s a way of cleaning up your economy, getting taxes, ensuring access to financial services and providing transparency and accountability,” but truly successful integration of the massive informal sector will need more than digital payments and mobile wallets.

“The way to deal with the informal economy is not to try to tax the informal economy, but to clean up the formal economy so it will want to move into it,” she added.

Changing behavior patterns is a problem that also lies at the heart of fintech.

“People go about doing their business in a cash-driven society and don't see the value in electronic payments. Creating a financial identity is a challenge,” Darwish said, adding that he is optimistic the potential rewards for both consumers and providers are there to spur growth.

An example cited by many in the ecosystem is Valu. The mobile site was launched by EFG Hermes, a traditional Egyptian investment bank that would normally be an unlikely player in fintech.

The site offers users payment by installment with over 2,500 vendors. “EFG has created their own consumer finance business and it has been taking off like wildfire as a nontraditional way of lending,” Darwish said.

Bakr believes as the market grows, Egyptian banks will likely focus their expansion in fintech on the credit side of the industry, looking to provide solutions to their existing client base. As an investor, he is looking at startups in the payment realm. “It is probably the hottest thing in the market right now.”

Ismail holds that the strong growth will continue. “There is a fertile environment for migrating into digital products in Egypt.”