Fostering the Fintech Ecosystem

Published in

imece

13 min readJan 3, 2020

A healthy fintech ecosystem requires all stakeholders to work together on problems, align on visions and support each other.

This report is part of the ‘‘Fintech for Social Inclusion’’ project supported by the UK’s prosperity fund. You can view the report in it’s full here.

Fostering the fintech ecosystem is a multi-faceted goal that requires all the stakeholders in the ecosystem — innovators, entrepreneurs, investors, key industry players, regulators and more — to, first, be willing to investigate and recognize the problems, aligned under the same vision, and, second, to act in unity to tackle obstacles, and support each other.

What worked in the UK, what supports the ecosystem?

Until now, the UK has been way ahead of the game in terms of fintech innovation compared to other countries. The UK is the fifth most innovative country in the world and was named as a leading European tech innovator in KPMG’s Global Technology Innovation report.¹

Behind this success, there are a number of factors, which include several key players’ determination in advancing fintech in the UK.

Government, Regulators, and Authorities

The UK government’s Financial Inclusion Policy Forum, established in 2017, has brought together key stakeholders in the fintech ecosystem players to provide strategic leadership and promote best practice in tackling financial inclusion. This forum has informed crucial government interventions, which include a feasibility study for no-interest loans scheme, a prize-linked savings scheme, and a 2 million pound fund harnessing the UK fintech innovation to help social and community lenders. The government has also worked closely with the Financial Conduct Authority (FCA) to create the right regulatory environment for firms to tackle financial inclusion.

The FCA has now approved 135 entities to provide open-banking enabled services to consumers and SMEs. This shows a rapidly growing open-banking system, which allows start-up companies to leverage this infrastructure, and offer specific solutions; traditional banks did not have done before.

Open Up 2020 Challange is powered by Nesta Challanges

With no doubt, the UK’s regulatory foresight, in introducing open-baking, has been one of the most significant factors in advancing the legislation. The Competition and Markets Authority (CMA) initiated the current version of open-banking, which included Open Up Challenge 2018 and later 2020, designed to unlock and accelerate the next generation of financial products and services for small businesses by incentivizing agile, innovative fintechs to develop new ideas.

Innovators, Technology Developers, and Entrepreneurs

The financial crisis stimulated the growth of the fintech ecosystem; it was a wake-up call to many talents, realizing how badly financial the financial industry treated many of its customers. Instead of working at traditional banks, the graduates started shifting their focus on innovative ideas. The UK’s ability to develop open-banking infrastructure and the related technology is another critical factor for its success. The UK is ranked fourth in the GEDI (The Global Entrepreneurship and Development Index).

Investment

None of the fintech growth could have been possible without access to capital from private equity, venture capital firms, angel investors, and corporate venture capital. The UK’s tax incentives have encouraged investments into start-ups and tax credits that rewarded start-ups focused on innovative technology. Tax-advantaged venture capital schemes such as the Seed Enterprise Investment Schemes (SEIS), Enterprise Investment Schemes (EIS) and Venture Capital Trusts (VCTs) have all raised significant sums from retail investors and have played an important role in providing a continuum of early-stage funding for companies.

Equity-crowdfunding platforms have also been a significant part of capital flow into fintech in the UK. The rapidly growing investment channel accounts for 10% of all the UK fintech’s investment in 2018, offering not-so-elite investors to participate in the ecosystem, who also benefit from tax-incentives, too.

This positive investment climate has resulted in nearly 300 million pounds of investment into the UK’s fintech in 201⁸² and expected to grow exponentially in the coming years.

Accelerators & Incubators

Accelerators and incubators make up another strategically significant group in the fintech ecosystem. Start-ups often need more than merely capital for their existence and growth, such as strategic advice, mentoring, networking, etc This is where accelerators and incubators come into play. According to TechNation, the latest estimates put the number of accelerators operating in the UK at 186 and the number of incubators at 205. These programs are hugely beneficial. According to new research, the average accelerated company raises 44% more funding and achieves a 75% higher valuation than those that do not.³

Overall, the UK’s fintech ecosystem’s success hasn’t come by chance. All the key stakeholders in the ecosystem have worked hand-in-hand to foster fintech, creating a more accessible financial system and fulfill different needs. The collective work of the government and regulatory authorities created frameworks for fintech start-ups to innovate and grow while attracting different forms of investments with tax-incentives, the abundant number of accelerators and incubators have helped numerous start-ups to grow. Such a robust ecosystem is a leading example for other nations to follow.

How is the fintech ecosystem in Turkey: accelerators, programs, bank’s participation

Turkey has started to take important steps forward in creating a more financially inclusive society, promoting financial literacy through start-ups and nation-wide programs. However, there is still a lot of room for growth, and the UK’s vibrant ecosystem sets exemplary footsteps to be followed.

Accelerators, Incubators & Key Industry Players

The vital role of accelerators, incubators and key industry players, was established previously to foster the fintech ecosystem. There are 35 Active Accelerators, founded between 2015–2019 and 27 Active Incubators & Science Parks (Techno Parks). In Turkey, international banks and payment technology companies are front runners as they have launched incubation centers supporting the fintech ecosystem and start-ups in Turkey. Some of the exemplary ones are:

Visa x Hackquarters: Visa’s program holds a leading position for the future of Turkish fintech initiatives. The main goal they have is to support the ecosystem and enrich its structure. Visa is a global company, once an enterprise gets linked with it, many different opportunities automatically are created, as well. They have been focusing on these topics so far: Concept verification, data security, design thinking, digital marketing, financial planning.
Fincube (Finansbank): Fincube is an accelerator founded by Finansbank in January 2018. They accelerate enterprises by focusing on their growth and linking them with the appropriate resources. Fincube Accelerator Program is designed to facilitate collaborations outside of the bank and support start-ups with their initiatives. The start-ups are required to have a lean team with a solution that could be integrated into the bank, creating a win-win scenario for both parties.
ING Innovation Center (ING Bank): ING Innovation Center brings together students and professionals working on fintech, entrepreneurship, innovation, software, banking, finance. They hold ING Enterprise Workshops to develop people working within the ecosystem and train them to create customer valuing innovative designs.
Albaraka Garaj (Albaraka Turk Bank): Albaraka Garaj supports and works with enterprises that work on financial technologies, islamic fintech, mass data, payment systems, AI. They provide financing support, mentoring, network, co-working space as well as access to Albaraka CVC, among other standard accelerator services.
Lonca Entrepreneurship Center (Kuveyt Türk Bank): Lonca Entrepreneurship Center has been created by Kuveyt Türk to help entrepreneurs develop and prototype their ideas. They give working space and personal mentorship for the enterprises. They work with mentors, fintech professionals, investors, experienced entrepreneurs, and consultants.
Workup (Is Bank): Workup is an “entrepreneurship program” established by Is Bankasi (Is Bank) to help entrepreneurs accelerate the growth of their businesses. Once accepted, their 6-month free program offers various trainings and office space. Upon graduation, the entrepreneurs are brought together with investors from the ecosystem. Although they are not fintech focused, Is Bank’s initiative has helped 51 start-ups in Turkey.

Regulation — E-money License & Open-Banking (PSD2)

Acquiring an e-money license is cumbersome for start-ups in Turkey since they are always cash-strapped at the beginning. The money management platforms don’t specifically require e-money licenses; however, they can’t survive without e-money licensed platforms, i.e., availability of open-API infrastructures provided by the licensees. Availability of open-APIs is critical for the growth of fintech ecosystem as fintech initiatives will be able to start offering products and services without making hefty capital investments to comply with e-money license regulations. The more the availability of open-API platforms, the more confidence start-ups will have in tackling money management problems in different verticals, such as farmers, retirees, etc

Despite the lack of PSD2 regulation, ininal, Iyzico, and Birlesik Odeme Sistemleri offer their APIs for other start-ups to use; such unique offerings have already sprouted initiatives like Manibux. Once PSD2 becomes effective in Turkey, by leveraging banks’ technology architecture many more start-ups are expected to flourish in Turkey. Selim Yazıcı, co-founder of Fintech Istanbul, stresses that

“ During and after the (PSD2) implementation, banks and fintechs need to cooperate. The banks will undergo a new structuring, and place themselves as a platform, and can offer their products through the fintech partnerships.” Underlining the importance of partnerships among sector representatives in Turkey, Yazıcı notes that “It is vital for ecosystem players (like banks, fintechs, regulators, and other infrastructure players) to communicate with each other, and work together to detect where the opportunities lie and how such collaboration can lower the bottlenecks in the fintech ecosystem.”

Soner Canko, CEO of BKM (The Interbank Card Center), foresees that “With the emergence of PSD2 and other regulations, there will be many new opportunities for the current and upcoming players. This (PSD2) will benefit the consumers the most, which will inherently increase competitive rivalry, leaving no free lunch on the table for any player in the ecosystem.” After PSD2 implementation, Canko predicts that the players outside of the financial services (such as retailers, airline companies, coffee shops, etc.) are also expected to act upon the financial needs of their customers — similar to Amazon, Google, and Apple. However, they will not be able to replace banks, according to Canko:

“Even though these companies serve as the medium of financial transactions, another important focus is savings and preserving them. With regard to savings, these brands could be at a disadvantage because banking requires trust. Transactional banking could prove possible, for instance, buying coffee, and paying for public transit with one card; however, we would want to deposit our savings into a bank. This can be achieved through reliable and user-friendly apps. Open-banking will change and improve many aspects, while they will intensify the competition with banks, they won’t be able to replace the functions of the banks.”

The recent amendment to the Law №6943, which defines the purpose, roles, and responsibilities of payment services pave the way for FinTech in Turkey. With these developments, Burhan Eliaçık, President of ÖDED (Payment and E-money Association), says, “Our dreams came true. Now the target is to attract investments to our country and to create unicorns. We have strong beliefs that our sector will gain serious momentum and that we will have payment and electronic money institutions with valuations of more than one billion dollars at the end of 2023.”

Investments

The presence of operating fintech firms in Turkey, which were funded by both domestic and international investors, indicates a keen interest in the fintech ecosystem in Turkey. In 2017, Turkey’s fintech investors are made of six VC funds, two CVCs (Corporate VCs), seven foreign VCs, six angel investment networks, and two accelerator funds. According to an Ernst & Young report⁴, prepared by Fintech Istanbul and BKM, the biggest bottleneck for capital flow into fintech in Turkey is the insufficiency of data, and partially the conjuncture Turkey has been in. Additionally, the report indicates that the Turkish investors don’t have full confidence in fintech yet, and therefore there is a lack of investment appetite towards fintech. Total investments have increased substantially since 2012, from $4.6 million to $29 million in 2016. The number of investments made into fintech, by angels and VCs, in Turkey between December 2016 and May 2017 is ~450, totaling $4.5 million.⁵

212, one of the most active and successful VCs in Turkey, has gained more popularity with their exit on Iyzico. Numan Numan, Managing Director of 212, attributed Iyzico’s success to the strength of the team ‘’The team had previous fintech experience, both domestically and internationally, and they wanted to bring their know-how into Turkey’s fintech ecosystem, which increased the success probability of the company, and proved that there is a big potential in the market.’’ 212 initially invested in Iyzico at the seed stage, then participated in Series A & B rounds as well. After Iyizico’s success, there were 20 more applications for the ‘’Service Provider’’ license in Turkey, which attracted more attention from both investors and budding entrepreneurs. Such success stories are helping the expansion of Turkey’s fintech sector.

Selim Yazıcı, the founder of Fintech Istanbul, observes that Turkish banks, with an investment strategy focused on fintech, can create more Corporate VCs (CVCs), and play a vital role in fostering the fintech ecosystem in Turkey. For instance, Finberg, a CVC established by FibaBank in Turkey, which is solely created to invest in fintech start-ups.

What could happen in between the UK and TR’s ecosystems to enable connections?

With its 44% unbanked young population, and high penetration of smart-device and internet usage, along with its unmatched geopolitical location, Turkey bears a significant amount of potential for fintech. Bringing out such potential depends on several key factors to be enforced by all of the stakeholders in the ecosystem, from regulatory authorities and government to investors, key industry players, innovators, and talent.

Regulatory Authorities and the Government

Unlocking regulatory barriers — Establishing Sandbox & PSD2 regulations will lay out a framework for start-ups to take advantage of and give them the courage to take risks, which are essential for growth.
Advancing equity-crowdfunding regulations — providing a flexible regulatory regime to include crowdfunding platforms to attract more capital flow into start-ups, from “common people,” is likely to prove a significant impact in the growth of the fintech ecosystem.
Providing tax-incentives to investors — from angels and VCs to crowdfunding participants — will increase the willingness and the risk appetite of investors, while such incentives to startups will propel them towards taking action and advance the fintech ecosystem.
Fintech Policy Forums — establishing such forums, by bringing together key stakeholders, will help the government make essential interventions, and enable a vision alignment by all key stakeholders in the fintech ecosystem.

Investments (Angles, VCs, Crowdfunding Platforms) & Key Industry Players

Promoting Impact Investment and Fintech — Investors have a critical role in fostering the fintech ecosystem. Adopting an impact-focused mindset can unleash hesitancy around capital flow into the fintech ecosystem. A shift from a competitor to a collaborator perspective, the key industry players (i.e., banks) can discover win-win opportunities in distributing the fintech services and products.
Corporate Venture Capitals — Despite the low number of CVCs in Turkey, an increased number of such platforms, in addition to capital, can provide safety, expertise, and confidence to infant fintech start-ups, which would inspire budding entrepreneurs.
Corporate Entrepreneurship Efforts — The creation of the programs, within financial institutions, could incentivize employees to create fintech solutions, and provide invaluable ideas to the fintech ecosystem.

Innovators and Talent

Education Programs — Education programs, offered through the collaboration of the government, financial institutions, accelerators, and incubators, could expand the talent pool in Turkey, increasing the number of fintech start-ups in Turkey. Providing additional funding to send such talent to foreign countries to attend workshops and education programs could increase the flow of know-how transfer.
Hackathons & Innovation Challenges — Such initiatives, organized by authorities, municipalities, or financial institutions, could bring out the dormant talent and innovators in Turkey.

Cultivating a Sustainable Relationship between the UK and Turkey

We have gathered the ideas below to cultivate stronger ties between the UK and Turkey to promote Fintech and its international reach.

Eurasia Fintech Forum — Eurasia Fintech Forum is a gathering of policymakers, international finance institutions, start-ups, investors, accelerators, and incubators where they exchange Eurasia Fintech Forum — Eurasia Fintech Forum is a gathering of policymakers, international finance institutions, start-ups, investors, accelerators, and incubators where they exchange know-how and discuss collaboration opportunities. An annual booklet can be a guide for all countries across Eurasia intended use for all the stakeholders in the ecosystem.
Enhancing and Activating Talent Pools — The UK could serve as a significant opportunity to improve the talent pool in Turkey — by hosting educational programs — while the unemployed talent in the UK can participate in Fintech projects in Turkey.
Investment Opportunities — With the implementation of PSD2 in Turkey, tax-incentivized investment opportunities could be offered the investors in the UK, to attract more FDIs into Turkey. UK-based fund of funds could provide capital to VCs and angel networks in Turkey. The evolution of the education programs for different target groups could serve predictive in determining areas where the future fintech companies will start to tackle in Turkey.
Borderless Operation Initiatives — With a favorable regulatory climate, Turkey and the UK can exchange know-how by allowing successful fintech companies to expand their operations into both countries. The strategic location of both countries could allow such start-ups to further expand into the Eurasia countries.
Sharpening Innovation — Cross-border hackathons organized by accelerators, incubators, and international financial institutions could potentially expose hidden talent, and boost the creation of new ideas to tackle problems of fintech.
Tackling Financial Literacy — preparing case-studies on how financial education programs did not have the expected outcome, with the Ministry of Education in the UK and Turkey, could provide insightful lessons, and ramp up the creation of better teaching initiatives.

¹ KPMG Global Technology Innovation Report 2018
² The 5th UK Alternative Finance Industry Report, the University of Cambridge, 2018
³ Tech Nation, UK Tech on the Global State, 2019
⁴ 23 Suggestions for a Sustainable Fintech Ecosystem in Turkey, EY & Fintech Istanbul, 2018 (In Turkish)
⁵ Fintech Ecosystem in Turkey, Deloitte, 2017 (In Turkish)

This was the last chapter of the report. You can download the report in it’s full here and see all of the chapters there.