In a country where only 14 percent of people have bank accounts, fintech startups servicing Egyptians’ unmet needs are playing on a field that’s still tipped in favor of big banks.

The biggest challenges for startups looking to take financial innovation to the next level are tough regulations, financial illiteracy, a lack of trust in providers, and a shortage of basic infrastructure such as bank branches.

According to recent statistics from the World Bank, 94 percent of Egypt’s estimated 92 million people rely on cash transactions. Only six to eight million Egyptians have bank accounts.

“On the supply-side of the financial services landscape, according to the 2015 International Monetary Fund Financial Access Survey, there were about five commercial bank branches per 100,000 adults in Egypt and about 13 ATMs per 100,000 adults in Egypt as of 2014,” noted the 2016 Brookings Financial and Digital Inclusion Project report.

But the sector is moving forward. Startups are working on ways around stringent banking regulations and have at least one supporter: Flat6labs launched an incubator, 1864 Accelerator, dedicated to fintech initiatives in May and the American University in Cairo (AUC) Venture Lab launched its first fintech accelerator cycle in August.

Startups are engaging in legal banking workarounds, such as payments startup DCB Egypt that is working with mobile companies; a new lender partnering with a bank to ‘piggyback’ off their banking licence. Other workarounds are headquartering offshore, as fintech sectors such as crowdfunding are still a legal grey area.

Giving the unbanked bank accounts

Unbanked Egyptians present both a problem and an opportunity for entrepreneurs. It upsets ecommerce, as sellers have to deal with issues that arise from allowing cash on delivery, but creates openings for startups like Dopay to provide solutions.

In MasterCard’s Road To Inclusion 2014 report, 16 percent of Egyptians surveyed cited “not having enough money” as the main reason for not having a bank account, while 24 percent claimed they didn’t see the point of having a bank account since all their transactions were cash based. Others claim high application fees or long queues for not having an account.

But Egyptians understand the importance behind having a bank account. They just don’t have much trust in the system or its safety mechanisms.

Trust issues relate to financial literacy, the understanding of basic financial concepts such as financial planning, compound interest, or profitable savings techniques.

Interviews with 10 people next to a major bank in Cairo, all from different social and economical walks of life, found that most lacked a strong understanding of basic personal finance.

Six said they had bank accounts but only because their salary was sent automatically there, and they only used ATMs. The feared the idea of taking out a loan, saying they would be more in debt and that couldn’t tell whether the bank was being truthful.

“I have been doing the books at my shop for years and I can barely read or write, I know what to do,” said a 62-year-old shop owner. “But I won’t leave my money with strangers at a bank, I keep it right where i can see it.”

From under the tiles and into the cloud

‘Under the floor tiles’ is a famous anecdote common among Egyptians, where one would hide cash savings under a floor tile in the apartment.  

For those Egyptians with bank accounts, interest rates on, for example an HSBC savings account, range between 1 percent and 3.85 percent for sums up to 500,000 Egyptian pounds (US$56,000), while inflation touched a whopping 14.8 percent in July.

While ‘under the tiles’ may have worked for centuries, it is evident Egyptians need to find better alternatives for savings.

With Egypt’s mobile connection penetration rate touching 113 percent in 2015, personal savings could easily be tech-enabled, said Feloosy founder Karim Beltaji.

“Tech-enabled Egyptians are younger by default and still haven’t figured out the concept of ‘saving for a rainy day’. They will, however, save for a new gadget or a car,” he said.

Feloosy lets users create a savings goal or milestone and then links their bank account to a financial product, such as an exchange traded fund (a fund that tracks the returns of a large group of shares on a stock exchange). A set amount is deducted from the account every month and put into the investment product until the financial goal is reached.

Piggybacking

But of this financial engineering requires Feloosy, Dopay, and any other startup offering to take a person’s money and send it elsewhere to be a deposit-taking entity, also known as an ‘aggregator’, and this requires a banking license.

The CBE hasn’t issued a new banking license since 1979 so any company that wants to offer a financial product has to partner, be it a major mobile operator wanting to create a mobile wallet or a tiny startup offering a new way to bank online, has to partner up with a bank.

Beltaji said the only way in was for fintech startups to partner with an existing bank, as Dopay had done with Barclays and phone payments system Payme with the National Bank of Egypt.

“If you can get a major bank on board, it might seem like an extra layer of work but it does seem to iron out all the kinks.”

He said the fintech scene was booming in Egypt, yet the only issue was regulations from the CBE that weren’t suitable for financial innovation.

“They are not evil, but banking information and access are sort of a taboo here and it is quite hard to explain that fintech is truly the solution for financial inclusion, financial illiteracy and informal banking.”

Digitalizing Egypt’s ‘collective’ mentality

When it comes to saving and lending, banks demand all sorts of documents from proof of legal employment, residency and dependants, to the legality of the collateral being offered to back the loan.

With an unemployment rate of 12.7 percent and the informal economy guessed to be anywhere between 40 and 70 percent of the whole, depending on who you read, many Egyptians are ineligible for loans by normal banking standards.

But they have friends and family members.

Enter the traditional Egyptian collective or ‘gameaya’: a group of people pay a monthly sum for a certain time and then one person in the group receives the collective sum every month. It is saving-meets-lending, with no interest or late fees.

The next step is to take this digital, which is what startups like crowdsourced funds pooling app Money Fellows does.

“The idea is pretty basic and each Egyptian has probably been subjected to that form of loaning/saving once in their lifetime,” said Ahmed Wadi, CEO of Money Fellows.

Wadi is very optimistic about the regulations and overall environment.

“We have spent zero marketing budget and we have over 1000 users on board, the idea is booming organically because you are crowdfunding with people you know. That is the best trust motivator anyone can ever wish for,” he told Wamda.

As for the CBE, “authorities will come around when they see the amount faith the community has in fintech modules.”

Entrepreneurs are having none of the worries about instability and inflation fears, finding workarounds and doing more groundwork until aging rules succumb to the fintech revolution.