A fine time for fintech

The soul of fintech may be Findex

No, fintech is not the code name for the joint research and development capabilities of Finland based Nokia and France’s Alcatel-Lucent. And for those who are troubled by the idea of being unaware of the latest buzzword, the term is not actually all that new. Blending the words financial and technology, fintech has been around for years as a descriptor of bland, back office information technology solutions provided to firms in the financial industry. As of late, however, the term is buzzing with redefinitions, and startups all over the planet appear bent to hire backend developers for fintech projects.

One cuddly definition of fintech ventures is that “they build and implement technology which is used to make financial markets and systems more efficient.” According to its authors at the student-led fintech club at the Wharton Business School in the United States, this entails companies in areas ranging from crowdfunding and peer-to-peer lending to algorithmic asset management and thematic investing, as well as payments, data collection, credit scoring, education lending, digital currency, exchanges, working capital management, cyber security “and even quantum computing.”

Other definitions of fintech are more aggressive, emphasizing that companies in this area are commonly tech startups out to push the buttons of established banking and financial services companies by being more agile, cheaper and absolutely superior in innovating information technology products and services when compared with the big banks.

Whatever definition one favors, the sector of entrepreneurial ventures is receiving international attention, not in the least due to optimistic consulting reports that investments in fintech startups have tripled twice in the past four years — to over $12 billion in 2014. The list of new companies is long and growing globally as well as in Lebanon, albeit at a comparatively subdued rate in the latter case. Local startups such as PinPay, Bnooki and Via Mobile — all companies which Executive has reported on under our entrepreneurship coverage — are alive and progressing well along their various tracks of development.

As Via Mobile’s chief executive Karim Khoury tells Executive, his venture — which was part of our Top 20 Entrepreneurs in 2014 — is growing as planned and has been helped by maturing market conditions where the e-payments concept is increasingly being accepted. Competition among fintech companies according to him is currently playing out in a smallish field of eight local companies. New contenders are expected to enter the fray but candidates are playing their cards close. The competition among the actors is overall healthy but consumers tend to get confused by the different new apps and solutions, he says, yet adds optimistically, “The market will start to consolidate soon. I expect mergers in the very near future.”

In Khoury’s view, the current high media focus on anything fintech is something of a hype and reminiscent of the time a few years ago when everybody was obsessing with talking about “the cloud.”

Fintech itself as an investment opportunity on the other hand is anything but hype, says Henri Asseily, managing partner at newly formed Leap Ventures, a late-stage venture capital firm dedicated to the Lebanese market.

“We have already seen a number of companies that are in the fintech space. I don’t think it is hype. I think it’s warranted. Fintech is there and it is key, but whether the entrepreneurs in Lebanon are going to do something that is world class, I don’t know yet. It really depends on if we see companies that are worth investing in,” he tells Executive on the sidelines of Leap Venture’s launch in Beirut last month.

Leap Ventures has received fintech funding requests in the $5 million range, and that is interesting to the VC firm, Asseily adds, but has yet to examine these proposals. While Leap Ventures’ limited partners are all from the Lebanese banking sector, he sees no reason why the firm would not invest in a qualified fintech company, as long as there is no existing strategic investor involved that is too close to the target company. “This [connection to the banks] is no conflict of interest,” he exclaims. “It is a great opportunity for fintech companies. [If] they come to us and if they have a great product, we call up all our banks and say, ‘try the product, pilot it!’ Our job is to put the product on the market.”

The idea, promoted in numerous fintech descriptions, of disrupting banks, attacking their high fees and taking financial business down to “the people” sounds hip. But in reality, new fintech contenders will often find themselves at least in the longer run having to aim for a symbiotic relationship with the established financial giants. This message that traditional lenders and tech entrepreneurs need each other is increasingly reverberating with the banking industry and analysts in developed markets.

Given its prominent and, in regional terms, very sophisticated banking sector, Lebanon seems bound to adopt such a symbiotic view as the fintech sphere expands beyond its currently very minor dimension. However, budding fintech operators are still confronted with perception barriers, says fintech hopeful Elise Moussa. Having spotted an entrepreneurial opportunity in facilitating mobile payments for retail goods after moving from Boston to Beirut in 2012, she initially contacted banks to present her photo-based solution enabling consumers to make goods purchases of up to $25, which she called Snapay. But finding banks to be “scared of anything that has to do with payments on a mobile phone,” she says she iterated her concept and shifted to telecommunications operators as target partners.

The market will start to consolidate soon. I expect mergers in the very near future

Her approach is to bootstrap her company until it has “some traction” before seeking major funding. Money is not the top problem in achieving an entrepreneurial opportunity in Lebanon, she says. “The number one issue is if we can apply the old rules and regulations to new technologies, and the answer is absolutely not. No amount of money can really solve this problem and it is a delicate dance between what the market needs and wants and what regulation is doing.”

Findex and fintech

Fintech entrepreneurs like Khoury and Moussa have no problem thinking big and envision possibilities to serve hundreds of millions of un- or under-banked people with mobile financial services in the Middle East and beyond. And indeed, the real measure of success for fintech as an industry may well not lie in the development of another convenience-enhancing tool for bank clients but in how effective they can contribute to the growth of financial inclusion.

Measured by the Financial Inclusion Index (Findex), almost 40 percent of the world’s adults in 2014 did not have access to financial services via either a conventional bank account or a mobile account, according to a World Bank survey finding released this April. It was the second survey of this type after 2011 and showed — although probably not yet highly robust on all statistical fronts — an estimated 700 million persons increase in the number of people holding financial access via a formal financial institution or mobile account.

According to a review of the second Findex survey by advocates of microfinance and financial inclusion, the increase in the number of people with financial access over only three years comprises over 500 million people who used a traditional channel, plus 160 million who came in as part of population growth and some 41 million from mobile accounts.

Analysis by Gallup, which conducted the survey for the World Bank’s Global Financial Inclusion database, shows a comparably low account penetration of 14 percent for conventional and less than 1 percent for mobile access in the Middle East. In sub-Saharan Africa, where overall financial access is the second lowest in the world after the Middle East, mobile accounts were particularly strong drivers of financial inclusion and almost one third of all adults with formal financial access relied on their mobiles as entry point to the financial system.

The World Bank sees access to regulated financial services as a potential bridge out of poverty and has set itself a hyper ambitious target of 100 percent universal financial access by 2020. The measurements of financial inclusion can be expected to improve over the next few years and deliver an increasingly sharp picture on the respective Findex success rates of traditional channels versus mobile accounts via fintech companies. This will be the litmus test if fintech entrepreneurs can make true on their visions of being positive disruptors to the economies of developing countries.

Thomas Schellen

Thomas Schellen is Executive's editor-at-large. He has been reporting on Middle Eastern business and economy for over 20 years.

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