You’ve launched the ‘State of Fintech’ report [co-authored with Wamda], which looks at the challenges and opportunities for startups in financial services, but what do we mean by fintech?
Fintech means a company or an idea that solves a problem for a consumer or a business. I want to pay something, I want to remit money, I want to transfer money, I want to borrow money, I want to invest money, anything around investment and wealth evolves into fintech. It could be a very small transaction, like ensuring my car.
Fintech fills in the gaps where financial institutions either don’t want to go, or cannot go.
For example, say a bank has capacity to make 10,000 loans every year and that’s their capacity, the bank would choose to make a loan that is let’s say $100,000 or higher.
Fintech allows the bank to go from $100,000 to $10,000 or $1,000. Rather than making 100,000 or 10,000 loans, I can underwrite one million loans every single year because I’m enabled through different technologies to do different algorithms... and capture more data, and my underwriting team can make sense of it faster.
I don’t have to look at the balance sheet of a company any more, I can look at other KPIs to make that decision. It’s called alternative lending for a reason, because you are looking at alternative KPIs that will contribute to their success or failure and how we measure their repyament history.
Financial technology relies a lot on Big Data, on how we forecast what an individual or organisation would do if you lend them money or invest money, or make decisions quicker.
Do they tend to be alternatives to the traditional banks?
Alternatives or complementary to. For example, NOW Money is complementary to a financial institution, so rather than them going and getting a guy whose going to fund his account for AED 1000 or 2000, which might not be feasible for the bank, they can go get them much cheaper.
The acquisition cost for a financial institution is much lower and it invites them to target that sector. It enables the bank to extend their target audience.
What are the main challenges in starting a fintech?
The biggest challenge for startups in fintech is trust and it’s trust in three dimensions. It’s establishing trust with the end consumer who’s going to buy my product, with the financial partner that I’m going to need to process my financial transaction, and with the regulator. How do I establish trust with all these different stakeholders and with the investors?
I have to establish trust with every single person. Investors say ‘get the financial partner and I will invest’; and it takes a year to get the financial partner and if I have AED 250,000 I’ve run out of money, I can’t continue.
The regulator says ‘it’s looking into it’, but it takes six months. I think it’s twice as hard to start a fintech company and I invite entrepreneurs when they’re getting into fintech to understand that challenge, that this is not going to take three months or six months; it’s going to take two years to establish, to get the investment, get the partners, and do a minimum viable product.
Do you need a lot of money to start a fintech company?
It’s not how much you need, it’s how long it’s going to last. To start a courier company you need ten million dollars and you can start a fintech company with half a million, but it’s got to last longer because it’s going to take longer.
Do banks here lend to startups and small businesses?
When we looked at the report, we found that only 5% of financial institutions in the UAE lend to SMEs, while 90% of our economy is attributed to the SME sector. That’s why Dubai SME was in the audience today, because they are keen to figure out what are the laws they need and who are the partners they need to get involved to support the SME segment.
Why don’t the financial institutions lend to SMEs?
I think it’s because of the order economics. How much does it cost me to underwrite a loan for AED 100,000 or 50,000 or 10,000, versus a loan that is AED 1 million? The cost is the same, but the profitability on the million dirhams is much higher, so I’d rather underwrite the million so I can do 100 companies per month, rather than 1000 or 2000 per month. For that, I’d have to hire an army and the economics don’t add up. This is an opportunity for fintech though. We streamline processes. That’s our job.
If banks don’t lend to startups and SMEs, who is lending them the money? Or are they muddling through?
They’re either muddling through or borrowing money from companies like Beehive and Liwwa [P2P lending networks].
That’s why these guys’ growth has been 60-70% year over year. In 2017, some of those companies will experience 300-400% growth rates.
Do you think startups and SMEs could do more to make themselves attractive to lenders?
Every entrepreneur and SME has a unique story to tell, but when you go talk to a bank and say I’ve been growing 100% month on month and they ask you how much you need and you say AED 50,000, they were hoping for a million. It’s the size of the transaction that appeals to the bank.
What’s your company’s story?
Payfort started in 2013 in the UAE. We wanted to solve the payment problem in the Arab world. We thought it was one [problem], apparently it’s eight or nine problems. The infrastructure was established, but it was not optimal.
There were a lot of failures happening, a lot of optimisation needed to be done, the technology evolved to mobile applications... Banks didn’t have the bandwidth to onboard [merchants]; we’ve onboarded 2000 companies and we have close to 3000 in our pipeline.
Last year, we processed $1.5bn in total payment value in six markets. We help companies increase their acceptance, increase their bottom line, minimise their fraud and enhance their user experience. We speak the language of the merchant, we understand which audience you’re going after, which markets, how we can help minimise the friction from payment. We’ve been the fastest growing payment company in the region. We have over 50 partnerships with banks in the region today, we act sometimes as lobbyists with regulators.
I would say we are in the emerging stage. We’re a hundred people, we have offices in eight different markets. We feel if we solve problems, our revenue will be maximised automatically. We are on a path to profitability at the end of 2017 or early 2018.
Why did you get involved with this report?
We don’t build our own roadmap, our merchants build our roadmap and they are coming to us and talking about more than payment. They want to offer instalments, loans to merchants on their marketplace, and develop Blockchain technology to enhance their process.
There’s a lot of things we were missing, so we realised we had to really analyse the sector, from the regulator’s point of view, the investor, the entrepreneur, the consumer… Without having that data, fintech startups are going to struggle. It gives startups the data they need to be able to build their business plans.
One of the suggestions in the report is creation of an entrepreneur’s visa. What is an entrepreneur’s visa?
If you want to start a company, you have to go to a free zone or find a sponsor. The cost is minimum AED 50,000; maybe 100,000. That is a barrier for you and I to innovate, to take the steps of entrepreneurship while we don’t even know if we’re going to succeed or not. I might want to start something, but I can’t leave my job because I have a family to provide for.
I can’t just act on a whim. I need a minimum viable product, I want to see the product scaling, I might even decide to hire someone before I quit my job.
An entrepreneur’s visa allows someone to do all of that, to enter into a minimum viable product, to enter into an affordable process before I have to go into a full blown license for a company.
It gives me a limited-scope license to do certain things until I reach a certain threshold and then I have to do things like get an office and pay a certain amount per year.
If the cost of entering is high, it’s going to eliminate entrepreneurs. It’s also trial and error; I might fail two or three times and I don’t want to spend AED 200,000 every time I fail.
What’s the key thing to know about starting a fintech company?
For your readers, as startups, the most important thing is to… highlight the difference in setting up a fintech. It’s not about raising more capital, it’s about making sure this capital lasts longer because you will need it to last longer. Don’t go out and hire ten people right away.
You’re going to need that money because it will take more time than you expect to get the financial partnership in place, or to get regulated or to get licensed.
It definitely takes patience. The governing bodies are dealing with very serious issues and they need to make sure the end consumer is protected.For all the latest business news from the UAE and Gulf countries, follow us on Twitter and Linkedin, like us on Facebook and subscribe to our YouTube page, which is updated daily.
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