Financial technology is, like everywhere in the world, transforming the financial industry in Central and Eastern Europe. As our “CEE Fintech Survey 2017” shows (download full pdf version here:
Fintech developers are increasingly leveraging Poland’s sophisticated financial sector, large domestic population, a solid environment for information and communications technology (ICT) start-ups, and a degree of government support. Furthermore, some international players have started to use Poland as a testing-ground for fintech products to be offered globally.
“Poland is widely considered as being in the vanguard of global financial digitization,” Maciej Sadowski, co-founder and CEO of StartUp Hub Poland, a non-profit foundation supporting start-ups in CEE, tells bne IntelliNews. “We are a playground for Western partners to test and popularise the most advanced customer interfaces and payment methods. Already, as far as standards are concerned we are ahead vis-a-vis regional markets and even Western [European] neighbours.”
Poland already has a range of fintech success stories to its name. Sadowski cites Cinkciarz, a fast-growing currency exchange programme. Also in the money transfer/forex space are Currency One, the biggest company on the online currency exchange market in Poland, and Azimo, which claims to have created the largest digital network in the world, enabling customers to send money to over 5bn people in 190 countries, from any internet-connected device.
“Unlike traditional money transfer services who are only able to send money to a bank account, Azimo understands that sometimes, depending on where the money is going, that’s not a viable option… [and] it’s not always the preferred option. Azimo can deliver the money in 80 currencies to bank accounts, cash, mobile wallets, mobile top-up as well as home delivery – so however customers want the money to be delivered, they have the answer,” the founders of Azimo, Michael Kent and Marta Krupinska, tell bne.
Poland has start-ups that span the entire gamut of fintech. In corporate banking there is Idea Bank with its Idea Cloud solution; and in the small and medium-sized enterprise (SME) segment there is Atsora, which provides small business owners with innovative tools for finance management that change the way SME customers communicate and collaborate with banks.
In identity verification there is VoicePin, whose voice recognition-based identity verification system can differentiate the unique characteristics of one voice from any other, and because the technology works with the microphone built into a smartphone it is cost-effective to implement. “A number of organisations, including some major banks in Poland, are now using VoicePin in a range of applications, including mobile retail and online banking,” the company says.
One of the most promising features of the Polish fintech landscape is growing co-operation between the banks and tech companies; the latter are not developing their products in a vacuum, and the former are not shying away from embracing new technologies. The mutual benefits of cooperation are strong. “Very often Polish fintech start-ups are founded by people with a strong financial background, which is a strong advantage,” says Igor Zacharjasz, start-ups and ecosystem leader at Alior Bank’s “Innovation Lab”, which works on R&D to accelerate the bank’s innovation efforts. “The knowledge and experience of the founders makes discussions with banks and financial institutions far easier. Investors in fintech start-ups are growing impatient with their ability to build scale, and partnerships are seen as a way to accelerate it. Banks have a large customer base and stable infrastructure. Start-ups provide out-of-the-box thinking and agility to adapt quickly to change.”
One of the reasons that the Polish fintech sector is relatively advanced is the rapid development of the country’s financial sector since the fall of communism. The absence of tight regulation was one factor that allowed fintech to grow as banks expanded, as was a willingness by local and international players to adopt new products that they might have shied away from in more mature and less dynamic markets. The enthusiasm of customers has also helped, of course. “Poland has a very modern banking environment, with the sector leapfrogging other more advanced economies in Europe in terms of digital and mobile retail banking,” Krzysztof Kowalczyk, founder and managing partner of HardGamma Ventures, an early-stage ICT-focused venture capital fund in Warsaw, tells bne.
“Our banking system is quite new, modern and fully open for products and services that can strengthen players’ market position,” Michal Zukowski, director of the National Centre for Research and Development, says. “E-banking development shows that the Polish financial sector is able to implement quickly and effectively new methods of payment and money management.”
mBank is regarded as one of the region’s leaders in transitioning to a digital bank. As mBank likes to point out, being “digital” means more than putting out a new app or beautifying the user experience on the front end. What really defines a digital institution in finance, it argues, “is having end-to-end digital product and services processes, so it can receive customer requests from any channel and interact with customers directly via digital or remote channels — all on the same core banking platform”.
Of course, other countries in Central and Eastern Europe have also seen rapid growth in their banking sectors, but Poland also benefits from its relatively developed economy – and most of all, its market of 38mn consumers. As well as providing a large pool of potential customers for fintech, this also allows developers and banks looking to offer the technology internationally fairly robust “proof of concept”, at a relatively lower price than in Western European countries, StartUp Hub Poland’s Sadowski explains.
Estonia is widely seen as CEE’s near-runaway tech leader, with the government encouraging or even requiring the digitisation of business processes and many aspects of daily interactions with the public sector, with knock-on effects for ICT businesses. However, Estonia is a small market, as are its Baltic neighbours Latvia and Lithuania. “No other country in CEE tops Poland in terms of fintech, although there are some interesting things going on in the region; just look at the Baltics and the string of money remittance platforms which have sprung up there. But, in reality, only the UK remains in terms of major competition,” says Sadowski.
The Czech Republic has a relatively big and fast-growing market for fintech. Its banks are considered some of the safest and best-run in the region, but also the most conservative, which makes them fat targets for emerging fintech firms to either offer new-fangled services to or even take business away from. The downside is that they take an age to make decisions.
“The Czech market for fintech firms is improving, but the main thing which I think has the potential to kill any fintech is the lead time to do anything with the banks,” says Ondrej Knot, co-founder of the Prague-based Dateio, a firm that provides retail campaigns by numerous participating merchants direct to bank customers through their payment cards. “One year for a bank is nothing, but fintech companies can get killed by this. We’ve been talking to some banks for some two to three years but we are still at the ‘maybe stage’.”
Dateio has one Czech bank in live operation and two big Czech banks in the implementation stage and three in Slovakia, which when up-and-running Knot believes will be transformative for his company. “Once we get these projects live, the situation will improve… [and] interest among both banks and the retailers will pick up further,” he believes.
What the Czech market does have is a long tradition in cybersecurity. Both AVG technologies and Avast Software hail from here (and this year merged), and their lead has spawned many niche competitors.
In fintech, there is the Prague-based ThreatMark, which is leading the seamless authentication and identity detection initiative in the banking industry. Its Digital Identity Sensing Technology (DIST) is a unique approach that relies on click-by-click monitoring of user activity inside the application. “This, in combination with high resolution device fingerprinting, enables us to ensure that the identity of the user is consistent with what he claims it to be – this is the key aspect for any authentication. The identity is monitored and checked continuously throughout the whole online session, which is an important protection mechanism against modern threats such as social engineering or banking malware,” explains Michal Tresner, CEO of ThreatMark.
While Tresner says the Czech fintech market is quite innovative, he notes that there are barriers for new security companies to deliver products to the big banks, “and there are less opportunities to sell to small banks, as they don’t have the resources”, he says.
An emerging fintech market is Romania. As well as being an attractive destination for large outsourcing companies in IT and shared services, which many believe are a fertile source of talent for start-ups, it also has the advantage of having a relatively big domestic market in which these companies can operate.
Initiatives like Bucharest TechHub’s recent Fintech Month and support from major companies and banks are intended to help foster startups and build a wider fintech community. And startups like TripWithMojo and Minutizer are hoping to join the tiny roster of Romanian fintech companies that include more established players such as mobile payments company NETOPIA mobilPay, which has already expanded into Mexico and is eyeing the rest of Latin America.
However, NETOPIA mobilPay founder Antonio Eram points out that the number of fintech companies is much smaller than companies operating in areas that do not require such deep and specialist knowledge. “Fintech is complicated. You need to know about payment methods and how the systems work, and because of that there is a high entry point. Young entrepreneurs lack this knowledge and they cannot compensate with enthusiasm.”
Alexandru Negru, co-founder of Minutizer Pay Per Minute, which adds a payment layer on top of Skype and other online chat apps, agrees. “The issue in Romania is that few people have knowledge of the ‘fin’ part of fintech, and those who do tend to opt for big companies or big banks,” he says, adding however that more startups will be launched in Romania, “because it’s cheaper and the quality of the developers and businesspeople is high”.
The biggest and most undeveloped fintech market in the region is, of course, Russia. As well as having the largest domestic market in CEE, it has a modern banking system and well-developed cybersecurity industry, and churns out programmers from its universities (this year half of the top 10 best-performing universities in the global ACM-International Collegiate Programming Competition were Russian).
Kaspersky Lab, the global cybersecurity firm whose services are used by Europol and Interpol, bestrides the sector, and is a leading provider to Russian banks, which are in many ways newer and more innovative than their Western counterparts. They are also more concerned with financial crime: Russia was ranked second in the world in terms of the volume and incidences of customer financial information stolen from banks in 2015, according to a survey by InfoWatch, a Russian online security firm founded by Kaspersky. The global average of such cybercrime stood at 8.6%, but the rate of the crimes in Russia was twice as high at 16%, the survey found.
In terms of the Russian banks themselves, Tinkoff Bank is a classic example of a disruptive startup taking on established rivals. Founded as Tinkoff Credit Systems in 2006 by serial entrepreneur Oleg Tinkov, who was previously involved in brewing beer, Russia’s first internet-only bank quickly, but with some bumps on the way, became one of the leaders in Russian consumer finance thanks to its branchless model and reliance on the internet to reach into the regions.
“UK banks need to be more open to innovation,” Ilya Sachkov, CEO of Group-IB, a cybersecurity firm, told delegates at the annual Russian-British Business Forum in London in December. “Russian banks such as Alfa and Tinkoff are very innovative and use technology in a very interesting way for retail and corporate customers. Their online presence is also very secure.”
The head of Russia’s largest lender Sberbank, Herman Gref, is known for his love of technology and latching on to the latest fads. Yet for all Gref’s geekiness, his state-owned bank typifies the problem that Russia has with fintech and technological progress in general, namely the Kremlin’s inability to rid itself of the old Soviet-style centralized thinking that it can choose the future ‘champions’ and direct state resources there.
To many observers, the state’s attempt to consolidate the banking industry around the state behemoths of Sberbank and VTB, which has forced most of the foreign banks to flee, is a disaster for the banking sector’s development. Then there’s President Vladimir Putin’s National Technology Initiative (NTI), which aims to boost the country’s future high-tech production and exports – a concept as derided as the Kremlin’s failed attempt to recreate Silicon Valley in a high-tech cluster sited in the Moscow suburb of Skolkovo.
“The NTI concept of focusing on selected ‘new markets’ that are expected to exist in 2035 is misguided. Its execution process, particularly the use of the Rapid Foresight methodology, results in recommendations that are banal or vague,” notes Jeff Schubert, director of the International Center for Eurasian Research in Moscow. “If Russia wants to make serious advances in future high-tech ‘production’, it needs a technology policy that puts more emphasis on promoting Russian ‘usage’ of presently available technologies. Much technological progress actually flows from the initiatives of ‘users’ of present technologies and the feedback they give to ‘producers’.”
Some fintech observers believe that Russia, and probably to a greater extent Ukraine and Belarus, will increasingly provide the brainpower for fintech centres around the CEE region. StartUp Hub Poland’s Sadowski argues that Poland should look to attract budding developers from the struggling economies of CEE like Russia and Ukraine, offering them a more conducive and safer environment to pursue their ambitions. “The legislative situation is at a crossroads,” he says. “Either Poland will adjust to average Eastern [European] regulations, or will leapfrog today’s standards and become Europe’s, or even the world’s, most attractive hub for equity crowdfunding and fintech.”
Show me the money
Despite the positivity abounding around fintech in Poland, there are still barriers to the sector’s development, mostly linked to the broader start-up environment in Poland.
“Poland has the intrinsics of a leading startup hub: people are educated, entrepreneurial, and thrifty,” Fedele Di Maggio, who worked across the CEE financial sector before founding DiPocket, a London fintech start-up, tells bne. “However, compared to other centres, the start-up ecosystem – venture capital and angels, accelerators – is less developed and the regulatory environment is less conducive to the creation of new businesses, as it does not follow a risk-based, materiality approach. In addition, in my experience young Polish graduates are very cautious when considering employment opportunities in start-ups, which makes it harder to extend the team beyond the founders.”
Di Maggio says that the lower availability of funds, as well as a stronger focus on operations rather than marketing, hold back Polish start-ups from international expansion. He feels that a softer touch on early-stage innovators from the Financial Supervision Authority (KNF), without imperilling systemic stability, would be beneficial, and encourage greater venture capital participation in the sector. Nonetheless, with the right changes, he sees Poland as a European leader, capitalising on the broader EU market, with Brexit an opportunity to be exploited.
In Czechia, there is a growing number of angel investors – many of whom made their money in the local tech industry – lining up to invest in start-ups. “Regards funding, that’s the lesser problem. We raised both seed and A-round funding from Czech investors,” says Dateio’s Knot.
But while local VC players in Poland, Czech Republic and elsewhere are crucial players early on, growing companies need access to more funds from overseas investors for later stage investment rounds. Yet for now, global private equity players do not seem particularly attracted by the region’s fintech start-ups.
Richard Sanders, partner at the UK-based Permira, which was part of a group of buyers that paid $3.25bn last year for the Polish online auction site Allegro in the largest regional technology deal ever, tells bne the fintech firms in the region are still too small to interest private equity outfits like his – a view backed up by the figures. According to KPMG, in 2015 Asia garnered 113% more $50mn-plus fintech deals than Europe, while North America saw 375% more mega-rounds than Europe. Europe is also a small piece of the global fintech pie: in 2015 VC-backed fintech companies raised $13.8bn across 653 deals, but only $1.48bn of that was in Europe.
In Russia, the difficulty for fintech startups in raising funds could actually have its advantages. “One of the things which is... I would say almost a blessing in disguise, is that it's been very difficult to raise capital in Russia over the last two or three years, so you don't have an abundance of venture capitals or early stage private equity capital. A problem we are seeing in other markets is actually lots of start-ups which don't seem to have a very clear strategy or strong products design because it's actually very easy to get capital, so you just live from one round to the next as opposed to being very strong in terms of your launch,” says Oliver Hughes, CEO of Tinkoff Bank. “As I said earlier, [founder Oleg] Tinkov invested a huge amount of his personal wealth into this project, so the barrier to entry is actually quite high in Russia, and you don’t have this overabundance of funding.”
So while the CEE fintech industry is proving to be an increasingly interesting area for investors, it remains largely a local affair for now.
(Andrew MacDowall in Warsaw and Clare Nuttall in Romania contributed to this article.)