Beyond Payment

Innovation has been, without question, one factor behind the excitement about entrepreneurship worldwide. From the microchip to the iPhone, the personal computer to virtual reality, new technologies have pushed progressed forward – and transformed our lives.

Among the biggest transformation: social mobility. Millions across the globe have moved out of poverty into the middle class. That is certainly true in Turkey and its surrounding region.

The biggest impact of the middle class? Spending.

The middle class has fueled growth in consumer products, in services, on the Internet – and, most importantly, in payments.

How people pay for goods and services has created the hottest startup opportunities.

 

FinTech is mobile money plus. It’s banking, payments, marketplaces, lending, and other transactions.

 

From cash to credit and beyond

Cash is and will be, for a long time, king. Yet it was the advent of credit cards that ignited tremendous growth and the birth of the smartphone revolutionized economies. Technology has enabled millions to move money in ways previously not possible. Take PayPal, one of the first online payment platforms. And let’s not forget M-Pesa, the mobile money platform born in Kenya that made mobile money mainstream.

Mobile money has been the ground floor for financial technology – “FinTech” everywhere.

 

FinTech in our region

Entrepreneurs dishes on FinTech startups in our region. Startups.Watch prepared FinTech report for Turkey last month and just published funding activities report.

 

From the VC view

‘Putting money into money’ isn’t so easy however. Financial services are an extremely regulated sector. That’s right, government. And that’s not a bad thing. If done fairly, regulation enables competition. Competition, by its very nature, leads to better products.

What’s fair? Interestingly a fair market isn’t one with fewer regulations or a more activist government. It’s one in which trust trumps all. Whether you operate a B2C company or a B2B, trust underpins every transaction. FinTech depends upon a market in which money can move around with confidence.

 

Size matters

The bigger the market, the bigger the transactions. This is what makes the Arab speaking world an incredibly attractive market. It is also why startups in the Balkans and Turkey are eager to do business in the east.

 

Get your A Team together

The cliché is true. VCs will always opt for a B idea with an A team. People are the framework and foundation of every business. The best will help operations thrive. The worst will lead to an early death. The best, however, cost money. That is especially true in FinTech. While there aren’t many upfront capital costs in the FinTech sector, allocating funds to hire the best talent is non-negotiable.

 

What does success look like?

If you are only watching headlines, there is a lot of reasons to believe the sky is falling. If you’re out pounding the pavement – visiting shops, marketplaces, and startups, you’ll know not to lose hope. Getting into the right mindset is the first step to success. That mindset should recognize that the positives in MENA far outweigh the negatives. And the positives aren’t marginal. MENA averaged 45 percent growth in 2015 – moving $40 billion in transactions. Several FinTech startups in the region continue to attract foreign investment, such as Iyzico, CashBasha, Madfooat. What are these startups doing? They’re focused on customers, an A team, and maximizing value.

“Go big or go home,” was most definitely yesterday. In today’s world, we have to get onto “Yes we can.” Let’s get to it.

Numan Numan

 


 

We asked some questions to Vostok Emerging Finance and FinTech payment companies, here are their responses,

 

David Nangle @Vostok Emerging Finance

Can you please share your thoughts on FinTech in CEE/Turkey/MENA region? What’s your view on the region going forward? Your prediction on the digitization of cash dominate region?

At Vostok Emerging Finance we focus on investing in some of the best FinTech companies across the emerging world as we take a simple but realistic view that disruptive financial technology is a global trend that is helping change the finance industry. That said, we find that most of the pots of investment capital tend to focus on developed market opportunities and if they do cross over to the emerging world, then it is China, India and maybe Brazil that tend to capture their attention. We are emerging market potential believers and see this long-term EM potential coupled with the structural changes been driven by FinTech as an excellent investment theme for us and our investor base to benefit from. We spend a lot of our time focusing on the countries of the EMEA time zone, including that of Turkey as well as neighboring CEE and MENA regions.

While FinTech is clearly a new-found term that is spreading across the markets we look at, innovation and disruption within financial services has always been occurring. In fact, one could argue that some of the most interesting early financial innovators came out of Turkey and CEE. When we look at the Turkish banking market and names like Garanti Bak and Deniz bank in particular, these names where always held in high regard for their in-house driven innovation around the card market and the product diversification one could distribute at the local ATM in Turkey. Polish Banks have long been regarded as some of the most innovative in the world, not just EM, with names like Alior and mBank coming to the fore. While Tinkoff Bank in Russia, given its branchless digital footprint is clearly the future of where all banks must go, only being realized today. On the flip side, from a regional perspective, the broader Mena region does remain behind the digitalization curve.

Looking at Turkey specifically, we have been impressed by the quality of FinTech companies and their management teams, but less impressed with the quantity given the size and potential of the Turkish market.

Dealing with the quantity aspect first, there are definitely less opportunities coming out of Turkey if we compare to other mainstream EM markets with China and India literally having thousands of companies coming through, while markets like Brazil more in the hundreds. Turkey is probably closer to Russia or Mexico in terms of quantum of opportunity set and has the potential to deliver a lot more. Arguably what is holding it back is a still rigid regulatory backdrop coupled with a banking system populated by banks who are both very good at innovating in themselves and not always open to the sharing culture which is key to diving young FinTech company growth. That said, Akbank seems to be setting itself apart and hopefully a fresh trend by being open and willing to share and integrate FinTech plays into it’s ecosystem.

Looking at specific FinTech names, we have been very impressed by the teams and progress made by both Parasut and FIT Solutions in the broader accounting SaaS space and both have been backed by quality local and international capital as a result of strong early traction. Iyzico, A VEF portfolio company, is clearly a favorite of ours and we think Barbaros and team are benchmark standard for global FinTech players and not just the local market, while PayU, the Naspers payments and FinTech subsidiary definitely brings international quality and expertise to the local market.


 

Barbaros Ozbugutu @IyziCo

  • What is your company’s elevator pitch?
    iyzico is the fastest and easiest way of accepting payments online
  • What do you find are the opportunities for your company in the industry and region?
    The payment dynamics always show us that “payment” is in fact a regional game and there is not a universal payment solution that fits all the markets. Even PayPal is strong in some major markets but in some specific markets PayPal usage is low. Therefore, we believe that iyzico is fitting the payment dynamics in the Orient region and we are moving towards the vision of “becoming the payment champion” of this region. Last year, we took the initial step towards this vision by becoming the first company to connect the closed loop payment system of Iran to the world.
  • What are your top challenges?
    As a startup founder, my current challenge is to make sure that the iyzico culture is being sustained with each new hiring. When the company was 30 people, it was relatively easier to do but as of today we have 75 employees and we are keeping the culture. I’d say that it is not so easy that’s why we are paying a lot of attention to this.
    Second challenge is that we have a specific target to become the first unicorn from Turkey by 2023. We are working hard for this target and it is a challenge for all iyzinators.
  • What is your view on the region going forward?
    When we look at the Orient region, there are 16 countries and have a total population of 410 million. In 2015, the total e-commerce volume was $40 billion with a YoY growth rate of %45. Although “cash-on-delivery” remains the king, the credit card penetration is increasing fast. This shows us the potential for online payment solutions. Once the customers in this region starts using such solutions, there will be a huge potential. We also believe that 2017 will be the year for companies to accelerate their cross-border trade efforts to penetrate new markets. That’s where we also fit in by providing our cross-border payment solutions.
  • What was the role of regulation on your startup? Does it help or block?
    Regulations are necessary to create a healthy market structure. From our side, in 2014, the regulations regarding the marketplaces in Turkey, helped us gain a good momentum thanks to our unique marketplace solution. On the other hand, we had some cases in which the regulations slowed down some of our actions. In general, regulations should be at a point where they act as enablers for the market players but not as blockers.
  • Being this is a cash dominate region, what’s your prediction on the digitization?
    Let me give an example from Germany. In Germany, there are almost 2.7 million SMEs. When analysed, %22 of them have a digital presence. But in Turkey, we have close to 2.5 million SMEs and hardly %3 of them have an online presence. This shows us the potential for Turkish SMEs to become digitalised. The same applies for the countries in this region. So, we can easily comment that we will see a digitalization trend in the coming years. In fact it already started taking place thanks to companies like us. Once such trend becomes stronger, the customers will also shift to using less cash making the path to becoming a “cashless” society.

 

Fouad Jeryes @CashBasha

  • What is your company’s elevator pitch?
    CashBasha is an e-commerce technology company that enables shoppers in emerging markets to make purchases from international online shopping sites that do not serve their geographies in a seamless and automated manner with their preferred payment methods, local logistics, clearance and full customer service to their doorstep.
  • What do you find are the opportunities for your company in the industry and region?
    In a majorly unbanked and under-banked region, the opportunity to automate and securely provide cash-based means of transacting to the online world, you can build a robust means to serve customers today, but also a hotbed to acquire customers and move them towards more sophisticated means of transacting.
  • What are your top challenges?
    Just one challenge: Experimentation with new and emerging payment technologies is always a challenge in our part of the world where regulators might ban or prohibit based on any risks involved in such systems. Whether security related or banking related, there is an attitude that is more lenient towards banning new or experimental ideas rather than building frameworks that may allow for a level of research and development.
  • What is your view on the region going forward?
    The beauty of our region is that many things have not been developed yet. The advantage of this is that we can leapfrog generations in particular field, especially in finance, and become models for a new era in finance related technologies. When you have nothing to lose, you have a great advantage to be creative and introduce new things.
  • What was the role of regulation on your startup? Does it help or block?
    We were not affected by regulation, however, there have been particular experiments we wanted to conduct within the digital currency space and those have been difficult to come by.
  • Being this is a cash dominate region, what’s your prediction on the digitization.
    Most reputable studies claim that cash will remain as the main mode of transaction over the next 15-20 years. That said, I believe central banks will wake up to the fact that paper is a less efficient mode of transaction and that a local digital currency would be far better. Despite that this may take away much of the decentralization that make crypto-currencies interesting, yet it would allow for a top-down push for digital financial transactions for everyone. Our lives would all look very different.

 

Brad van Leeuwen @DoPay

  • What is your company’s elevator pitch?
    There are more than 2 billion people in the world with a job, but no bank account. dopay works with companies in emerging markets to make it possible for them to pay their salaries electronically for the first time. We provide companies a cloud-based payroll calculation platform and their employees a dopay account linked to a dopay Visa or MasterCard and the dopay mobile banking app. Companies working with dopay no longer need to manage large amounts of cash – instead they can pay employees with the push of a button.This isn’t just good for companies and their employees, but our partner banks too. Our distribution model allows us to reach the mass retail market with a much lower CAC than is achievable by them, which brings in net new deposit funding and cross-sell opportunities.
  • What do you find are the opportunities for your company in the industry and region?
    There is a massive opportunity for neo-banks around the world, unencumbered by legacy systems, to win market share from traditional banks by offering a fantastic experience, at scale, using modern technology.Nevertheless, neo-banks operating in markets with developed banking systems face a big challenge to transition from being a novelty, to a customer’s primary account, because so few customers move bank each year.The large population of unbanked people in this region means the opportunity is arguably greater here, because FinTech startups don’t have to compete with banks for business.The opportunity to provide customers their primary bank account creates the foundation for us to provide a whole range of exciting new products that are otherwise unavailable in the market. In the coming year, you will see us introduce lending, saving and insurance products, all available within our mobile banking app, that will set a new standard for convenience and customer experience in the markets we operate.
  • What are your top challenges?
    • Building trust – in many countries around the world it is common to get your first bank account before you start school. In the region, where banking is less common, people are used to being able to see, touch and count their money. One of our top challenges is to demonstrate that we are a safer, more reliable and better way for people to manage and use their money.
    • Scaling processes to meet our fast growth – scaling processes in an environment of fast growth and high standards for customer service is a challenge for any successful startup. This is even more of a challenge in this region with less progressive regulation around things like KYC and e-Signature. Unlike most FinTech startups in the UK and US, we still have to move around a lot of paper!
    • Third party providers – in the US and Europe there are banks, payment processors and other providers that make it their business to open their infrastructure to startups and other companies. They invest in keeping their technology relevant and move relatively fast so their partners can build great products and services on their rails. Unfortunately, in this region there is not the same strength or depth of providers and so it can be a challenge for us to move as quickly as we could in other regions.
  • What is your view on the region going forward?
    Emerging market FinTech may be one of the greatest opportunities for startups in the world. There is a large, young, mobile-first population that is well informed about how things are done abroad and frustrated that the same solutions are not readily available to them here.Whilst the opportunity in the region is big, it will be hard for startups to successfully execute on that opportunity because of the region’s fragmentation. The reason the UK is the global leader in FinTech is at least partly due to the regulatory environment created by the EU which allows access to a market of more than 500 million people. The challenge for FinTech startups in this region is that to achieve scale, they will need to do so across several countries with different legislation, regulation and currencies which adds another layer of complexity.
  • What was the role of regulation on your startup? Does it help or block?
    Regulation is a fact of life for all FinTech startups anywhere in the world. Mark Zuckerberg’s concept of moving fast and breaking things does not and should not apply when you’re handling people’s money – it’s one thing if you can’t access your Facebook page for a little while, but it’s a whole lot more serious if you can’t access your money to pay your electricity bill before the due date.Having said that, it’s true that sometimes regulation doesn’t keep up with changes in technology and it does slow us down. KYC and E-signature laws are two examples of where changes could help us provide a better experience to our customers. My hope is that as dopay and others demonstrate the benefits that innovation provides to the region’s economy, regulators in the region will follow the good example of progressive regulation set by the FCA in the UK in enabling innovation.
  • Being this is a cash dominate region, what’s your prediction on the digitization?
    Electronic payment is the foundation of the modern internet-led economy. How would Amazon, Airbnb, Dropbox or Netflix operate if they couldn’t accept payment online? So, while the region is dominated by cash today, I expect consumers will begin to look for a means of electronic payment more frequently so they can access online services and e-commerce.

 

Nasser Saleh @Madfooat

  • What is your company’s elevator pitch?
    MadfooatCom is disrupting cash payments in Jordan and the emerging markets, it offers an online, real-time bill presentment and payment service, which enables customers to inquire about and pay their bills anytime, anywhere. In 2014, the company won the exclusive tender of the central bank of Jordan to build, operate and administrate the electronic bill presentment and payment service (EBPPS) “eFAWATEERcom” nation-wide in Jordan. The service is now connected to 92% of the banks in Jordan, Post Office, JoMoPay (Jordan Mobile Wallets) and more than 75 billers with more than 270 services (government, all Utilities, all Telecoms, Universities…).
  • What do you find are the opportunities for your company in the industry and region?
    MadfooatCom has a very good opportunity in the emerging markets which suffer from cash payments (more than 300 billion USD of yearly bills are paid in cash in MENA region) and with the network it builds among banks and billers, many new FinTech products can be introduced in addition to the electronic bill presentment and payment services (Remittances, KYC, credit/bill payment history, big data…)
  • What are your top challenges?
    Main challenges are acquiring investments, growth and changing culture.
  • What is your view on the region going forward?
    Although the region is suffering currently politically and economically, these challenges can be a very good opportunities for startups and SMEs especially in the FinTech sector and I believe the future is positive for the region.
  • What was the role of regulation on your startup? Does it help or block?
    MadfooatCom was lucky that the Central Bank of Jordan (Regulations) was an open minded and strong helper and adopter in making the project a success.
  • Being this is a cash dominate region, what’s your prediction on the digitization.
    This is the most interesting challenge, I feel very positive and happy when I see MadfooatCom changing the culture of people gradually from cash payments into ePayments and I’m optimistic as we have more than 70% of young population who are looking for e-payments and e-services and the interesting thing that we started to see good adoption rate from the more older generation in using eFawateerCom service (the central bank service for electronic bill presentment and payment service in Jordan; built and operated by MadfooatCom)