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
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“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.