Legal Framework of Digital Banking in Egypt
What is a Digital Bank?
A digital bank is a bank with technology-enabled business model which provide its services remotely with limited or no branch infrastructure. Alternative terms used by market participants are virtual banks, internet-only banks and neo banks.
Digital banks are different from ‘fintech financing’ platform which refers to electronic platforms (not operated by commercial banks) that provide a mechanism for intermediating financing over the internet. They are also different from online banking which is often used to refer to a service provided by traditional banking institutions that allows their customers to conduct financial transactions over the internet.
Digital banks in Egypt can conduct the same type of business as other traditional banks. They can be licensed to take deposits and use the deposited money to carry out their banking activities (e.g. granting loans). The difference is that digital banks deliver their services primarily over the internet. They accordingly rely heavily on digital technologies, connectivity and advanced data capabilities.
According to Egypt’s new Banking Law No. 194/2020 (“Banking Law”), a digital bank is defined as those a “bank delivering banking services through digital channels and platforms using modern fintech”. Banking services are defined under the Banking Law to include:
- Granting loans.
- Investment banking activities.
- Any other activity that is customarily considered as of a banking nature.
What are the Licensing Requirements for Digital Banking?
The main licensing and ongoing requirements apply on both, traditional banks as well as digital banks. Applicants for a digital bank license face same requirements and legal form, sustainability of the business plan, fitness and propriety of management, risk governance frameworks and documentation of the exit strategy. An applicant to establish a bank in Egypt must fulfill the following main requirements:
- The applicant must take the form of an Egyptian joint stock company.
- The issued and fully paid-up capital of the company must be a minimum of EGP 5 billion. According to Article 64 of the Banking Law, digital banks may be exempted from such minimum capital requirement by a resolution from the Central Bank of Egypt (“CBE”).
- Submit a clear statement about the ultimate beneficial owners of the share capital of the company.
- Submit a feasibility study including a statement of the objective of the establishment of the bank, the nature of the activities and services it will provide, and a study of the market showing its ability to mobilize savings.
- Submit the plans for the internal control system and the risks management as well as the work systems, governance, strategy and policy systems.
Are PSOs and SPS Regulated in Egypt?
The Banking Law extended its scope of application to regulate the various players in the digital payment ecosystem. It required, for the first time, payment service operators (“PSOs”) and payment service providers (“PSP”) to obtain a license from the CBE.
PSOs and PSPs are non-banking payment providers and/or facilitators. PSOs process and facilitate transactions, while PSPs are platforms that offer payment services via banks and PSOs.
A PSP provides shops and merchants with online services for accepting electronic payments by their customers through a variety of payment methods, including credit card, debit card and real-time bank transfer. Typically, a PSP would be used by an online shopping portal to facilitate settlement of the transactions and would permit the consumer to select between different payment methods on one web page.
The Banking Law imposed a number of obligations on PSPs including:
- Deposit a bond in favour of the CBE to guarantee performance of contractual obligations.
- Comply with rules regarding electronic retention of documents to be set by the CBE.
- Obtain CBE approval on the appointment of executive managers.
- Notify the CBE before changing the company’s shareholding structure above certain thresholds.
- Obtain CBE approval before changing its articles of incorporation.
The CBE is authorized to require PSOs to set up a fund to guarantee the operation risks related thereto and the commercial risks arising from the default of any of its users.
The CBE is delegated to issue detailed regulations governing the licensing requirements of PSOs and PSPs. This will particularly include the minimum capital requirement, the technical efficiency requirements, financial solvency, corporate disclosures, type of technology used, quality standards and operating rules. The Banking Law provided that the license fee will be EGP 500,000 for the PSOs, and EGP 100,000 for PSPs.
The CBE already has existing regulations governing PSPs. For example, the regulations issued in May 2020 regarding aggregator services providers and payment facilitators (“Regulations”). Payment facilitators are required to have: (1) a physical office in Egypt and (2) a website. Additionally, amounts received by the payment facilitator from the customers must be deposited in separate account and must be transferred within maximum three working days.
The Banking Law expanded the scope of its application to include PSOs and PSPs with physical presence in Egypt as well as outside Egypt as long as providing services to Egyptian residents.