A white paper by Fitch Group noted that Egyptian fintechs could succeed in Morocco, Tunisia, Algeria and Lebanon. What challenges and opportunities could they face?

Not so long ago, a mobile phone was just that: a device that made its users reachable anytime, anywhere. Today, it is more of a personal assistant that helps with everything from paying bills to entertainment.

MENA governments, however, have been talking about making residents use smartphones to pay for everything from public services to impulse purchases. So far, the results have been underwhelming. “In our region, what I have noticed so far is that we are essentially stuck in a rut,” Abdulaziz Aljouf, founder and CEO of fintech company PayTabs, wrote in MENA Bytes in August. “We announce trendy press releases with speed and ease, but when it comes to implementation, it’s sad to note that we are lagging far behind from our claims, let alone our counterparts in Asia,” he noted.

Egyptian fintech businesses, however, may be significantly ahead of their regional counterparts, according to an article by Fitch Solutions published in November. “Egypt is positioning itself as a leading fintech hub in North Africa, with the government and central bank creating an environment in which new applications can be tested in a live context,” it said. The article also pointed out that those companies have the potential to expand to the region, benefiting from “first-mover advantage in neighboring markets.” Fitch Solutions identified Morocco, Tunisia, Algeria, and Lebanon as markets with the most potential for local fintechs.

However, those nations are at very different stages of digital financial inclusion. While that opens a diverse range of opportunities for Egyptian fintech companies to develop tailored solutions, it also gives them a unique set of challenges in each market.

Why Egypt?

Fitch Solutions pointed out that while Egypt has a relatively small banked population with 20 million accounts and a population of more than 100 million, it is the largest market in the region. That gives Egyptian startups a significant laboratory to test new solutions. Even though banks are “largely focused on basic money transfer platforms such as prepaid debit cards,” added the report, “there is room for more complex and relevant services to penetrate the market.”

One example of support for local fintechs to scale up their solutions is the state-backed project to issue a debit card (known as Meeza) for all Egyptians to access their salaries and pay for government services over EGP 500. “Meeza should be seen as providing the first steps toward greater financial inclusion,” said the report.

Another advantage in Egypt is the Central Bank’s (CBE) launch of a regulatory “sandbox” in June for such fintech companies, mentors, and investors to test products in different regulatory contexts. “The sandbox will provide [space to develop] cloud-based payment processing, machine learning, data analytics, and artificial intelligence with assistance from the Information Technology Industry Development Agency (ITIDA), among other institutions,” according to Fitch Solutions. “The plan is that, over time, participants can work with the CBE, other financial institutions, and the government of Egypt to develop and refine best practice guidelines and hone new business models… as well as create a transparent and robust regulatory framework.”

Meanwhile, in terms of funding, the World Bank allocated $200 million for Egyptian fintechs in April 2019. “Fintech startups targeting Egypt would have the strongest case for securing loans as the World Bank is keen to increase the supply of seed, early-stage and venture capital to riskier and innovative startups,” the article reads.

Fitch highlighted several fintechs that have the potential to succeed abroad. The first is Fawry, the pioneer firm in Egypt that develops all of the government’s electronic payment tools as well as private sector solutions. It also is the only one listed on the local stock exchange. The other firm Fitch highlighted was 7aweshly (Save for Me), a micro-savings mobile application targeting those without access to traditional banks.

Fitch also cited PayMe, a mobile-based payment application to transfer money among businesses and consumers. It uses the National Bank of Egypt to secure transfers. PayMob and PaySky are similar applications. However, they use credit cards or mobile wallets to certify online transactions or those done at points-of-sale. Meanwhile, Alexbank has its inhouse Ma7fazty (My Wallet).

Other notable Fintechs are Sherka (Company), a specialized crowdfunding platform that connects fintech entrepreneurs with investors, and Dopay, a cloud-based payroll system.

Morocco: blockchain leaders

In November, Morrocan central bank Governor Abdellatif Jouahri announced at the Africa Blockchain Summit that the bank is working on developing blockchain technology to “improve access to financial services. All individuals and businesses [must have] fair access to formal financial products and services in order to promote economic and social inclusion.”

During the second quarter of 2019, Morocco started using blockchain to keep records in some government agencies, thereby creating a more secure decentralized government.

Outside the realm of government services, Egyptian fintechs have tremendous opportunities. Among them, according to Kelly Cornley, a researcher at CoinTrust, a thinktank based in the United Kingdom, is that Morocco’s service sector accounts for 55 percent of GDP. In a paper, she also described the country’s banking system as “well-regulated and sufficiently capitalized.”

Another benefit is that of the 35.1 million people in Morocco, only 13 million are unbanked. “With the penetration of the internet and mobile telecommunications, fintech offers tremendous opportunities to strengthen financial inclusion,” said Jouahri.

Also, nearly 40 percent of Moroccans live in rural areas with limited access to brick-and-mortar banks. Having fintech solutions would help them efficiently manage their finances, according to Cornley. “Morocco’s leading telecommunication company, Maroc Telecom, said it would offer mobile money transfers, deposits, and payment services,” Cornley wrote.

Driving the Moroccan fintech movement is a national strategy called Maroc Digital 2020, which succeeded Maroc Numeric 2013. According to the Moroccan Ministry of Industry, Trade, and Green and Digital Economy, the goal is to digitize 50 percent of government administrative procedures, reduce the gap between those who have access to digital service and those who don’t by 50 percent, and connect 20 percent of Moroccan SMEs to fintech solutions.

Aiding that strategy is a banking law enacted in 2014 that creates two categories of financial providers. One is explicitly for banks; the other for non-banks, called “participative banking.”

The big question lingering over Morocco’s fintech environment, however, is whether mobile money transfer services will pick up, similar to other Sub-Saharan African nations, according to Cornley. That would most likely come down to raising public awareness and trust, wrote Cornley. That is because Morocco’s 2014 law mirrors legislation found in Sub-Saharan nations with high mobile money transfer activity.

However, Rachid Aourraz, an economist and researcher at the Moroccan Institute for Policy Analysis, said the country’s environment still is not entirely fintech friendly. He explained that the country still needs to improve access to digital banking and financial services, along with telecom networks and digital coverage. Aourraz also stressed the importance of raising awareness and “massive” IT infrastructure investments, along with “real” economic reforms.

Tunisia: state infrastructure

While The Financial Times has reported that 37 percent of Tunisians have bank accounts, 90 percent use the post office for financial services, according to CGAP, a global partnership of 30 development organizations.

Tunisian fintech firms, meanwhile, have capitalized on that infrastructure, receiving international recognition and funding. Expensya raised EUR 4 million in 2018. In the same year, I-Fintech Solutions signed a contract with the Islamic Development Bank Group, based in Saudi Arabia. Also last year, Tunisia’s first payment and credit scoring bureau — Kaoun — started operations. That is part of the reason why so many Tunisian fintech startups have focused on developing electronic Know Your Client (e-KYC) solutions, according to The Financial Times article.

In early 2019, AfricInvest agreed with U.S.-based Cathay Innovation to establish the $170 million Cathay AfricInvest Innovation Fund, which focuses on specific sectors, including fintech, which may help Egyptian companies looking to invest in Tunisia.

The number of new fintech businesses in Tunisia should increase with the passage of the 2018 Startup Act that offers tax exemptions, allows employees to take a year off from work to manage their startups, gives entrepreneurs a salary from the state, and provides assistance in filing for patents abroad.

Unlike other nations in MENA, Tunisia is testing the use of digital currency whose value would likely be backed by the Tunisian dinar. The Tunisian Central Bank is looking at the “technical feasibility of a theoretical digital currency,” according to a press release. “This test is a ‘proof-of-concept.’”

However, the Tunisian fintech scene faces several challenges, according to Rostom Bouazizi, co-founder and COO of Flouci, a mobile money transfer app, and Kaoun. “Our product launch has been slowed by the long administrative processes of partner banks and government ministries. There are high barriers to entry in the sector, which are particularly significant for non-traditional players trying to disrupt the market,” he told The Startup Scene, a news portal, in August. “While we as a startup depend on our ability to adapt and pivot quickly when necessary, most of our partner institutions are accustomed to more time-consuming processes and are reluctant to change.”

The other challenge is successfully securing funding, according to SwitchMed, an initiative that links tech stakeholders in Mediterranean countries. In 2014, 109 Tunisian startups requested a combined EUR 1.9 million euros in funding, yet only nine succeeded, getting an average of about EUR 9,000 euros each. In 2015, 32 projects secured funding worth EUR 200,000, an average of EUR 6,250 euros each.

“This funding was mainly raised through donations (due to the difficulties associated with funding by Tunisia-registered firms) secured by platforms based in France, the United States, and Lebanon,” reported SwitchMed. Currently, leading startup financers in Tunisia depend on donations, including KissKissBankBank, which is in France; Zoomaal in Lebanon; and CoFundy with headquarters in Tunisia and France. Afrikwity, with offices in Tunisia and France, is the only major funder that relies on investments.

Lebanon: minor changes needed

Despite Fitch’s report citing Lebanon as a prime location for Egyptian fintechs, it is the country where they will face the stiffest competition. One reason why the fintech startup scene is so crowded is that the Lebanese central bank, Banque Du Liban (BDL), decreed in a Circular 331 note that 75 percent of the bank’s investment budget in innovation must go to startups.

Monica Elias, a researcher for Arabnet, an innovation-focused thinktank, in an article published in May wrote: “With the introduction of the Circular, Lebanon has been increasing the number of fintech startups founded each year.” As a result, Lebanon has the third-highest number of fintechs in the region.

Digital banking is the biggest benefactor due to “fewer regulatory restrictions when collaborating with [traditional] banks,” noted Elias. The most utilized service is digital payments, according to a May 2019 MAGNiTT report.

Supporting this growth is StartechEUS FinHub, a fintech startup hub in Beirut. It is a one-stop-shop offering funding, specialized coworking space, and training. MAGNiTT calls it “the Levant home of fintech.”

Accordingly, new entrants will find open opportunities in blockchain, artificial intelligence, and customer experience solutions. “AI companies should be flourishing in Lebanon, but still they don’t survive,” said Fintech Galaxy CEO Mirna Sleiman to Executive Magazine in December. “Part of it is lack of awareness and ignorance on a banking level.”

Other challenges include a lack of regulations and complicated licensing procedures. Also, fintechs must partner with locally licensed banks or financial institutions. However, they are few and have a history of avoiding risky innovative projects, according to Sleiman.

The third obstacle is the lack of technical or regulatory fintech “sandboxes,” where startups can test products in various legislative scenarios. “As a result, many fintechs find themselves turning to regional markets earlier in their lifecycle than startups in other sectors — in some cases before testing or marketing their products,” Sleiman told Executive Magazine.

Algeria: greenfield environment

Algeria is still finding its way into the fintech world. Its main problem is that it doesn’t have a “properly functioning financial system,” according to a Euromoney report in September. “Algeria’s banking system is one of the least sophisticated and most unreliable on the continent.”

Yet half of Algerians have at least one account with a financial institution, the report noted. However, the Algerian economy still relies on cash and banking technology is “behind what can be found in … Morocco and Tunisia, while regulatory compliance leaves much to be desired,” said the Euromoney September report.

Article 43 of Algeria’s 2015 Finance Law allows non-banks to offer financial services to residents. Yet, according to Mohamed Loukal, governor of the Algerian Central Bank, the problem is in “arbitrary application of procedures by the banks,” Oxford Business Group (OBG) reported. In June 2018, Loukal called on banks to “halt requiring extra documents that certify the source of deposited funds.”

The OBG report also noted Algerians’ lack financial literacy and lack of trust in the country’s financial institutions.

Safety net

Fintech startups are more likely to fail than to succeed, regardless of where they operate. “It is unlikely that all of the new fintech ventures will survive to maturity,” wrote Fitch.

However, Fitch’s report on Egypt’s fintechs finding opportunities in the MENA region noted that operating abroad may help sustain their finances and business models over the long term. “With neighboring Morocco, Algeria, Tunisia, and Lebanon also suffering from low usage of formal banking services and in need of improved economic liquidity, we believe there is scope for many Egyptian companies to become established in these markets,” concluded Fitch’s paper.