For a country with not much to be proud of on the economic front over the past decade, the banking sector in Egypt has actually been a rare positive for the country. Due to cautious policies, the absence of complicated financial instruments, privatisation and increased competition from foreign banks; the Great Recession of 2008 hit the Egyptian banking sector relatively lightly. And while they have spent the last 5 years fighting off deteriorating macro-economic conditions (as well as a government mandated managed currency), the financial sector in Egypt is still relatively advanced from a structural and competitive standpoint.
I say this only as a preface to my next statement:
Egyptian banks are uniquely positioned to be the most disrupted financial ecosystem in the region.
Despite the fact that the financial sector is structurally sound & competitive, the banking infrastructure just isn’t that large. By most estimates, 90% of Egyptians are still unbanked.
On Sunday Dec 11th, I sat on a panel at RiseUp where the discussion was centered on Banking & Fintech, where one of the many talking points was about evolution vs. revolution of fintech companies, and how banks have started embracing partnerships with fintech startups more and more.
But they key tension driving these discussions in other markets (both developed and developing) is this:
Startups need distribution. Banks need innovation.
For fintech startups, their number one challenge is the being able to recoup the CAC (cost of acquiring customers) at a scale that will make them profitable (especially with low margins that exist in the space).
For legacy financial institutions, the issue is keeping up with a user base and technology infrastructure that is constantly evolving. Over the past 10 years, banks have suddenly had to deal with the fact that smartphones have beat them to global distribution, as well as the fact that connectivity costs have gone to zero (making it impossible for them to charge almost anything for payments). If sending a tweet is free, it seems impossible to think of a future in which paying a friend over a messaging platform isn’t.
So startups have the user experience but no scale. Some of them try to throw money at the problem and achieve scale. Some go to retailers and try to leverage their scale. But significant portions have started partnering with banks that they otherwise would compete with.
So why is this relevant to Egyptian banks? Because they don’t have scale to offer to fintech startups. Not real scale anyways. The biggest bank in Egypt (CIB) serves 700K customers according to their website.
As a result, the only leverage these legacy institutions have right now to get startups to partner with them are regulatory and branding. And while these two are not insignificant factors, more and more they are becoming less relevant. Just last Friday in the US, it was announced that fintech startups would get a license to bank.
So yes, banks and fintech will partner and not compete when necessary. And the banks in Egypt seem like they recognise the challenge they face (both Barclays and CIB have been involved in the Fintech startup scene). But despite the fact that they’ve gotten a head start, Egyptian banks are at serious risk of being replaced due to their lack of scale. And that’s probably why they’re getting a head start at attempting to capture some of the innovation startups are creating. And while it’s great to see them move quickly and understand the changing ecosystem (because as shown by chart below, not all banks know what business they’re in!), fear of missing out is the biggest driving factor for these banks, as it should be.