Will the CEE Region Be the Next FinTech Hotspot?
One goal of the first F10 FinTech Hackathon in Vienna is to boost innovation in the Central and European banking sector by bringing FinTech and the local bank network closer together. Read here where the chances for FinTech and InsurTech in the CEE countries lie.
In many Central and Eastern European countries, entrepreneurship was not encouraged but forbidden for five decades. Nevertheless, the CEE region is developing rapidly with annual GDP growth of 4.2 percent in the second quarter of 2018 and many innovation initiatives as well as Startups from the former Soviet block are ready to revolutionize the global finance sector. According to the Uni Credit Group, the demographics favour digitalisation in CEE: younger generations (digital natives) are playing an increasingly significant role in society and economy with almost 50 per cent of the population being under 35, versus 40 per cent in Western countries. Multiple worldwide known tech ventures such as Skype (Estonia), Avast (Czech Republic) and Bitbay (Poland) have their roots in Central and Eastern Europe. NASDAQ is powered by Lithuanian software developers and IBM’s innovation centre is located in Poland.
The CEE tech landscape has more to offer than just cheap labour
”Many CEE firms have grown into solid centres of competence, equal tech partners and value-added developers. There has been a shift in the motives behind outsourcing from labour price arbitrage to expanding the talent pool”, an article from the World Economic Forum states. World-known tech companies such as Google and Facebook have long been recruiting engineers and developers from the CEE region.
In spite of attractive job offers for young Central and Eastern European professionals working in tech, experts see a new tendency: „Bulgaria is notoriously known for its labour migration, but I think that the trend is turning and one of the main reasons for it is the development of the IT industry. As a bank, we are cooperating with the biggest universities in the country and we see that younger people are willing to stay here and work for an IT company or to develop their own Startups“, Daniel Aleksiev, Head of Digital Banking and Innovations at Raiffeisenbank Bulgaria, was quoted by the Austrian business technology platform Trending Topics.
Eastern European developers rule the coding world
This high affinity for tech in CEE has also been recognized during various Hackathons and coding competitions: developers from Slovakia, Czech Republic, Hungary, Poland and Serbia won the most programming contests in Europe. “Central and Eastern Europe is an important hub for young talents in tech. We want to exploit this potential and create a borderless FinTech network to further innovation in not only the European but the global finance sector”, says Thomas Landis, Head of F10.
Innovation is more than just a buzzword in Switzerland: despite being a small country, the alpine nation has been labelled one of the most innovative countries worldwide numerous times. According to an index by the World Intellectual Property Organization (WIPO), Switzerland is top in the world when it comes to innovation. In 2018, the country with a population of about 8.4 million has been ranked number one in innovation for the eighth year in a row. Switzerland scored particularly high in the category ‘knowledge and technology outputs’ as the Swiss have the highest ratio of European patent applications to the population.
FinTech offers opportunities to improve customer experience and process management
By organizing the F10 FinTech Hackathon in Vienna, F10 wants to bring FinTech and the Central as well as Eastern European banking ecosystem closer together. “In contrast to their Swiss counterparts, banks in the CEE region have a strong focus on retail banking. Our experience in Switzerland has shown that FinTech offers retail banks sheer endless opportunities to improve customer experience and process management. We aim to help banks staying attractive for the next generations of customers and reducing costs”, Thomas Landis explains.
So far, two Startups with roots in Eastern Europe participated in the F10 “Prototype to Product” program and contributed to the ongoing FinTech revolution: Vestberry from Slovakia and Basis ID from Estonia. The Accelerator Program offers the most-promising Startups in FinTech, RegTech and InsurTech six months of training and coaching in Zurich.
Austrian FinTech companies developed six cryptocurrencies in 2017
CEE is currently home to more than 600 FinTech companies, 162 of them are Austrian. More than half of the FinTech companies in the CEE region are working in the segments of transaction & payments or financing, including peer-2-peer lending or crowdfunding, while 12 percent are companies involved in investments & asset management such as trading platforms, robo-advice or analysis of personal finances. The rest cover a wide segment related to a variety of activities, expense tracking, InsurTech, risk management, fraud prevention and cryptocurrencies. In the latter, Austrian FinTech Startups are at the forefront with six cryptocurrencies made in Austria in 2017 alone.
Numerous FinTech initiatives in Eastern Europe concentrate on digital or mobile payments. Slovenia’s largest market segment in FinTech is digital payments. The Central European country’s total transaction value was 837 million US dollars in 2017. Slovakia is considered one of the world leaders in cashless payment with a transaction volume of 1623 million US dollars in 2018. The statistics portal Statista forecasts an annual growth rate of 11.5 per cent until 2022. In Bulgaria, a volume of 1.2 billion US dollars was transferred via alternative financial technologies in 2017 and it is expected to reach 2.2 billion US dollars in 2018, according to “Trending Topics”.
Swiss and Estonian students are first in mathematical sciences in Europe
In an extensive CEE FinTech survey, the researchers outline Estonia as the region’s tech-leader. The Estonian government encourages or even requires the digitization of business processes and many aspects of daily interactions with the public sector. In the northernmost Baltic state, the foundations of computer programming are taught in public schools and Estonian and Swiss students received the best results in mathematical sciences in Europe according to the OECD statistics relating to PISA (Programme for International Student Assessment).
Licences are issued the fastest in Lithuania
The development of innovative solutions does not only depend on the education level, financial performance, political stability and life standard of a country, but also on government regulations. Various CEE governments seem to have realized this: Lithuania is said to have the fastest licence issuing in the European Union and has seen 35 new FinTech companies being incorporated in 2017 alone, while Bulgarian authorities started to support FinTech companies after the financial crisis of 2008. Since then, the tax system has been one of the most business-friendly in all of Europe. The Polish government is currently working on so-called Sandbox regulations to facilitate the implementation of FinTech solutions in the market. This means that innovative products, services and business can be tested without being subject to all existing regulatory requirements in the beginning.
The Latvian government has also issued programs to promote the break-through of FinTech and introduced a Startup visa for visiting entrepreneurs to push innovation. Fintechnews Baltic describes Latvia as “home to as nascent but bustling Startup scene”. But with a population of under two million, the Latvian market is relatively small. Local entrepreneurs must thus set their sights on the global market.
Are the Czech Republic and Romania the starting points for a banking revolution?
The Czech Republic also has a relatively big and fast-growing market for FinTech. Czech banks are considered some of the safest and best-run in Central and Eastern Europe, but also the most conservative – which makes them targets for emerging FinTech firms. Romania is the other hot candidate for being the starting point of the banking revolution: bank commissions in Romania have been among the highest in the region. Therefore, the prospects for banks that offer alternative and efficient digital services for the young generation are excellent, a study of Saxo Bank finds. It is crucial to venture into untapped markets and address unmet needs for FinTech to grow.
In Poland, the banking sector has recognized that FinTech is not only a threat to traditional banks but more a chance to address changing customer needs and design more efficient processes. Poland’s banking industry boosted FinTech more than Startups. The “Forbes” names the example of the Polish Alior Bank that launched their document repository based on blockchain technology in summer 2018.
The Hungarian life insurance sector is supposed to grow further
Hungary is an interesting country for insurers with remarkable growth in the life insurance sector: gross written premiums for life insurance in Hungary have increased by 5 per cent in 2017, according to a report by the international rating group RA Experts. “It is expected to continue growing supported by the new transparency regulation, tax incentives and strong macroeconomic growth”, the authors write. Yet, the investment environment in the insurance remains quite limited compared to Western countries. RA Experts relates this to the low yield environment – especially in the major sovereign bonds – which are the main investment focus of Hungarian insurers.
Another focal point for insurers in the CEE region is Slovenia. Penetration and density in Slovenia figured at 4,8 per cent and 1183 US dollars in 2017. “These figures can be compared with countries such as Portugal, Norway and Austria”, the authors of RA Experts conclude. As of the end of 2016, the Slovenian market had 14 insurance companies where six were composite insurance companies, four non-life insurers and four life insurance companies. As of 2017, the top 5 insurers controlled around 77 per cent of the Slovenian market.
InsurTech offers quick wins in insurance retail
Like FinTech, InsurTech provides solutions to create new customer touchpoints and manage processes more efficiently. Insurance technology, however, has a slightly different focus than FinTech as the major part of the InsurTech business is in serving retail clients. Market observers agree that online and mobile channels as well as digital technologies offer quick wins in insurance retail because the importance of millennials and in insurance increases quickly. Young, digitally savvy customers are generally-speaking less loyal to companies or brands and tend to perceive financial products and services as interchangeable. The new generations of insurance clients value convenience and prefer to execute transactions remotely—if possible, without direct interaction with the institution.
The Baltic insurance markets are less developed than in other CEE countries. Penetration and density in Latvia were as low as 1.7 percent as of the end of 2017 while it was 1.9 per cent in both Estonia and Lithuania. These untapped markets offer new chances for InsurTech companies.