The NileView

FinTech: The NextGen innovation-driven financial inclusion ecosystem

Globally, more than two billion people (23%) of the world population have limited or no access to basic financial services.  Therefore, the concept of financial inclusion is becoming increasingly recognized by policy­makers, given the significance and correlation of financial exclusion on poverty and the impact on lives and livelihoods worldwide.  Besides, the financial inclusion of small and medium-sized enterprises (SMEs) is at the core of the economic diversification and growth challenges that many countries face.  Therefore, supporting SMEs and improving their financial inclusion can help increase economic growth, job creation, fiscal and monetary policy effectiveness, and contribute to financial stability.

Accordingly, and realizing the value of financial inclusion for socioeconomic development and growth, government and private sector institutions worldwide are taking steps to help the financial sector advance and overcome its various challenges.  Many recently introduced initiatives and projects that support the digital transformation of financial services by increasing access to the required technological infrastructure, encouraging the development and use of innovative digital financial solutions, and increasing awareness of the benefits of digital platforms.

Accordingly, financial inclusion is becoming a universal priority pushing different economies to integrate it into their vision, strategy, and future plans.  Furthermore, the United Nations’ 2030 Sustainable Development Goals (SDGs) consider financial inclusion a fundamental underpinning and a vital enabler of global development and progress, with five of the seventeen SDGs addressing the issue given its invaluable role in eradicating poverty, ending hunger, achieving food security, promoting sustainable agriculture, profiting health and well-being, achieving gender equality and economic empowerment of women, promoting economic growth and jobs, supporting industry, innovation, and infrastructure, and reducing inequality.  All these goals and invaluable socioeconomic issues require improved and universal access to a comprehensive financial services portfolio such as payments, insurance, cryptocurrency, funds transfers, crowdfunding, and personal finance to spur sustainable development and growth.

In that respect, digital transformation has the potential and reach to transform economies and realize financial inclusion through the deployment of innovative technologies including but not limited to the platforms, tools, and applications enabled by the fourth industrial revolution such as artificial intelligence, the Internet of things, robotics, big data, cloud computing, and blockchain-based technology which according to the World Economic Forum, by 2025 will store around 10% of the world’s GDP.

One of the promising platforms enabled through these emerging innovations is the financial technology solutions known as FinTech.  They continue to disrupt the global financial services and consequently cause a significant digital transformation in the banking, insurance, and financial services ecosystem.  According to various recent reports, the role and contribution of innovative financial solutions, including digital finance, could benefit billions of people worldwide by driving inclusive growth that can add around 3.7 trillion US dollars to the GDP of emerging economies within the next decade.

FinTech is opening a broad spectrum of inclusive development opportunities that narrows the divide between the haves and the have nots, especially in the context of emerging economies.  It is worth noting that innovative tech-driven financial solutions such as mobile wallets, peer-to-peer payments, and digital-only banks have proven to be particularly popular in emerging markets.  For example, in Kenya, M-PESA has contributed to lifting close to 200K households representing 2% of the population out of poverty over the last few years.  Besides, FinTech, in general, is playing a significant role globally in changing consumer behavior and the perception of dealing with different financial transactions and services.  Recently, statistics show a growing trend resulting in more than 80 percent of traditional banks’ consumers worldwide who are increasingly enjoying adopting and trusting what FinTech offers.  Accordingly, in the years to come, one should expect that the competition between traditional banks, financial institutions, and FinTech operators to evolve, become fiercer, which will be reflected in the acceleration of innovative solutions, all contributing to offering better and more diversified services to global markets. 

The disruptive power of tech-based and tech-enabled products and services have remarkably increased the level of competition and pushed traditional banks and financial institutions to heavily invest in their digital infrastructure to fend off the innovative accelerators and newly emerging tech-enabled service providers with their creative business models and approaches to penetrate the market and to keep pace with the growing portfolio of diversified FinTech products and services.  Besides, they are continually attempting to revisit their core business and improve their offerings across their various business lines that are ranging from retail to corporate, to match the evolving popular developments among different consumers, and to cater to as well as capture a growing market share that is geared to a relatively younger, tech-savvy, mobile and digital-first generation.

However, with the continuous development in the space of financial services and the recent acceleration of digital transformation, one would expect that even with the digital facelifting of traditional banks and financial institutions and the growing impact of FinTech; they might not be enough to compete with the global reach of mega digitally-driven global powerhouses such as Amazon, Google, Alibaba, and many others when they penetrate the financial services markets; note that I said when and not if.

Therefore, it would be natural to see the convergence within the financial technology space of a growing number of banks, financial institutions, and emerging FinTech where coopetition among different stakeholders will prevail through entertaining various possibilities for partnerships and integrations is perceived as a driver for innovation to boost productivity, gain a competitive market edge and maximize growth.  The potential collaboration will primarily depend on the traditional banks and the financial institutions coupled with the emerging FinTech operators’ ability to have the characteristics necessary for sustained success across four key pillars, including human capital, finance, business acumen, and innovative technologies.  Such an approach might be the best way forward given today’s hyper-connected and value-chain-driven environment of digitally transformed economies, businesses, and users for the providers of various financial services to remain relevant, agile, and competitive and not be left behind.

In Egypt, one of the areas that can help in sustainable development is financial inclusion, which is important given the large segment of Egyptians who do not have access to basic banking and financial services.  Therefore, the market in Egypt represents a fertile ground for FinTech solutions, products, and services.  The non-banked segment is estimated to be around 85-87% of the 100+ million Egyptians, with no more than 15 percent of the adult population having a bank account, one of the world's lowest penetration rates.  However, looking at the glass half full, this demonstrates the massive prospects for growth, especially that today, Egypt's market is home to 13+ million mobile wallets and more than 33 million credit, debit, and pre-paid cards.

Providing access to a portfolio of financial services, including loans, credit, and electronic payments, among other services, to more Egyptians can drive inclusive economic development, growth and help create more jobs.  Accordingly, FinTech solutions can transform how financial services are offered, with profound implications for individuals, organizations, and society.  With the mobile penetration rate in Egypt standing at 99%, including at least 30% who are smartphone users, there is ample opportunity to increase the dissemination and adoption of digital financial services across society, thus enabling the gradual integration of the unbanked segment.  It is imperative that the different stakeholders in the ecosystem work together to achieve financial inclusion by promoting the notion of a cashless society and disseminating the use of electronic payments.  In Egypt, cash is king and therefore represents one of the most attractive markets for unconventional and innovative financial technology platforms such as FinTech.

On a different note, using innovative technologies such as FinTech can help SMEs, which make up around 80 percent of Egypt’s firms, bridge the financial inclusion gap, move into the formal economy, and effectively improve their capacity to compete, grow and prosper.  Unlike the conventional wisdom that SMEs have been historically underserved by banks and financial service providers given that they make less revenues while requiring more efforts and services than larger firms; hence, labeled as unprofitable to serve; FinTech has managed to find ways and means to serve SMEs while realizing some profits based on the acceleration of digital transformation, which represents a real game-changer to the entire financial markets’ ecosystem. 

FinTech can both help reduce constraints on bank accounts, credit, digital business services, and open new chan­nels for SME financing provided that the policies and the legal and regulatory environment supports and encourages the development of SMEs through greater reliance on innovative technologies for broader financial inclusion.  For starters, many countries around the world, through their regulators, are increasingly adopting an accommodative approach to tech-driven and tech-enabled firms such as FinTech that are operating within their economic environment given that they are contributing to enhancing the consumer experience and driving the financial sector development and growth.  FinTech is emerging as one of the key building blocks in promoting entrepreneurship, transforming the economy, migrating many informal sector transactions into the formal economy, reducing unemployment and poverty levels, and offering a variety of financing options for micro, small and medium-sized enterprises.  Given the size of the market and the untapped potential, there is also the possibility for Egypt to become a regional FinTech hub, stimulating and supporting innovation and creativity in the domain of digital transformation in financial services.

FinTech started growing in Egypt over a decade ago, providing solutions including electronic payments for peer-to-peer transfers and bills, payroll, pension, and social security payments; merchant and online purchases; and the proliferation of smart wallets.  One of the early adopters was Fawry, launched in 2008.  It was a pioneer in the field and remains the leading digital transformation and electronic payment platform in Egypt, offering a variety of financial services and electronic commerce solutions through over three million daily transactions serving 29+ million consumers and businesses who are enjoying a portfolio of around 900 services delivered from 194K locations and service points as well as a variety of channels, including ATMs, mobile wallets, retail shops, post offices and vendor kiosks.  Fawry’s stock price increased 300 percent since its debut, and today, it has a market cap of over 1 billion US dollars, becoming the first tech-startup in Egypt to reach such valuation.  Such development only confirms the potential in Egypt’s growing market, which has seen a further acceleration in its digital transformation since Covid-19 hit in March 2020.

Moreover, FinTech can offer the unbanked segment a variety of valuable services such as paying back their loans and transferring money through kiosks and micro-businesses across the country.  It is expected that moving forward, the market will experience the acceleration of digital transformation, the expansion in the use of Omni channels, and the gradual and expeditious move towards mobile services, which will have positive implications, including gradually integrating large segments of the informal economy.  However, this is easier said than done.  Peter Drucker often said, “Culture eats strategy for breakfast,” and the biggest challenge for digital transformation in general and FinTech in specific is undoubtedly the cultural fit, the mindset, and that needs to be carefully, smoothly, and delicately addressed.

Emerging markets, including Egypt, are well-positioned to compete with the developed world in the NextGen innovation-driven financial inclusion ecosystem, assuming the enabling and supportive policy and the legal and regulatory environment is opened to adapt, leverage data, and apply innovative approaches to cater to improving the consumer journey, that is being redefined by the ongoing progressive digital transformation and the creative and agile platforms offered by emerging FinTech solutions, making it more efficient, fast and enjoyable to use.  However, for now, and until we get there, banks around the world, including Egypt, remain more fin than tech, and FinTech remains more tech than fin.

About the authors: Hisham Ezz Elarab is the managing partner of HE Advisory and chairman of the CIB Foundation, and Sherif Kamel is a professor of management, dean of the school of business at The American University in Cairo, and President of the American Chamber of Commerce in Egypt.

30 November 2020
Issue #8