CEE FinTech – The Emerging Center of Gravity for International Entrepreneurs

With the usual suspects maintaining a strong grip on the world’s attention (we are talking about Hong Kong, Singapore, and New York), it's easy to overlook emerging markets offering outstanding opportunities to international tech and finance talent. One of those markets is Central and Eastern Europe (CEE) – a unique region that has been making unprecedented strides to bring innovation to every level of the government and business operations. Being an economic success story for the past two decades, CEE countries are continuously reinventing their economies to adapt to the changing world.

Europe remains one of the world’s top regions for executives, experts note in an attractiveness survey 2017 (Europe). Despite major geopolitical events, growth around the world facilitates demand for European products and services and gives business decision makers the confidence to expand and invest. Asked to rank the attractiveness of global regions, investors vote Western Europe first overall (53%), followed by US (39%) and CEE (37%).

Image: CEE key economic indicators; FinTech in CEE: Charting the course for innovation in financial services technology

In total, the CEE FinTech market is estimated to be worth over €2.2 billion, with the FinTech investment market in the region to grow at 55% annually until 2020. A recent comprehensive study on CEE FinTech reveals that innovations for the banking sector provide the greatest share of FinTech solutions in all CEE countries. Such solutions are highly developed in virtually all countries (internet and mobile banking, contactless cards, etc.).

Insurance and asset management sectors are considered to be far behind, with the focus in the insurance industry being on improving distribution channels (apps, gamification), and launching new services based on telematics. The asset management sector is deemed to be still conservative with most financial institutions using systems provided by traditional vendors, which, on the positive side, represents existing opportunities to break down the dominance of these players by offering exible and inexpensive solutions.

In an extensive CEE FinTech Survey 2017, professionals outline Estonia as CEE’s near-runaway tech-leader, with the government encouraging or even requiring the digitization of business processes and many aspects of daily interactions with the public sector, with knock-on effects for ICT businesses. In fact, Estonia became the first country to offer e-Residency, a government-issued digital ID available to anyone in the world. E-Residency offers the freedom to easily start and run a global business in a trusted EU environment. The e-Residency project was launched on December 1, 2014. As of March 15, 2017, over 18,300 people from 136 countries worldwide had applied for and over 17,300 have received the eID. By the same time, over 1,400 e-residents have established a company and there are over 2,700 companies connected to e-residents (owners, board members, etc.).

Another interesting contender among the CEE countries is Poland, which has been widely considered to be among the frontrunners as a hub of technological innovation. We want the region to become the center of innovation. It is our responsibility to create an ecosystem in which you will be able to develop your talent, Beata Szydlo, Poland’s prime minister, said to an audience of nearly 1,000 entrepreneurs and investors from local countries gathered in Warsaw. We create, as a country, good conditions for entrepreneurs and we connect it with science. Then we hope and we know that it will have a positive impact on the economy she added. We want you to make your dreams come true here, in your countries, and through making them come true, help us all make our dream about the development and safety for our region come true.

The philosophy underlines one of the most promising features of the Polish FinTech landscape – growing cooperation 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.

Poland is widely considered as being in the vanguard of global financial digitization. We are a playground for Western partners to test and popularize 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] neighbors, StartUp Hub Poland’s CEO Maciek Sadowski explains. 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.

Mentioning other notable CEE FinTech markets, professionals emphasize Austria, Bulgaria, Croatia, Czech Republic, Hungary, Romania, Slovakia, and Slovenia. Each of these countries, while largely overlooked, offers unique opportunities for FinTech professionals.

Rarely mentioned, Russia is another emerging hotbed for FinTech. As well as having the largest domestic market in CEE, FinTech professionals admit it has a modern banking system and well-developed cybersecurity industry, and churns out programmers from its universities (in 2017, half of the top 10 best-performing universities in the global ACM-International Collegiate Programming Competition were Russian). Some of the FinTech professionals participated in a survey in 2017 believe that Russia, and probably to a greater extent Ukraine and Belarus, will increasingly provide the brainpower for FinTech centers around the CEE region.

Country Opportunities Austria
  • Austria has the highest level of internet access in CEE (82% vs. the 75% average for CEE). Austria also has the highest ratio of smartphone penetration – 66% compared to the average of 56% for CEE countries.
  • In Austria, one in four invoices is electronic: the average in the CEE region is half as many.
  • The share of e-government users in Austria is the highest among CEE countries (37%), and exceeds the EU average (32%).
  • Almost the entire population aged 15+ has a current account with a financial institution (97%).
  • Real GDP is expected to increase by 2.0% in 2017.
  • In 2014 there was a reversal in the trend for growing unemployment. The rate decreased to 11.4% and is expected to fall further to 8.8% in 2017.
  • Bulgaria’s corporate income tax (CIT) rate is the lowest in the EU at 10%. The personal income tax rate is also at 10%. Industries that face structural unemployment issues are granted a 0% tax rate.
  • GDP growth, observed in 2015 for the first time since the crisis, is expected to remain stable in 2016-17 (2.1% on average), while the unemployment rate is forecast to drop below 14.0% in 2017 from 17.3% in 2014.
  • Labor market reforms in 2013 and 2014 aimed to facilitate the use of flexible types of employment.
  • Since Croatia joined the EU (January 1st, 2013), its trade connections have been improving.
  • Croatia is planning to invest €203 million into fast broadband through the use of Structural Funds.
Czech Republic
  • Forecast GDP growth of 2.7% for 2017.
  • Total R&D intensity (research and development expenditure as a percentage of GDP) is forecast to reach 2.9% in 2020, only slightly below the EU target of 3.0%.
  • The government has implemented the Business Corporations Act, aimed at facilitating setting a business by substantially reducing the minimum capital requirements.
  • The ratio of public debt to GDP is forecast to fall in the next two years.
  • Hosts Phoenix conference, bringing together international executives in partnership with F6S, Auka, Innovatrics, and many others.
  • As the market situation slowly improves, crisis taxes and the fiscal burden are being gradually eased off.
  • Society follows technological trends: internet penetration is 76%, 60% of the population has Facebook accounts and 55% have smartphones, all spelling opportunities for the further development and adoption of digital solutions.
  • Digital entrepreneurship is moving up the government’s agenda: numerous initiatives have already been launched to support this area, such as Kitchen Budapest and Colabs (incubators), and Web 2.0 (a competition for startups).
  • The high level of business-cycle synchronization with the advanced German economy, due to an integrated supply chain (exports to Germany accounted for 26% of all Polish exports in 2014).
  • Poland is the largest beneficiary of EU support. The EU will have allocated €82.5 billion to Poland over the 2014–2020 period.
  • There is a possibility of obtaining dedicated public aid, granted on the basis of an agreement between the Minister of the Economy and the investor. Companies planning to invest in seven selected industries, including R&D and biotechnology sectors, can apply for support.
  • Numerous domestic FinTech startups and mature companies are operating both in Poland and abroad.
  • Romania has the fastest broadband internet in Europe – the peak connection speed is close to 60 Mbps, and 16% of all connections have a speed of 100+ Mbps.
  • The Romanian government actively supports domestic companies and foreign investors through state aid schemes, tax incentives, super deductions (150%) for R&D investments and low CIT.
  • Romania was ranked 37th in the global Doing Business Index 2016 (with improvement noted in the areas of paying taxes, enforcing contracts and resolving insolvencies).
  • An increase in public investment is expected over the years to come.
  • Slovakia has exited the EU’s excessive deficit procedure, and the government expects to achieve a balanced budget by 2018. EU funds are likely to improve the country’s infrastructure.
  • Business confidence in the country is recovering after the crisis, driving investment growth.
  • The government is planning to further develop broadband access by rolling out fiber optic networks in rural areas.
  • Slovakia jumped to 29th place in the Doing Business Index in 2016, up from 37th the year before. Most important improvements included the shortening of time required to register a company (following the launch of a one-stop shop), the elimination of the requirement for a notary to verify signatures, and a reduction in corporate tax rates.
  • Slovakia offers several incentives (such as cash grants) and investment support to companies operating in technological centers.
  • Slovakia has one of the highest rates of cloud computing adoption in Eastern Europe.
  • GDP growth is expected to accelerate in 2017 (2.3%) after a slowdown in 2016.
  • Slovenia improved from 35th place in 2015 to 29th in 2016 in the global Doing Business ranking due to reforms in the fields of insolvency resolution, the enforcement of legal contracts and real estate management.
  • Slovenia adopted a new FDI strategy and a smart specialization strategy in 2015 (25% of measures included in the Single document – the Slovenian government’s initiative aimed at ensuring better regulatory and business environment and enhancing competitiveness of Slovenian economy – were implemented).
  • The number of individual e-buyers who made a purchase within the last 12 months grew by 6% annually between 2010 and 2015 to account for 39% of the population (aged 16-74).
  • Slovenia is expected to launch the use of the SME test in 2016, meaning every new law will have to be appraised based on the impact it will have on businesses, SMEs in particular.

Data source: FinTech in CEE: Charting the course for innovation in financial services technology

Not to sugarcoat those opportunities – every one of the markets has its drawbacks and threats able to impair future prosperity. Even leading CEE markets have controversial processes in place, requiring careful assessment of the best choice should one decide to go on a CEE quest. High barriers for entry in certain countries, ageing society, corruption, significant rural population are among important downsides to local economies. Nonetheless, CEE is expected to emerge from local problems to a region with highly cooperative and supportive governments (which many already are), strong and open to collaboration banks, powered by an insignificant competition, up to the moment when the hype grinds down every aspect of CEE nations to shed light for the international community on their next place to be.