Once the name of a subsidiary IT company of a Turkish state bank, the term “FinTech” (Fintek) now represents an attractive market in Turkey for venture capital investors from Japan to the USA. Nowadays, Istanbul’s potential status as a ‘hub city’ for the region is discussed very often by the Fintech ecosystem’s thought leaders. Its prime location in finance, its young, educated workforce and tech-savvy national population make this success very likely.
What should Turkey do to achieve its dream of being a FinTech centre for the region? With such an ambitious target, it needs to seek more from other key ‘hub cities’ and understand the policies behind their global achievements.
Israel, for example, sharing similar geopolitical challenges as Turkey has shown remarkable success in the sector over the last decade. Now, Tel Aviv ranks in the top five FinTech cities of the world.
Foreign investors fund 75% of investments in Israel. However, this does not explain why companies like Barclays, Citi, Visa Europe, PayPal, Santander, MasterCard, and many more have invested in fund accelerators and R&D centres, despite limited national demand of a population of 8 million in 2016.
There is great value in focusing on some metrics and forming data-driven approach to figure out what can be learnt from Israel’s journey of building up a global-scale FinTech ecosystem:
1. Time Required to Start a Business
First, it’s important to understand how the bureaucracy is affecting an entrepreneur’s life in Israel. According to the World Bank Data, the time required to start a business in Israel – that is 12 days, as of 2016 figures, is still well above the average of OECD members, 8.13 days, and Turkey, 6.5 days.
Apparently, the bureaucracy in Israel is still one of the challenges for early-stage entrepreneurs, as it is in the rest of the world. Despite the negativity of this metric, Israel is one the world’s biggest FinTech centres, with the largest contribution by the sector as a percentage of GDP, ahead of the UK and the US. The graph below shows the time required to start a business in days:
2. The Cost of Business Start-up Procedures
On the other hand, Israel has managed to keep the cost of business start-up procedures (% of GNI per capita) well below the EU’s average and closer to other distinguished FinTech countries like Singapore, Estonia and the UK. The graph below illustrates the cost of business start-up procedures: Still, it is hard to claim that this second metric was one of the major drivers of Tel Aviv’s success in the global market. On the other hand, this metric makes it undeniable that Israel has a stronger position in this aspect among the global league players than the other regional players like Turkey.
3. European Patent Office Metrics
To assess how global Israel’s know-how is, the European Patent Office (EPO) statistics supplied by OECD OpenData sources comparing patent statistics in Israel and Turkey might help.
Turkey’s total applications have soared over the last 15 years, reaching a record level of 506 in 2010 as presented in the first graph below. In the second graph, the percentage of cooperation-with-abroad patents over total patents have stayed steadly high for Israel over the years, whereas it is declining for Turkey.
The dipping performance that Turkey has shown suggests that Turkey could not manage an innovation path as extrovert as Israel in partnering with global actors. The very low level of patent applications sample data in Turkey lightly suggests the reliability of this insight.
Government Funding in R&D Activities
All the metrics presented in the article up to are relevant to a country’s position in FinTech area indirectly as opposed to directly. Another metric which is unquestionably directly affecting the FinTech ecosystem is the funding in R&D activities – and Israel leads the way in this metric following South Korea as shown below, in a graph illustrating the percentage of government funding in R&D activities.Note that this is only civilian R&D spending and does not include R&D spend on defence. In most countries, the bulk of R&D spend is by the state, but in Israel, the spend is now mostly by the private sector, the state only supplies around 13% (2013) of finance in R&D activities according to OECD OpenData Sources.
This is another key metric disclosing the fundamental aspects of Israeli science and technology policy. While gradually reducing its role in funding, the Israeli government takes the lead in other strategical areas and supply an extensive institutional support for making the marketing knowledge, networking opportunities with partners, regulatory consultancy and the required infrastructure accessible for all investors and entrepreneurs.
The UK-Israel Hub, a well-known government-backed institution, has brought hundreds of companies together and offers bespoke schemes of networking and end-to-end consultancy to FinTech startups seeking for new challenges for their products in cross-border markets.
The Ministry of Economy in Israel leads the FinTech ecosystem by entering partnerships to develop products and technologies and providing technological and regulatory consultation and marketing directions to promote high-tech export capacity of national actors. To promote cooperation with abroad in FinTech, the Israeli governments have invested in long term business agreements with many countries like the US, the UK, Japan and recently with India.
The institutional approach the Israeli Government has put in place has resulted in a skyrocketing effect on Chinese investments, “…with volume leaping from $50m in 1992 to almost $11bn in 2013”, as noted by the Israeli Ministry of Foreign Trade Administration.
It is obvious that, without these kinds of policy schemes and the institutions that Israel highly invested in since the early 2000s, it is hard to create success regionally and globally for national FinTech ecosystems. Turkey’s FinTech Investment journey that began in 2012 with some $1.1m, successfully grew eight-fold by the end of 2015.
This growth comes as no surprise in the global FinTech industry, where valuations of FinTech companies that were founded only a couple of years ago reach billions dollars levels. Since 2012, the global FinTech industry mostly enjoyed the easy money, which had highly positive effects on investment decisions despite market volatility in the short term. But 2016 underscored the fact that entrepreneurship is about more than just valuation while some companies which were listed at the top once are now gone (see Powa Technologies in the UK).
Under such conditions, Istanbul’s ambition of being a regional FinTech hub city requires institutional strategies other than relying on investors’ appetite which showed signs of stagnation by the end of 2016. Despite the increasing support of BKM (the Interbank Card Center) and its president Soner Canko’s highly appreciated contribution to the Turkish FinTech ecosystem, highly dominated by payment start-ups, there is still a need for institutional measures and long-term commitments at the national science and technology policy level to leverage ecosystem to a global standard in multiple focus areas of blockchain, RegTech, InsureTech, payment, lending, personal finance and anti-fraud.
This kind of framework policy should seek for ways to promote cross-border marketing activities and cooperation abroad and should be backed by government-level agreements with leading FinTech ecosystems.