There certainly are challenges, regional imbalances and pressures of capital flight. But, Turkey secured a 4% GDP growth in Q3 2015. Robust domestic consumption and government spending have both ushered to achieve such eye-catching number.
For its growth prospects, Turkey clearly relies on its young and demanding demographics with an increased level of purchasing power. This is a country with median age 29 for its 79 million residents. Industry surveys indicate there are 46 million active Internet users, 42 million social media accounts, 71 million mobile connections and 36 million mobile social users. Numbers narrate the story eloquently.
To many accounts, Turkey is experiencing a digital boom. Informatics sector grows in double digits every year and has now reached a volume of $34 billion. According to TEPAV, a research think tank, there are more than 2,300 software development companies approximately half of which are located in techno parks. The country has become a place of presence for global service providers that have either established new businesses or acquired local firms. Intel, Microsoft, Yandex, IBM, Qualcomm, PayPal and others are all involved heavily for a piece in the cake.
Take e-commerce which registered 35% growth rate on sales in 2014 reaching to €6.5 billion. Online shopping represents 1.6% of retail turnover whereas this number is above 5% in most of the EU markets. Only this implies the gap to be filled soon by digital stores. The potential has been signaled by an acquisition of gittigidiyor.com by Ebay in 2011 for $217 million and a more notorious one of yemeksepeti.com by Berlin-based Delivery Hero for $589 million in 2015. Korea’s SK Holding co-invested with Dogus Group a few years ago in n11.com, now a premier meeting point for buyers and sellers. It has reported €300 million sales, 400 million visits, and 6 million member accounts in 2015.
Online marketplaces have proven to be ground breaking for Turkish retailers who are strict in placing trust in digital tools. Internet banking platforms, for instance, are still underused in against for massive investments by the banks. Mobile has turned out to be different. Every other purchase on e-commerce portals is conducted via mobile devices. An ING survey highlights the number of mobile owners that use mobile banking in Turkey as 65%. This is higher than the US, the UK and the rest of Europe. Some researchers contend that millennials are shifting the paradigm of conventional shopping and payment in the country.
Financial services are not lagging behind in this ever-changing landscape. The banking crisis almost fifteen years ago seems to have taught lessons to the Turkish bankers as they have scrambled into innovation—a distinct feature from some other markets. One indicator is mobile banking which accounts for 18% of total banking transactions. Corporate and retail banking is of high quality thanks to integrated technologies in data management and operations. Banks’ total assets to GDP has surpassed the threshold of 100% which is a straight answer to innovation in conventional banking. Disruptive innovation has also been pioneered by banks. Finansbank’s enpara.com and BNP Paribas’ cepteteb applications offer low-cost and less hassle services in P2P payments, card-less ATM cash withdrawals and online payment functionality. Garanti’s payment operations are now maintained by BBVA Global Payments to spread its technology across where the Spanish giant has presence. Denizbank became the world’s first when it introduced a Facebook banking application in 2012.
The number of credit cards has doubled over the last 10 years to 58 million, and debit cards have grown by an even greater margin to 112 million. A few years back, Turkey overtook the UK as Visa Europe’s largest card market. Contactless card payments were launched in 2004; and today its network is nearing 200.000 POS terminals representing 8% of the total in the country.
BKM (Turkey’s interbank switch & clearing agency owned by a consortium of local banks) embarked on a new domestic payment scheme called TROY which will provide Turkey with greater control of its payments. Pozitron, Monitise and Cardtek are gaining ground with banking infrastructures. Wallets became popular in the sideways. BKM Express, 3Pay, ininal, Moka and others are tackling the customer appetite for digital wallets. Some of the fintechers are even crossing the borders. iYzico, an Istanbul-based payment startup, has recently signed an agreement with Tehran-based Pecco to become the first of its kind introduced into Iran’s $400 billion economy.
Capital market, though belated a little, has resonated well to the demand of local and global markets for diversified product portfolio. New capital market legislation signals openness and competition even though the industry watchdog promises a cautious transition. Financial and commodity derivatives have boosted the turnover by registering triple digit growth per annum. BIST’s recent switch to Nasdaq-powered technology paves the way for sophistication in trading. Algorithmic and high frequency trading are set to galvanize liquidity in the equity market. Domestic institutional investors are more prevalent in the trading than before. Pension funds, shored up by government’s cash incentives, have grown to 6 million subscribers with €15 billion AUM. Matriks, Tradesoft and Rasyonet are only a few of the local disrupters crowding-out competitors thanks to product quality and cost efficiencies. Matriks only captures around 65% of market data services where Bloomberg and Reuters are trailing way behind. It is nothing erroneous to anticipate more startups entering into the trading and asset management landscape in the years to come.
The government has been an enabler in technology development by liberalizing the market place, leveling the playing field, easing regulatory burdens and incentivizing startups. There are now 48 techno parks across the country offering cluster services for around 3500 technology providers. Those companies located in such centers enjoy tax incentives, lower statutory fees and substantial cash grants. A brand new regulation has expanded the incentives framework. Angels and venture capitals will pay no taxes once investing in startups. Restraints on foreign workers have been relieved. At a separate note, the Treasury struck a deal with Chambers of Commerce towards a joint funding platform which will execute direct investments in startups towards an initial commitment of $50 million. A broader investor landscape for fintechs with the inclusion of government is not necessarily a prophecy.
Back to the prologue! Yes, there are challenges in and around the country. Pressures are eminent. Some risks are gauged downwardly. Let us, however, make no mistake. Turkey has a peculiar potential to build up further. Fintech is and will be one of the pivots in this process.
Iran is a powerhouse of entrepreneurship in MENA region due to strong demographics, large-scale growth potential and high-end technological infrastructure. Such positive environment has been curtailed by the notorious sanctions imposed globally on the Iranian economy. The lift of sanctions in 2016 by P5+1, however, has changed the perception to this particularly substantial market, and paved the way for an increasing interest of foreign investors to tap into unrivalled returns and opportunities both in public and private markets. Such drive has also facilitated formation of an ever-expanding ecosystem of private equity, venture capital, entrepreneurship and start-ups.
Fintech industry has not been immune to this shift to a higher ground. The interest towards rising fintech industries is an eye-catcher alongside other innovative ideas. There are now ten accelerator programs such as Avatech, Dmond, Trigup; three venture capital investment companies; five venture capital funds such as Sarava, Shenasa and Rahnema, and two angel networks, Avaangels and Karaya. Iratel, Griffon and PSIG has created venture capital arms to invest in tech companies. An idea exchange has been created to facilitate information and updates across the board. Various fintech businesses have drawn investments ie Fanap, ISC, eFarda, Tosan and others. Availability of sector-focused funds and varying scope of fintech firms is an indicator that the more has yet to come. It is however not quite easy to map the industry around numbers. A country-wide database seems to be very relevant to eloquently identify the fact-based potential in Iranian fintech landscape.
Below are some of the highlights to consider for the Iranian fintech market:
Regulation: Lack of an authorized fintech body and an integrated regulatory framework is a backdrop. Central Bank of Iran has recently announced that it is engaged in a comprehensive framework to regulate fintech industry in the country. This is a look-forward to development.
Technology Leverage: In the sanctions-era, technology companies have emerged to sustain domestic financial services. Such technology and software houses are there out in the market empowering banks, insurance companies, brokers and other players. Impromptu emergence of such operators have helped building know-how, professionalism and innovation in the country. It is why transition to fintech mindset might prove to be easier in dimensions such as P2P payments, P2P loans, remittances, crowd funding, microloans, e-wallets, robo-advisory, trading, data analytics and personal finance.
Efficiency: Low-cost and high-caliber workforce is a clear advantage. Broad availability of quality engineers and developers is an added value.
Banks: Banking services are available throughout the country towards widespread branches even in small towns. Banks however need to be upgraded technologically given the appetite towards online banking. Use of smart phones among youth is a catalyst to switch to mobile banking. There is a compelling reason for banks to collaborate with fintechs to lever on innovation, agility and flexibility.
Trading: Capital markets are liquid and widely participated by individual investors. Trading culture is embedded and shored up by brokerages. Algorithms and product diversification will prevail the local markets as the foreign funds are drawn into competitive returns. Investment advisory is expected to convert into online space with more robotic and speed-based technology involved. It is very likely to see fintechs in capital markets towards deployment of technology, AI and big data.
Challenges: Despite upsides, some challenges remain in effect. Merits of fintechs are not entirely discovered by market participants. Banks are yet to be fully linked with the global system. Swift integration is slow, and seriously undermines money transfers across the border. Regulatory framework requires alignment. Accounting rules need to be brought updated. Foreign ownership in firms is subject to constraints. Political pressures on the country are not completely lifted.
Similar to many other countries, Iran is experiencing an appetite towards fintech products and operations. Such appetite is counter-weighted by various challenges. There is however a need to educate the regulators, banks, investors and fintechers towards a healthy development of the fintech market.
FintechPark is organizing a fintech conference in Tehran in May 2017, first of its kind in the country. Such event will help all interested parties to grasp a better understanding of the market, potential and challenges. Stay tuned for updates. Look forward to seeing you there!
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- There has been an explosion in the number of financial technology startups which are called fintechs. These companies aim to either:
- Revamp the processes or business lines in traditional financial services
- Disrupt the financial services with the emergence of alternative finance: non-bank, non-insurance, online companies through combination of innovative business models and cutting edge technologies
- To some estimates, there are around 12K startups globally challenging their competitors whereas a dozen of fintechs have surpassed the market value of $1B (so called unicorns).
- Fintechs have raised substantial financing from a variety of sources as the interest of venture and private equity investors is shifting towards added-value technology businesses. There are venture capital firms focusing only on fintech opportunities.
- NY and London have resonated well on the success of financial startups based on the size of financial industries. Singapore, Hong Kong and Australia are becoming other candidates to follow the frontrunners.
- Driven by global trends including regulation, financial services industry needs to reinvent itself in order to be able to distribute its products to broader set of clients. Integrated data management, risk management and capital management are key for making this happen. Fintechs have created a perfect storm in this landscape and offered alternatives.
- There are a number of elements that have led to a perfect storm for fintechs:
- New technologies: Blockchain, Internet of Things, Big Data, natural language processing, machine learning, micro chips, cloud and smart applications have paved the way for new financial sector entrants with agility to meet consumer demand more efficiently. Cost of technologies is also decreasing due to diversity of alternatives and open source.
- Businesss model: Fintechs offer clarity, consistency and less complexity in their business modalities. This is one of the edges over conventional players. Agility and scalability of fintech services are very high in adjusting to new technologies and processes.
- Low transaction costs: Servicing fees of fintechs have been dramatically reduced thanks to automation and human-free processes vis-a-vis enormous operations like call centers.
- Capital requirements: due to global policies (G20) and regulation, the financial services capital model has been changing, which can only be addressed through more efficient processes and access to new resources, e.g peer to peer
- Transparency: This is not only a requirement from regulators globally but also increasingly a common client demand.
- Regulation: Regulation has actually caused a huge acceleration in Fintech innovation as it has slowed and hampered the large financial services firms who are the focus of regulation.
- Government support: Fintechs have benefited from the open support of governments seeking to promote innovation and competition in financial services. Grants, tax incentives, regulatory and advisory supports, techno parks are only a few examples to recent governmental policies.
- Fintech is a catalyst in transforming the legacy systems of finance from banking to payments, lending, transfers, insurance and wealth management.
- Payment is the leading segment for the number of fintech companies as well as for the money raised.
- Every year, fintech platforms enjoy a larger share of demographics. US and UK in the West and Hong Kong and Singapore in the East are leading the crowd for user penetration.
- Gen Y or so-called millennials opt for fintech platforms more than any other age groups. Markets with lower median age might pose a bigger potential for fintech companies.
- The role of fintech seems to be better understood in some of the financial centers such as NY, London and Hong Kong. Other markets particularly the emerging ones have lagged behind. This implies a challenge as well as an opportunity.
- Established players and startups face very different challenges. Despite sizeable investments, bankers have yet to fully diffuse the role of innovation through internal operations. Meanwhile, startups are trying to navigate the regulatory landscape.
- Banks will have to find a way to develop new platforms while overcoming legacy infrastructure; startups will have to find a way to scale out their business while facing increased regulations, higher costs, and larger infrastructures that will be more difficult to change and manage. This will frame the boundaries of competition in the years to come.
- Financial markets have a multitude of silos. Fintech start up do not have experience in servicing to financial services companies as they mostly offer piecemeal solutions.
- The number of investors goes up but there will be a learning curve with mistakes for both buyers and sellers. Another challenge is to find quality partners that will add value to the business strategy.
- The blockchain is a wild card that could completely overhaul financial services. Both major banks and startups around the world are exploring the technology behind the blockchain, which stores and records Bitcoin transactions. This would have a dramatic effect on big banks, which currently face high operating costs. It’s also disruptive in that it could disintermediate many financial processes.
- Payments will remain the leading segment for a while. However, other segments will grow faster to fill the gap.
- Unique, easy-to-access, high value add, less hassle, low cost platforms will succeed and survive. Regulations will be one of the keys in determining the winners.
- EMEA region maintains large demographics with growing income per capita.
- Usage of internet, social media and mobile apps are widely acknowledged and accessible.
- Financial services are not fully aligned with global practice. Innovative products in financing, lending, payments, asset management, crowdfunding, etc would fill a gap.
- Regulatory loopholes provide conducive environment for fintech entrants. Regulatory arbitrage offers benefits.
- There is a spring of fintech companies across the board but it is still largely underdeveloped.
- The following is a list of markets in which fintech promises potential: East Europe (Poland, Hungary, Romania, Bulgaria, Russia and Ukraine), South East Europe (Greece, ex-Yu countries, Albania and Bulgaria), Turkey, MENA (Egypt, Saudi Arabia, Lebanon, Jordan, UAE and Iran).
Turkish government has developed a wide array of incentives for startups as well as for venture capitalists and angels. Leading teknoparks are filled with tech service providers as it is next to impossible to find a vacant office in some of the parks.
Investors have proven to be eager to invest in technology companies as 2015 M&A report indicates: