CEE FINTECH FOCUS
The last two years have seen a seismic shift in the relationship between banks and fintechs across the globe, and central and eastern Europe is no exception.
Where until recently fintechs were boasting of their ability to put banks out of business and banks were viewing the newcomers as dangerous disruptors, today both sides are starting to appreciate the benefits of working together.
“Fintechs have realized that it’s not that easy to kill a bank,” says Michal Smida, founder of Czech e-commerce credit provider Twisto. “In our region banks are doing a pretty good job, and people like them. And none of the fintechs can offer the full service to clients that banks can.”Tudor Stanciu, co-lead of Fintech Camp in Bucharest, says most startups in Romania have accepted that collaboration rather than competition is the way forward.
“Dealing with other people’s money is a very sensitive business, and you need the level of trust that traditional brands have,” he says. “Banks and insurance companies also have data that startups would need to spend a lot to collect.”
Most importantly, partnering with banks allows fintechs to reach the mass market.
Sigrid de Wever,
“The frictionless experience fintechs offer is very popular, but they want to deepen their penetration and access less tech-savvy customers,” says Sigrid de Wever, head of corporate strategy, transformation and innovation at KBC Group. “That’s why they come to banks.”
For their part, banks struggle to replicate the agility and creativity of fintechs.
“Banks are realizing that they are very slow to implement change, while for fintechs that’s their core strength,” says Gergana Stoitchkova at the Bulgarian Fintech Association.
But if both sides have accepted that cooperation is inevitable, the form it will take has yet to be determined. In emerging Europe, the big regional banks leading the fintech charge have opted for a range of strategies.
The most visible is Raiffeisen Bank International (RBI), which runs a network of accelerator programmes and boot camps for fintechs across CEE. Launched in 2017, the Elevator Lab initiative is the largest in the region, covering 10 countries from Slovakia to Albania. Maximilian Schausberger, RBI’s head of fintech partnerships, says the idea was to provide startups with a way of engaging with the bank.
“The feedback we received from fintechs was that one of the main barriers to collaborating with corporates was finding an initial point of contact,” he says. “We established Elevator Lab to create this point of contact and to send a clear message that RBI is open to cooperation with fintechs.”
Challenges are held each year by RBI’s CEE subsidiaries, with the winners entering a four-month pilot programme. The bank identifies a list of focus areas for competitors. In practice this is very broad, covering everything from payments and small and medium-sized enterprise banking to advanced analytics and cybersecurity.
Schausberger says RBI is keen to tap into the “rapidly developing innovation ecosystems” in its countries of operation, as well as targeting international firms.
“We want to offer the best fintech solutions from around the world to our customers,” he says.
He admits that emerging Europe is not always an easy sell for global startups.
“Obviously, many fintechs are looking to expand into large markets such as the UK and US, whereas CEE mainly consists of smaller markets with diverse currencies, languages and cultures,” he says.
At the same time, the relative underdevelopment of fintech in the region can offer opportunities due to the lack of competition.
“To access them, however, you need to have a strong understanding of local markets and regulations, which as a regional bank we can provide,” says Schausberger.
Fintechs have realized that it’s not that easy to kill a bank.
- Michal Smida, Twisto
RBI also touts its ability to provide access to more than 16 million customers across its 14 markets, as well as its investment capacity. In 2018, the bank set up a fund, Elevator Ventures, to invest in later-stage startups. It has also partnered with Austrian insurer Uniqa and venture capital firm Speedinvest in a fund of funds.
Elevator Ventures made its first investment in August 2019 in Austrian regtech startup 360kompany, an alumnus of the first Elevator Lab programme.
Another regional bank that has opted for the accelerator model is OTP. The Hungarian market leader, which has been rapidly expanding its CEE network over the last three years, launched a startup programme in late 2017 under the aegis of OTP Lab, its in-house innovation hub.
The lender has already run two pilot programmes and a third is due to start in early March. This year, for the first time, the initiative will cover five of OTP’s subsidiaries – in Russia, Ukraine, Serbia, Albania and Croatia – as well as its home market.
The focus of the programme has also shifted since its first iteration. Unlike fellow Hungarian lender MKB Bank, which targets younger startups through its Fintechlab incubator, OTP is increasingly looking to attract more mature firms.
“We realized that it’s tough to bridge the gap between very early-stage startups and the bank,” says Andras Fischer, head of innovation at OTP Lab. “We’re better suited to firms that have a working product or already have active working client relationships, either with banks or non-banks.”
Even more than RBI, OTP is keen to reach fintechs outside the region and has designed the programme accordingly. Participants are only asked to spend nine days in Budapest during the three-month pilot, with all other interaction done by video conference and other digital channels.
Fischer says the size and complexity of CEE markets have not been a deterrent for global firms.
“For startups that want to get a foothold in the EU, OTP is a very good starting point, especially as we are present in multiple markets within the region,” he says.
Last year’s programme attracted more than 300 applicants from 65 countries. Again, OTP has followed RBI’s lead in establishing a venture capital fund to invest in promising startups.
Other CEE regional banks have opted for a lower-profile approach to fintech collaboration. KBC, the fourth-largest group by assets in central and southeastern Europe, recruits startup partners directly both at group level and through its subsidiaries in Czech Republic, Slovakia, Hungary and Bulgaria.
“Local teams mainly look for fintechs to cover their own solutions,” says de Wever. “At group level we have the luxury of being more out-of-the-box thinkers. We can look at different types of fintechs to enrich our overall value proposition.”
Fintechs are assessed on a range of criteria, including maturity, functionality and white label readiness. For those deemed fit for purpose, KBC defines four levels of potential cooperation: buying a product or licence; time-limited cooperation; strategic partnership; and direct investment.
Partial equity investments are made through KBC’s venture capital arm, while outright acquisitions are conducted at subsidiary level. The majority of fintech collaborations in CEE to date have been through partnerships, although the group has purchased two aggregator firms in Czech Republic.
De Wever says KBC’s strategy makes for a relatively high implementation rate compared with other banks.
“We are very selective at the start of the process in our engagement with fintechs, which increases our hit ratio,” she says.
As with RBI and OTP, KBC offers startups the opportunity to access its six-country network.
“If the fintech is offering a solution for a problem all our countries are facing, for example on-boarding, and if the fintech is internationally active, we will discuss it at our innovation community in which all countries and group level participate,” says de Wever.
For Erste, which runs CEE’s only multi-country digital banking platform, finding fintechs with cross-border capabilities is even more important. Called George, the platform is already available to Erste customers in Austria, Czech Republic, Slovakia and Romania and will be rolled out in Croatia and Hungary this year.
“We want partners who have a proposition for all our markets, because our strategy is to be able to offer features across the whole group,” says Maurizio Poletto, head of George Labs.
This rules out many local startups.
“Fintechs in CEE tend to be smaller and less well-capitalized than in western Europe, so they often focus only on their home market,” says Poletto. “Only a few have enough capital for regional expansion.”
For those that do, Erste’s unified regional platform is a unique selling point.
“If you are a partner that has capital and ambition to grow across the region, we are perfect partners because with one integration you can get access to five million customers across six countries,” says Poletto.
Erste has also eschewed the structured programme model of fintech collaboration in favour of targeted recruitment for specific solutions. Current startup partners include a cash-back-on-purchase firm in the Czech Republic, a German voucher provider and a Nordic fintech focused on subscription management.
The Austrian group can invest in strategic partners but, unusually for a tech-focused bank, does not have a venture capital arm.
“It’s not in our DNA,” says Poletto.
But while banks tout their various models, how do all these initiatives look from the perspective of fintechs in CEE?
Broadly, there is support for the structured programmes. At blockchain information security firm LogSentinel, winner of 2018’s Elevator Lab in Bulgaria, co-founder Anton Gerunov agrees that such initiatives are a good way to make contact with banks.
“Within these structured programmes, it’s much easier to get in touch with decision-makers and really be able to demonstrate the value you can create,” he says.
Adrian Cighi, co-founder of Romanian bill payments aggregator Pago, agrees.
“Accelerator programmes are a useful exercise to go through, even if you don’t end up in partnership with the bank running them,” he says. “They are a crash course in the major things you need to keep in perspective when running a startup, which is particularly useful for firms that don’t have founders with a business background.”
Accelerator programmes are a useful exercise to go through, even if you don’t end up in partnership with the bank running them.
- Adrian Cighi, Pago
Cighi says MKB’s Fintechlab incubator, in which Pago participated in 2018, proved particularly useful in helping the firm avoid costly mistakes.
“We had three months to test our idea, which helped us to realize that the Hungarian market was not ready for us to launch,” he says. “Without the programme, we probably would have invested much more time and energy to arrive at the same conclusion at a higher cost.”
For most fintechs, however, the regional platforms have more appeal.
“The most interesting structured innovation programmes are the ones that go beyond national level,” says Gerunov at LogSentinel. “They provide an opportunity to demonstrate value and roll out a solution to the whole group.”
Investment from banks in the sector, whether through venture capital firms or directly, is also broadly welcomed in a region relatively short on startup funding.
Twisto’s Smida also notes that having a bank as an investor can add more than monetary value. When the firm expanded from its Czech home market into Poland in partnership with ING Bank Slaski, both the Polish subsidiary and its Amsterdam-based parent took equity stakes in the startup.
“The due diligence ING did on us before investing was incredibly in-depth,” he says. “Going through that adds credibility to our business and to our team, particularly with other banks.”
Again, he says ING’s multi-country network was a key part of its appeal.
“They are strong in other markets we are interested in, including Romania and Spain,” he says. “Having them as a partner means when we enter a new country we have someone who can help us understand the market and provide us with banking support and to some extent balance sheet financing.”
At the same time, the relationship between banks and fintechs in CEE is still rockier than some bankers might care to admit. Not everyone in the startup community, for example, is enthusiastic about the structured programmes run by local and regional banks. To some entrepreneurs these look like a way of shutting fintechs down, either by locking them into relationships or simply appropriating their ideas.
“The banks are very active in advertising how pro-fintech they are, but they aren’t willing to put any money towards it,” says Adam Soukal, co-founder and chief executive of Czech invoice financing firm Roger. “They want to see what we do and how we do it, what’s working and what’s not, but they still believe they can do it themselves. It’s completely foolish.”
The banks are very active in advertising how pro-fintech they are, but they aren’t willing to put any money towards it.
- Adam Soukal, Roger
Cighi at Pago agrees that accelerator programmes can be restrictive.
“Most banks see them as a source of inspiration for new features; or if they offer partnerships, they’re really just looking for things to incorporate into their own products,” he says. “If you look at these partnerships two or three years down the line, the startup doesn’t exist anymore and the founders are working in the bank’s digital ecosystem.”
Others see accelerators as more about PR than substance.
“They can be a bit of a gimmick rather than something that really adds value or builds a strong partnership,” says Smida. “Anyone can do them – all you have to do is invite a couple of founders, take a picture and put it on a corporate website.”
Another frequent complaint about bank programmes relates to the speed of implementation. One winner of the 2019 Elevator Lab, while praising the initiative, noted that more than six months later the partnership with RBI had only progressed as far as discussing proof of concept.
“That’s the dynamics of the relationship,” he says. “It’s love-hate, stop-start.”
Complaints about speed also go beyond the structured programmes.
“By the standards of the fintech sector, banks move very slowly,” says Stoitchkova. “They have good intentions, but the decision-making process is very lengthy.”
Some banks are trying to address the issue. In 2019, Erste tasked a working group with cutting the time for third-party integration – from first contact, and including security, legal and compliance – to just one month. The project was completed in June and is being piloted ahead of a full roll out this year.
OTP is also doing everything in its power to speed up implementation, says Fischer.
“We try to create cut-throughs wherever possible,” he says. “In the procurement process, not only the sponsoring departments but also all the supporting areas that could put a brake on collaboration – compliance, legal, IT architecture, IT security – are involved from the start.”
He says the bank has already seen big internal improvements since the start of its accelerator programme but admits there is more to do.
“Banks haven’t been adapted historically to work with small independent external companies,” he says. “As they say, no one ever got fired for choosing IBM.
“We need to make a big effort to spread the culture that it’s OK to take risks, make mistakes and learn from the experience. We need to let in startups as well as the big IT firms. They can offer more competitive pricing and we can bend their products in a way that really fits our needs.”
Ivo Gueorguiev, founder of Bulgarian fintech group Paynetics and a CEE banking veteran, agrees that banks’ organizational structure makes it tough to speed up innovation.
“You can have strong commitment from senior management, the board and even shareholders, but things get diluted as they go down the execution level,” he says.
“Key people throughout the bank have to understand the need for change and have it as an objective, because there is still a lot of pressure to deliver profitability. Fintech is cool, but if it doesn’t obviously enhance profitability, it will always go down the priority list.”
Fintech is cool, but if it doesn’t obviously enhance profitability, it will always go down the priority list.
- Ivo Gueorguiev, Paynetics
At the same time, as ING Bank Slaski vice-president Michal Boleslawski points out, there are some things banks can’t shortcut.
“Banks are by definition far less agile than fintechs,” he says. “We are obviously subject to heavy regulation.”
Some fintechs founders are more understanding than others, especially those from banking backgrounds.
Loic Le Pichoux,
Bulgarian peer to peer (P2P) lending platform Klear last year partnered with Germany’s Varengold Bank. Loic Le Pichoux, Klear’s chief engagement officer and a former BNP Paribas banker, says the additional reporting required by the Hamburg-based lender was “part of the deal”.
“Banks have to be accountable to their shareholders, especially if they are listed companies, so dealing with them will always be more demanding in effort, time and cost,” he says.
For Nigerian SME funding fintech Lidya, which entered the Czech and Polish markets in 2019, partnering with corporates and banks in its countries of operation is part of the business model.
“We know it will take 18 months to two years to sign on any bank,” says co-founder Tunde Kehinde. “Banks have a lot of reputational risk. They take customer deposits, so if they decide to put their logo next to yours as a partner, they have to know that you’re here to stay.
“Building that level of trust takes time. As we show that we are a big player in CEE, that we have a good brand name and a good track record, it will become easier for banks to partner with us.”
At LogSentinel, which is currently rolling out its product across RBI’s network 18 months after winning Elevator Lab, Gerunov takes a similarly long-term approach.
“We benchmark ourselves against IT companies, which usually take one to two years from first contact to implementation,” he says. “When you’re dealing with large, heavily regulated institutional customers with operations in multiple countries, you expect to have a long sales cycle.”
Not everyone is convinced that banks want to partner with fintechs. Some founders still report resistance to the sector, particularly in the business-to-consumer space.
As a P2P lender offering low-cost online retail loans, Klear is seen as a direct competitor by local banks in Bulgaria. As such, says Le Pichoux, it was not worth looking for a partnership.
“It’s difficult for banks to acknowledge they can’t go it alone, particularly in an area like lending,” he says. “Partnering with a fintech could be seen as showing weakness, and banks don’t want to do that.”
Soukal has also given up on the idea of finding bank partners for Roger’s planned expansion in CEE and southern Europe.
“The banks are still very reluctant to cooperate,” he says. “They are scared of us, and they get even more scared when they do pilots with us and realize that their clients want our services.
“We are going to enter new markets without banks. We will show them what we are doing there, how profitable it is and then we will try to persuade them to invest in it and cooperate with us. But it will be a very slow process.”
There are also complaints that in some CEE countries – particularly those with banking sectors dominated by a few large players, such as the Czech Republic and Bulgaria – banks are actively lobbying policymakers to block the development of the fintech sector.
Gueorguiev cites a proposed change in legislation in Bulgaria, sponsored by the local banking association, which would ban fintechs from offering payment or e-money services.
“The banks are still trying to build walls, through policy and regulation, to prevent fintechs from entering their territory,” he says.
Smaller banks are more open to change, he adds.
“For big banks, the main objective is to defend their position,” he says. “Small banks realize that they can’t afford to develop everything in house so to compete with bigger banks they need to find partners.
“Most of the interest in our product recently has come from smaller banks that are looking for allies to strengthen their competitive proposition.”
Soukal agrees that small banks are more open to cooperation with fintechs. Equa Bank, a Czech lender owned by private equity firm Anacap, has partnered with Roger to provide invoice financing for SME clients, while the local subsidiary of Russia’s Expo Bank is integrating its investment platform.
Meanwhile on their side, bankers complain that fintechs often fail to do their homework before engaging with banks.
“We’re approached by a lot of fintechs, but many of the propositions we see are naïve,” says Erste’s Poletto. “They don’t demonstrate a real understanding of how complex the retail market is in the area where we operate.”
Kalina Konstantinova, chief commercial officer at LogSentinel, agrees.
“When startups fail to establish partnerships, it’s easy to blame the banks for being too demanding,” she says, “but often it’s the startups that don’t show up with a ready product.
“Banks are the hardest clients to get. They need to see that you can scale, work with legacy systems and handle long-term projects in a challenging environment, and that they can trust you to provide a solution for years ahead. Banks shouldn’t be the first clients startups go after.”
Fintechs also fail to address banks’ needs, says Poletto.
My message to startups is, please don’t concentrate on things you think are great… We banks need help and you should focus on things that help us do our job better. There’s a great opportunity there.
- Maurizio Poletto, George Labs
“My message to startups is: please don’t concentrate on things you think are great,” he says. “We banks need help and you should focus on things that help us do our job better. There’s a great opportunity there.
“There are big gaps in the market. The economy is ageing and older people are the ones with money, but I don’t see a lot of fintechs dealing with the silver economy.
“On the other hand, there are still lots of startups coming up with payment ideas – but as a consumer, payment is not a problem. We are surrounded by millions of ways to pay, with our watches, phones, online, offline. We don’t need another payment solution!”
Another common theme from bankers is the need for caution when it comes to giving fintechs access to platforms and customer data. This comes up frequently in the context of the second EU Payment Services Directive (PSD2) legislation, which startups say banks have been slow to implement.
“We are extremely selective in allowing fintechs to offer solutions to our customers because we have high demands on quality and customer experience,” says KBC’s de Wever.
Poletto agrees that large banks are “naturally sceptical” about startups and PSD2.
“In the Czech market, where it was implemented very early, there have already been issues with bad connections being established through [application interfaces] and data from customers being shared inappropriately,” he says.
“Open banking is a work in progress, so it’s natural that banks are very cautious about opening up.”
Despite teething troubles on both sides, however, the relationship between banks and fintechs is clearly set to continue – in CEE as elsewhere. For all the gripes from founders, lenders in the region say they are currently deluged with applications from startups.
Poletto says the task for banks is not finding fintechs but selecting them.
“The challenge is to figure out whether behind the fancy demo and the PowerPoint presentation, they really have a good algorithm that will work for my five million customers and billions of transactions,” he says.
CEE fintech focus: Bulgaria
Bulgaria has been a relatively late arrival on the CEE fintech scene but is rapidly establishing itself as the region’s rising star.
Since 2015, the Bulgarian fintech sector has spawned more than 30 new startups covering segments, from blockchain and payments to personal finance, while early leaders such as Paynetics, LogSentinel and Klear are expanding at home and abroad.
In 2018, Bulgaria hosted its first fintech conference and became one of the first countries in emerging Europe to acquire a fintech association. It is the only market in Raiffeisen’s 10-country Elevator Lab programme to feature both a boot camp for startups and an accelerator for later-stage fintechs.
Locals attribute this rapid rise in large part to Bulgaria’s strong tech tradition. In the communist era, the country was the main producer of computers for the eastern bloc. Then from the early 2000s, the combination of tech talent and ultra-low costs made it an increasingly attractive hub for business-process outsourcing, particularly after EU accession in 2007.
SAP, VMware, IBM and Hewlett-Packard are among a clutch of global tech firms with operations centres in Bulgaria. More recently, the country has proved a magnet for big European payments firms such as Paysafe and SafeCharge.
“Most of them started with back-end operations in Bulgaria but are increasingly moving towards product development,” says Ivo Gueorguiev, chairman of fintech group Paynetics. “This is creating a pool of experienced professionals, many of whom are now looking to build their own fintechs.”
According to Gergana Stoitchkova of the Bulgarian Fintech Association, this is the main driver behind the recent surge in fintech formation.
“Most of the founders and main employees in these companies come from the fintech, technology and payments giants that opened offices here some years ago,” she says.
The rapid development of the sector is all the more remarkable given the size of the local market. Bulgaria has a population of just 7.1 million, but, Stoitchkova says, this is less of a constraint that it would be in other countries.
“There are plenty of early adopters here and people are concentrated in a few large cities, which makes them easier to reach,” she says. “It’s easy to test a product in Bulgaria and get some initial feedback before launching in other parts of Europe.”
One of the main limitations on sector development in the early days was lack of funding. The first venture capital firms only appeared in Bulgaria in 2013 – however, thanks to backing from various EU bodies, the industry now comprises around 20 members.
These include Bulgaria’s first fund of funds, launched in 2018 with backing from the European Investment Fund (EIF), which has made more than €150 million available to local fund managers.
“Today, if you have a solid and scalable early-stage company, you will likely find funding in Bulgaria,” says Stoitchkova.
Others are more sceptical. Gueorguiev says Bulgaria is “very far from being overfunded”.
“The biggest challenge for fintechs here is getting proper funding,” he says. “The available capital is predominantly from the EIF, which comes with a lot of bureaucracy and strings attached. More importantly there is still lack of VC culture and infrastructure.”
To date, Paynetics – which includes software point-of-sale terminal Phos, the winner of last year’s Elevator Lab Challenge in Bulgaria, and payments and banking platform Phyre – has been entirely funded by its founders.
“If you want to accelerate development and deliver quickly in Bulgaria, the best way is to self-fund – but it’s an expensive exercise and obviously not everyone can do it,” says Gueorguiev.
Stoitchkova admits there is a lack of financing in Bulgaria for more mature fintechs.
“Our local funds mainly provide seed and early-stage Series-A funding,” she says.
Some local fintechs have managed to obtain support from strategic institutions. Klear, a peer-to-peer (P2P) lending platform launched in 2016, has announced a partnership with Germany’s Varengold Bank.
The Hamburg-based lender, which specializes in providing finance to marketplace platforms, opened a branch in Sofia in 2018 to cover southeastern Europe.
“Varengold was looking to expand into regions where the margins are even higher and the outlook brighter than in its traditional markets; in Europe that clearly applies to SEE,” says Sergey Panteleev, head of Varengold’s Bulgarian operation.
“And within the region, Sofia’s vibrant ecosystem of fintechs, IT and financial resources made it the obvious choice for a hub.”
Klear is Varengold’s first investment in the region. As well as providing debt finance, the bank also took a 20% equity stake in the firm and has committed to support its international expansion. Loic Le Pichoux, Klear’s chief engagement officer, says this will likely start with Romania and Poland.
“Countries in western Europe already have very efficient consumer lending players,” he says. “In this region there are almost no pure P2P platforms, so I believe we can offer a new value proposition.”
Other challenges cited by Bulgarian fintech founders include limited support from policymakers – although Stoitchkova says attitudes are starting to change. In 2019, the Bulgarian finance ministry set up a working group to discuss areas such as fintech, bitcoin and stable coin, while the central bank is also becoming more receptive to approaches from the sector.
“Previously fintechs have struggled to establish meaningful dialogue with the regulator, but as an association we have been more successful,” she says. “It’s still baby steps though.”
For several fintechs in Sofia, however, the biggest problem remains external perceptions of Bulgaria. One of the country’s leading regtechs, blockchain information security firm LogSentinel, has established an entity in the Netherlands for its international operations.
“Bulgaria doesn’t have a great reputation globally, so some firms blacklist vendors from the jurisdiction,” says Anton Gerunov, co-founder of LogSentinel. “For those deals, we use our Dutch entity, which can offer better legal protection for corporates.”
CEE fintech focus: Czech Republic
The most economically and financially developed market in emerging Europe, the Czech Republic, has nonetheless lagged larger neighbour Poland when it comes to fintech.
Partly, this is a simple question of size.
“You can’t do big business in a market of only 10 million people,” says Pavel Novak, chief executive of Prague-based peer-to-peer lender Zonky. “We always saw the Czech Republic primarily as a place to build a great platform that we could then take abroad.”
Launched in 2015, Zonky is gearing up for a big push into western Europe, starting next year with Spain under new brand Benxy.
“Then we plan to focus on all countries where PSD2 [the second EU Payment Services Directive] is in force,” says Novak.
One of Czech Republic’s largest fintechs, Twisto, is already reaping the rewards of looking outside its home market. In 2017, the e-commerce credit provider moved into Poland in partnership with ING Bank Slaski, which integrated Twisto’s deferred payment solution into its Imoje online retail gateway.
In May, the fintech firm raised €14 million of Series-B financing to fund its expansion into Romania and Italy this year, again in partnership with ING.
Chief executive Michal Smida, who founded Twisto in 2013, says his only mistake was not looking outside the Czech Republic sooner.
“We should have gone abroad earlier in the company’s life cycle,” he says.
Another rising Czech fintech star, Roger, is also planning to expand across Europe. The invoice financing firm, which has an annual transaction volume of around €100 million in its home market, has already obtained passporting for Poland, Slovakia and Spain, and is applying for other markets including Greece.
Nonetheless, Adam Soukal, Roger’s co-founder and chief executive, says the Czech Republic does have advantages for fintechs.
The banks here are very profitable, so they seem to be reluctant to develop new products, especially for SMEs
- Adam Soukal, Roger
“The banks here are very profitable, so they seem to be reluctant to develop new products, especially for [small and medium-sized enterprises],” he says. “We are able to execute high margin on what we do and we don’t feel any real competition.”
Fintechs from outside the Czech Republic have also spotted the gap in the market.
Nigerian startup Lidya, which offers short-term online unsecured financing for small businesses, chose the Czech Republic and Poland for its European debut this year.
“We like the Czech Republic a lot,” says co-founder Tunde Kehinde. “The population is obviously smaller than Poland, but the SME community is quite large and there’s a big credit gap in the segment.”
Other key advantages of the Czech market include the high take-up of online services and a strong supply of tech talent. Novak notes that nearly 40% of all goods in consumer electronics in the Czech Republic are sold online, compared with just 25% in Germany.
“We are an online nation,” he says.
Meanwhile Czech universities are turning out large numbers of tech graduates, many of whom are keen to work in the fintech sector.
“Young people want to have freedom and do something creative,” says Novak. “I have many more candidates than vacancies, despite the tight labour market here.”
Smida agrees that access to talent is a big advantage for Czech fintechs – particularly given the relative underdevelopment of the sector.
“Being one of the biggest firms in the market allows us to hire incredible talent at a fraction of the cost in the West,” he says.
Along with the size of the market, the other main reason cited for Czech fintech’s slow start is the late development of the country’s venture capital industry.
Smida notes that when Twisto started in 2013, there was barely a handful of funds in the Czech Republic able to back early-stage ventures. As elsewhere in the region, however, an influx of funding from the European Investment Fund has transformed the industry.
“Today, there are maybe 30 venture capital funds able to write tickets of up to €1 million and there is huge appetite to invest in fintechs,” says Smida.
Another area where some see progress is in relations between the sector and the local regulator, the Czech National Bank (CNB).
Following requests from the Czech Fintech Association, which was set up in 2018 to improve dialogue between the industry and the authorities, in November the CNB created a fast-track enquiry process for fintech-related queries.
Michal Vodrazka, head of payments regulation and financial innovation at the CNB, says the bank is also planning regular meetings with both banks and the fintech community.
Nevertheless, some in the industry remain sceptical of the CNB’s commitment to innovation. The biggest bugbear is the protracted delay in issuing PSD2 licences.
The Czech Republic adopted PSD2 promptly in January 2018, but the first partial licence – to personal finance app Spendee – was not issued until December of that year. The first full PSD2 licence in the Czech non-banking sector was issued to Zonky in September.
Some applicants, including Roger, are still waiting – and their chief executives are not happy.
“The CNB is one of the most conservative regulators in Europe and it is putting us at a huge disadvantage against platforms from the UK that have had a PSD2 licence for two years,” says Soukal.
Vodrazka insists that responsibility for the delay lies mainly with the fintechs, which failed to appreciate the challenges of obtaining updated insurance contracts despite warnings from the CNB ahead of the implementation of PSD2.
He admits, however, that the central bank has also faced challenges.
“We had to reissue licences to all the payment services companies in Czech Republic, of which there are around 200, which was a lot of work for our licensing department,” he says.
The CNB has also been criticized for failing to support innovation in the financial sector, but Vodrazka says that is not in the bank’s remit.
“As the financial supervisor, we don’t feel it’s our role to pick winners and decide which companies get special attention from the CNB,” he says.
Similarly, he adds, the bank sees no value in a regulatory sandbox.
“The amount of leeway we would be able to give companies is very limited,” he says. “Most of the rules – and especially those parts that are seen as onerous by market participants – are EU legislation. We legally can’t give waivers from them.”
CEE fintech focus: Romania
With a population of 19.5 million and relatively low banking penetration, Romania should be a natural target for fintech disruption. Yet, until recently, activity in the sector was severely limited.
“The fintech ecosystem has taken a while to get going in Romania,” says Tudor Stanciu, co-head of the local chapter of Fintech Camp. “When we started organizing fintech meet-ups in Bucharest and other cities in 2017 we saw very little interest.”
Over the last two years, however, things have changed rapidly. Not only have dozens of new startups sprung up on the local market but several big European fintechs have made inroads into the Romanian market.
The biggest gains have been made by firms serving Romania’s peripatetic population. Fintech Revolut has signed up nearly one million users in Romania since entering the market in May 2018, despite competition since the start of this year from rival Paysera.
Monese, TransferWise, N26, Monzo and PayPal have also gained traction among Romanian migrant workers and travellers, despite not having a local presence.
Other fintechs eyeing the country include Nigerian small and medium-sized enterprise lender Lidya and Czech e-commerce credit provider Twisto.
“Romania is a very interesting market,” says Twisto founder Michal Smida. “Customers are very open to trying new things and there’s a coolness factor to something that’s not local.”
Adrian Cighi, co-founder of home-grown bill payments app Pago, agrees that Romanians are open to innovation.
“We had good take-up with minimal marketing when we launched in 2017,” he says.
What was lacking in Romania, until recently, was funding for early-stage tech firms.
“Two years ago, the venture capital industry here was almost non-existent,” says Cighi.
Pago’s initial development was financed through a partnership with Romania’s largest lender, Banca Transilvania.
Since 2017, however, an influx of funding from the European Investment Fund has spurred rapid development in the sector. A clutch of home-grown venture capital funds have sprung up, supported by Romania’s traditionally strong angel investor network.
Existing fintech entrepreneurs are also helping to develop the sector.
“Firms are organizing hackathons and founders are passing on their knowledge to other companies in the ecosystem,” says Stanciu.
Romania’s banks have been slower to engage with the fintech ecosystem, but again there are signs that attitudes are starting to change.
Raiffeisen Bank International launched its Elevator Lab boot-camp programme for early-stage startups in Romania last year. Banca Transilvania backed a fintech hackathon in July, while Erste subsidiary BCR’s accelerator, InnovX, has seen substantial interest from fintechs since its inauguration in 2018.
Market participants have also been encouraged by a recent shift in the Romanian central bank’s attitude to financial innovation.
“What used to be a one-way discussion between the regulator and the fintech sector has this year become two-way,” says Stanciu.
The central bank has already set up a special contact channel for fintechs and is reportedly considering the introduction of a regulatory sandbox.
“That would be fantastic for the local market,” says Cighi. “It could be a game changer.”