Despite hugely challenging circumstances, the Egyptian banking sector has managed to succeed in growing its assets and maintaining profitability despite the national upheaval and the succession of four leaders and three constitutions in the past three years. However, more than half of the country remains unbanked and resorts to a financial system comprising almost entirely of cash transactions.
In order to modernise the national financial system and offer a greater range of services to its unbanked and underserved population, Egyptian banks are demonstrating a keenness to invest in financial technology and innovations. These include the implementation of internet and mobile banking, electronic payments systems and cybersecurity measures to protect consumers against financial fraud.
Current Technology Trends Shaping Egypt’s Banking Sector
Mobile and Internet Banking
“The mobile phone has emerged as an extremely effective tool to drive financial inclusion and advance cashless transactions in Egypt.” – Raghu Malhotra, MasterCard Division President, MENA region
As reliable broadband access and smartphone user percentages quickly increase across the Egypt, so does the importance of offering mobile and online banking options. Admittedly, both North Africa and the Middle East have been slow to join the emerging mobile banking market but that initial sluggishness is set to change into more dynamic growth as the regions’ banks recognise mobile’s potential to offer new services and reached unbanked populations.
That potential is easy to understand and hard to ignore as 70% of the worlds 82 million mobile banking users live nearby in Sub-Saharan Africa. There, the innovation of mobile banking solution providers such as M-Pesa has allowed people from every age and wealth demographic to transfer from a cash or card-based economy to one the purely involves online/mobile transactions.
The convenience, safety and security features offered by mobile banking cannot be ignored and already its influence is being felt on the Egyptian banking sector. Currently, 10 out of the 35 banks operating in Egypt provide their customers with mobile banking services. These include Banque Misr, Arab African International Bank (AAIB), National Bank of Egypt (NBE), Citi Bank, Arab Bank, HSBC, Commercial International Bank (CIB), United Bank and Arab Investment Bank (AIB).
Additionally, more Egyptian banks are investing in mobile banking technologies, producing their own mobile apps and endorsing the spread of apps produced by third parties. In June 2013, NBE launched Flous, the first ever Arabic mobile money implementation app in partnership with MasterCard and the wireless carrier Etisalat of Abu Dhabi. More recently, NBE launched Phone Cash; a mobile wallet that allows for person-to-person transfers, the payment of bills and the ordering of airline tickets with participating airlines.
Likewise, the Housing and Development Bank recently partnered with the UK’s Vodafone Group to introduce Vodafone Cash, while local telecoms operator Mobinil has teamed up with French telecoms giant Orange to introduce MobiCash in cooperation with Emirates NBD.
This may seem somewhat limited compared to the utility of major mobile wallets produced by the likes of Apple and PayPal, but it’s indicative of a sea-change currently occurring in Egypt as banks look to endorse mobile banking. With four phone wallets soon to be released by major banks and payments companies, Egyptian consumers and merchants are quickly becoming aware of the widening set of banking and payments options available to them.
The proliferation of mobile banking apps offers Egyptian consumers improved services and the chance to meet their preferences in ordering their finances the way they want. It also offers banks a chance to reach untapped markets, specifically the unbanked population of Egypt. Considering that only 35% of Egypt’s citizens have access to a bank account, but an estimated 98% own a mobile phone, the scale of the opportunity associated with this market becomes abundantly clear.
“The high use of mobile phones in these emerging markets also creates an opportunity to drive financial inclusion. We believe that a prepaid card linked to the mobile phone account can provide a simple entry point into the financial system and bridge the gap between the formal financial services sector and the millions of underserved or unbanked individuals, especially when combined with services such as bill payment and P2P capabilities.” – Raghu Malhotra, MasterCard Division President, MENA region
An estimated 94% of all transactions in Egypt are cash based, to the point where the wealthy send their drivers or other messengers to take their cash and queue up to pay their bills. For the less privileged, lengthy queuing awaits along with the inconvenience and security issues of always needing to carry cash. Money management is almost entirely cash dominated for a variety of reasons including cultural preferences for “Gam’eya” (social money pooling) as well as a lack of trust or familiarity with banking systems.
In a recently released report by MasterCard, 24% of surveyed respondents said that they neither need nor see the benefits of having a bank account. Respondents perceived banking services to have intimidating requirements and complex processes.
This is a situation that is set to change through the proliferation of contactless payments technology for credit cards and as well as mobile payments through NFC (Near Field Communication). As discussed, the growth of the mobile banking and payments sector is set to accelerate as both sides of the market wake up to its potential benefits, but there are other signs of Egypt’s banking sector modernising its payments environment.
Prepaid cards currently have a low usage in Egypt – approximately 5% across all markets – but when integrated with P2P and bill payment capabilities their utility makes them immensely attractive to Egyptians looking to manage their finances more effectively. In MasterCard’s recent survey, 44% of respondents cited “control on my spending” as a key benefit of owning a prepaid card and 18% said they would prefer not to have to carry cash around. In all, 51% said that they were highly likely to apply for a prepaid card once they were educated about the concept.
While current progress towards a “cashless society” through electronic payments remains slow, a factor that may hasten the process is the potential for Egyptian banks to work with financial technology providers. A recent example is Dopay, a FinTech startup that has launched a cloud-based payroll service that employers can use to pay staff even if they don’t have a bank account, as their Dopay account is linked to a debit card. Dopay was endorsed by the Central Bank of England to work through Barclays who are a prominent force in encouraging the modernisation of the Egyptian banking sector.
Cybersecurity/Anti-Fraud Technologies and Strategic Online Defence Development
“Cybersecurity is a growing concern for the nations of the African Union as more people come online. It is critical for the countries to adopt cybersecurity policies that better protect users while respecting their privacy and other human rights.” – Drew Mitnick, Junior Policy Counsel at Human Rights Organisation Access
Africa has a long history of hosting both the perpetrators of cybercrime as well as its victims. Security experts Kaspersky reported that more than 49 million cyber attacks occurred on the continent in the first quarter of 2014, with Egypt as the second biggest victim behind Algeria. Unfortunately, the sophistication of cybercrimes occurring in Egypt has increased along with its frequency.
Various types of “phishing” scams remain the most popular method of Egyptian cybercrime gangs in order to commit financial fraud. In 2009, the largest international phishing case ever conducted took place when US and Egyptian authorities charged 100 people (53 in the US, 47 in Egypt) with financial crimes involving the transference of $1.5 million into fake accounts.
More recently, in May 2013 an international gang of criminals stole $45 million by hacking their way into a database of prepaid debit cards and then stealing funds from ATMs in Egypt as well as a number of other countries. The hackers infiltrated bank databases and removed the withdrawal limits on a number of debit cards while creating access codes for them. Then other members of the gang used these codes to access Egyptian bank ATMs and drain them of all their available money.
The escalation of the threat landscape currently faced by Egyptian banks and their customers has encouraged heightened levels of investment in cyber security solutions designed to counter threats to point-of-sale (ATMs etc) as well as data theft attacks to banks’ central servers. In addition, the Central Bank of Egypt has been working with international institutions such as MasterCard to drive the use of safe electronic payments.
In December 2014, MasterCard launched a first-of-its-kind unified fraud service in Egypt that aims to protect MasterCard cardholders, financial institutions as well as merchants against criminal activity. It is used to monitor and evaluate all transactions processed on the MasterCard network and quickly detect high-risk transactions in real-time using state-of-the-art detection technology. As electronic payments, debit/credit card usage and mobile/internet banking increases in Egypt, we can expect to see further investments in advanced IT security technologies, including biometrics.
“For forward-looking banks, the Basel III requirements can be much more than a technical burden and a drag on growth and profitability. Rather, financial institutions should consider the new rules as a catalyst to upgrade their capabilities, as well as a clear call for thoughtful, balanced and better articulation of their risk-return profile and strategic choices. The new regulation, once implemented across the region, should benefit the regional banking system not just during times of financial crisis or market dislocation, but for decades to come.” – Jihad K. Khalil, Senior Associate with Strategy&
Egypt’s banking sector has been called a “beacon of stability” by international analysts as it continues to grow and secure profitability under challenging conditions. CBE Governor Hisham Ramez has repeatedly said he believes that the key to maintaining momentum is continued regulation, transparency and greater levels of financial inclusion.
There are a number of forthcoming regulations being imposed on banks by both national and international regulators but the most pertinent are the implementation of the third and latest set of Basel requirements. Named after the Swiss town of Basel, the Basel regulations were first introduced in 1988, with a second set published in 2004 and banks will have to comply with the third set of rules within the next four years.
The core principle of Basel III is to help prevent international economic shocks of the magnitude that caused the Global Financial Crisis of 2008. One of its key tenets is that banks will have to maintain greater levels of capital reserves; between 15-18% depending on the additional requirements of the CBE. Fortunately, Egyptian banks are traditionally well capitalised and used to maintaining high reserves, but the jump from 4.5% under Basel II to more than three times that amount is expected to curtail some of the banks’ more rapid growth.
The new regulations will require a new mindset for Egyptian banks, as they will have to make strategic decisions about allocating capital towards risk-balanced and profitable activities while still encouraging growth through greater levels of financial inclusion. An enterprise-wide analytical approach will be necessary for banks to implement comprehensive data and risk management policies in order to comply with emerging regulations while also achieving their growth ambitions.
From Cash to Cashless: The Transformation of Egyptian Banking
Egypt’s banking sector currently stands in an enviable position of security coupled with significant opportunity for sustainable growth. Despite the slight curtailing of growth expected by the requirements of Basel III, investment in new banking technologies and innovations could see forward-thinking Egyptian banks connecting with the largely untapped market of unbanked but technologically capable Egyptians.
The conversion from a mostly cash-based society to a cashless one is likely to take many years still, as cultural norms and valid security concerns are overcome. However, the potential of the latest banking innovations to modernise Egypt’s monetary systems is undeniable and they are rapidly enjoying greater levels of interest from Egypt’s banks as well as its populace.
Seven lessons from 2020
Rebeca Ehrnrooth, Equilibrium Capital and CEMS Alumni Association President
Attending a New Year’s luncheon on 31 December 2019, we played a game that involved predicting the world in 2020. Some of the questions included: would Uber become profitable? Would the three-decade bond rally finally come to an end? Would the US hit a recession?
Unlike any of our predictions based on a traditional approach to business and predicting, we now know that 2020 became the year where business, professional and personal plans were turned upside down, reshaped and put-on hold. The proverbial black swan had arrived.
As revealed in a new CEMS Guide to Leadership in a Post-COVID-19 World, to which I contributed, the COVID-19 pandemic has exposed deficiencies in the 20th Century vision of leadership, giving a rare opportunity to question the status quo.
So, what are the main lessons from 2020?
- Humans are enormously adaptive. This is not an extinction scenario. The world is getting used to dealing with global human disaster which may become a recurring event. Life continues guided by new parameters.
- No sector or country is immune to rapid change. Just as the leveraged finance and equity markets ground to a halt during the Global Financial Crisis, we have seen a disruption in the financial markets (including M&A) in 2020, including a significant redistribution of wealth between sectors; think tech vs airlines and the hospitality industry. When a market is disrupted it has secondary and tertiary effects such as less work for accountants, lawyers, financiers etc.
- Location is not as important anymore. The belief that finance staff need to be based in one of the financial capitals to be effective has been forever altered. Pursuing a career in finance from anywhere is becoming possible. However, it’s likely that over time, financial controls and human interaction will move the work model back towards the traditional office approach, as work is a critical sanctuary for people. While working from home may allow more time for family, chores and sports, it is mainly effective for people who already have their internal and external networks. For junior employees it presents a notable challenge as they may be forced to spend their formative years without a chance to really build their networks.
- Change is likely to be lasting. The opportunity for alternative finance and tech focused providers is enormous and 2020 will accelerate this shift. For example, many retail banks are providing rather poor customer service, blaming the pandemic. Even the most loyal customers will be heading elsewhere. For recent graduates and current students this is a major shift; future winners and key employers may not be names we are used to seeing in the headlines.
- There will be a spotlight on leaders with visionary strategy and understanding of the operations. 2020 showed many politicians and business leaders behaving like they were playing a game of snakes and ladders, rather than executing a thought-out strategy. The next wave of thoughtful leadership is urgently required.
- Collaboration leads to success. The definition of a pandemic is an infectious disease prevalent worldwide. A global problem requires a collaborative solution rather than each country and industry on their own. Quoting Steven Riley, professor of infectious disease dynamics at Imperial College London: “Once you have the knowledge and you share the knowledge, then you are able to take measures to push transmission much lower”. This principle is transferable to management education. In a world more complex than ever, investing in a degree is hard currency. Combined with the full global alumni network, corporate partners and schools, CEMS is capital that doesn’t depreciate.
- Resilience has become a watch word. Saint-Exupéry’s quote resonates with me: “If you want to build a ship, don’t drum up people to collect wood and don’t assign them tasks and work, but rather teach them to long for the endless immensity of the sea.” We are in a new paradigm – so prepare for the next change. For COVID-19, while we hope that the vaccine will soon upon us, the broader long-term positive challenge remains.
Data after Brexit: How does the end of the transition affect GDPR?
By John Flynn, Principal Security Consultant at Conosco
The UK has officially left the European Union now that the transition period has ended on January 1st 2021. But this could raise issues with one of the biggest bugbears for many companies – the international transfer of personal data.
Businesses can relax, somewhat – GDPR, which took businesses months to get their heads around, is not being replaced. It will continue as the UK GDPR 2018, and will still be based on the criteria of the Data Protection Act of 2018. However, the UK will retain the right to change the UK GDPR as it sees fit in the future.
The main changes apply to those who receive data coming into the UK from Europe. Transfers from the UK to other countries can continue under existing arrangements.
We know it can be difficult to cut through the legal jargon, so we have simplified what you need to know to protect yourself and your data:
1 – Update your privacy notice
Most businesses do not have the correct clauses in place ahead of January 1st, potentially exposing their liability, should something happen to their data. All company privacy notices online will need to be updated to specifically state ‘UK GDPR’, as opposed to ‘EU GDPR’. You will also need standard contractual clauses in place, which cover both parties – those transferring and those receiving the data.
The Information Commissioner’s Office (ICO) has a list of what needs to be included in the standard contractual clause here. The ICO will remain the UK regulator for data protection, regularly liaising with each EU member state.
This also applies to Multi Corporate Groups who operate in multiple countries, who need to update their documentation and privacy notice to expressly cover the data transfers. The UK has applied for an adequacy assessment, which would negate the need for contractual clauses, however this has not yet been approved by the EU.
2 – Data privacy assessments
Any company which runs applications and software should always perform a Data Privacy Impact Assessment. This was also in the guidelines before, but these assessments are now more important for those who outsource their IT operations internationally.
For example, when using a service such as a cloud-based system, the company must be sure that its service provider adheres to UK GDPR and stores the data within the European Economic Area (EEA), or has a binding corporate agreement with the company, where data is stored outside of the EEA. You should also, as mentioned above, make sure that a contractual clause is in place.
3 – Review local legislation
Contracts should now have contractual clauses that specify the responsibilities of the data controller and the data processor. If you are receiving personal data from a country territory or sector covered by a European Commission adequacy decision, the sender of the data will need to consider how to comply with its local laws on international transfers. You should check local legislation and guidance in this case.
4 – Cyber Security health check
The ICO is increasing its capacity and efforts to crack down on data breaches, post-Brexit. Now is a great time for all companies to have a health check to understand their Information Security posture and GDPR compliance. Nobody wants to be caught handling data improperly and fined when it could have been prevented with education and training.
A gap analysis performed by an expert is money well-spent. It’s also a fact that companies that have cybersecurity and Information Security controls are not only able to better defend against attacks but are also far better placed to recover from an attack.
It’s important that all businesses – large and small – are properly preparing their data storage and transferring for the 1st January. ICO has been busy setting examples by fining large, high-profile companies for failing to keep millions of customers’ personal data safe.
It will continue to come down hard on the data breaches of personal identifiable information and special categories of data. The saying ‘prevention is better than a cure’ rings truer than ever this year, and you will thank yourself if you make the efforts to properly store your data now, and not when it’s too late.
2020 reflections and 2021 outlook
By John Hunter, Head of Banking and Fiduciaries, Finance Isle of Man
Reflections on the most surreal year
The Covid-19 pandemic has completely changed the world as we knew it, resulting in catastrophic loss of life and fears of a downturn hang over global economies like a sword of Damocles. In the UK, the new strain has further exacerbated the situation. As I am sure many have already said we are living in what could be called the most surreal times. People have been trying to cope with this “new normal”, by changing their lifestyles and evolving behaviours.
The Isle of Man responded swiftly to the pandemic by closing its borders and enforcing social restrictions which everyone respected and adhered to. Socially and culturally the Island demonstrated all the good things that come from living on a relatively small Island where community still means so much.
The Isle of Man’s financial services sector adapted quickly, seamlessly transitioning to working from home. The banks too adopted flexible remote working practices and continued to support clients around the world helping them navigate the challenging situation and making the most of any opportunities that arose.
Although there is no substitute for face-to-face interactions, we all embraced web-conferencing platforms like Microsoft Teams and Zoom to stay connected with contacts around the world and build and nurture business relationships, whether it was with financial services firms or high net worth individuals looking to relocate to the Island.
Furthermore, a priority for the Isle of Man has been to reinvigorate the business and cultural ties with South Africa. In a normal world, we would have travelled to the country, held in-person meetings with businesses and industry representatives and talked about building on our wonderful historic ties. However, because of the scale and breadth of disruption we had to change all our plans! We hosted a virtual roadshow which comprised a series of webinars exploring why it has never been more important for South African businesses and individuals to choose the right jurisdiction for long term financial planning.
Looking ahead to the future
We are all hoping that the global rollout of vaccines will provide the pathway to some form of return to normality and all the things people are missing will be back. Like amidst all periods of immense turmoil, interesting, new possibilities have emerged such as the revolution in work culture and a renewed importance of being close to nature and green spaces is. And these possibilities can help reshape society for the better.
The global economic recovery and rebuild might seem further away in the current environment especially amidst the new lockdowns. But we are confident in the resilience of economies and are hopeful that different industrial sectors and governments working together would result in green shoots.
The financial services industry has an important role to play in getting the world economy back on its feet. It is a core component of the solution to continue facilitating the financing of corporates, as well as to develop sustainable finance and nurture digital technologies which have proven to be vital during the pandemic. The sector should continue its cooperation and collaboration with governments and regulators to ensure efficient capital flows and financial stability for businesses and individuals.
Banks too have a crucial role to play as they are instrumental to the effective transmission of monetary policies and stimulus packages. As mentioned in a report by EY: “Financial insecurity in the wake of COVID-19 will require banks to boost consumer confidence and help build a more resilient working world.”
We expect the Isle of Man’s financial services sector and banks to continue navigating the situation with resilience as they have been doing thus far and contributing to the global recovery process. Also, we truly hope this will be our busiest year ever (subject to our ability to travel), with an extensive global schedule of planned activity to promote the Island as an international financial centre of excellence and innovation. Personally, I had planned to be in South Africa for the British & Irish Lions tour, but regrettably, it might not take place and as such we will look forward to catching up with friends there as and when we can.
No doubt, there are significant challenges for the world ahead but as Albert Einstein said: “in the midst of every crisis lies great opportunity”. And it is this opportunity that we all need to work together to identify and make the most of. We are confident that in 2021 the Isle of Man will continue to support financial services businesses help their clients, employees, and the wider society through these surreal times. We are all in this together.
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