After nearly three decades since the end of the socialist experiment many countries in Central and Eastern Europe (CEE) have made enormous progress, but they are still catching up to their western peers. But not in fintech, which has been embraced by entrepreneurs of Emerging Europe. Austrian bank Raiffeisen International attempts to capture the vibrancy with the publication of its CEE Fintech Atlas.
A collection of small states, the Central and Eastern Europe (CEE) often looks fragmented and insignificant to outsiders. But the region has been booming for several years and contains some of the most vibrant economies on the Continent. Some regions within these countries and the leading cities have already overtaken the EU average levels of prosperity. How can we really capture the business potential of the CEE region?
Analysts at Raiffeisen Bank International (RBI) have been devoting themselves for years to a more in-depth analysis of the local banking sectors in CEE. RBI has now published its first CEE Fintech Atlas that brings a new insight on the development of the countries in the region.
The study turns several of the "old narratives" in the CEE banking and financial sector upside down. While Western European banks are still big players in the established banking business, in fintech the situation in the CEE region is very different.
The West has no clear starting advantages over the CEE region in fintech, as was the case at the beginning of the banking sector reform over 20 years ago. In this respect, some of fintech's locations in CE and SEE are at least as developed Western Europe’s offerings, and in some cases they are already well ahead of the West. Russia stands out as a leader in the fintech and a top location for fintech innovation. Ukraine is also performs surprisingly well in the CEE Fintech Atlas, despite all its economic and political problems.
In concrete terms, the CEE Fintech Atlas analyses factors such as the number of local fintechs operating in a given CEE country and the local fintech financing volumes. The results are then compared with the respective country data on the status of digitisation in the individual CEE banking markets (also in comparison to Western Europe and other leading emerging markets). In figures, this means, for example, that there are significantly more national and locally active fintech companies in Russia (189) than in Austria (87) and important Central European countries combined (Czech Republic: 87, Romania: 49, Hungary: 39). Ukraine is also included in the CEE Fintech Atlas with an impressive 80 local fintechs. Only Poland can keep up with Russia (171 national Fintechs).
Regarding the most important regional fintech investors, there are only two western players among the top 10 (from Austria and the USA), while here there are four players from Russia. The Czech Republic, Hungary and Turkey (with two significant investors) are also in the top 10 here.
It is clear that the inbound investment into the regional fintech market in CEE is much more a local affair than the investment into the traditional banking business.
However, the large Western EE banks see themselves as regional operations with a local anchor. And so fintech partnerships are obvious for them. Especially since the existence of a classical bank account still represents the most important entry ticket into the digital banking business and provides a platform to develop other business models.
The large banks operating across the CEE region in multiple countries can give fintech access to a comprehensive customer base that negates the problems of the fragmentation of populations in the region. After all, almost 70% of the total population in CEE is equipped with an account and a bank or credit card, while at least 50% are already actively using digital banking services of some sort.
According to the RBI Fintech Atlas, fintechs can currently tap a total market of around 150mn digital bank customers in CEE, almost 80mn of which are in Russia. Russia is an extremely attractive fintech location and an important market for digital banking in global terms. However, there are also five other countries in CEE where there are already at least 5mn digital bank customers: Czech Republic, Poland, Hungary, Belarus and Romania.
The trends and country names outlined above show that Central Europe and Russia, plus Ukraine, are currently the most attractive fintech locations and digital banking markets in CEE.
And the CIS market (which also includes Belarus) already stands out in a pan-European comparison as the gap between digital banking products penetration (50% of the population) and the penetration of conventional banking products (66% of the population) is already lower than in Western Europe where the gap is almost 20 percentage points versus the 16pp in the CIS. In the development of banking services in the CIS, banks have simply leaped over several development stages and jumped straight to fintech solutions, leaving the West to catch up with their more sophisticated offerings. The leader in this respect is Estonia where the gap between digital and traditional banking products is only 14pp. The migration to digital banking in Estonia has been so strong that banks have been closing bricks and mortar branches that are becoming increasingly redundant.
Central Europe also performs remarkably well in terms of digital maturity: 58% of the population already actively use digital banking products. In Southeast Europe, on the other hand, there is still a lot of catching up to do, where digital penetration in the local banking markets is even less pronounced at 34% of the population. However, at least the conditions are right regarding for a repeat of the “leapfrog” effect that has marked the development of the CIS fintech scene.
The CEE Fintech Atlas shows, for example, that Bulgaria is one of more exciting markets. In the less developed markets in Southeast Europe the usage of digital payments is already at high levels as well; 60-80% of the population already make use of digital payments. It transpires that prosperity or GDP per capita income is a less decisive factor when it comes to using making digital payments than in the traditional credit business. Even less developed markets in CEE currently offer great potential for banks and fintechs as a result. It is also particularly interesting here that Russia, Ukraine and Belarus stand out as very special regional locations as young people are already making very active use of digital payments.
A precise picture of the CEE fintech scene in combination with the digital maturity of the local banking markets is not only relevant for western fintechs, but also for the western banks operating in the CEE region. The growth story of the last 20 years cannot be repeated in the classic banking and credit business. Growth rates in the range of 15-30% can only be achieved in the digital space. In addition, the growth opportunities for fintech's and banks in CEE in the area of digital value creation are not closely linked to the level of prosperity in a country. However, in view of the facts outlined above, the narrative of Western banks bringing new technology and practices to the CEE region is less and less valid. Rather, western banks operating in the region are increasingly concerned with exploiting local innovative potential and tapping into local fintech scenes than they are importing new technology to the region.
Overall, the CEE Fintech Atlas clearly shows the heterogeneity in the region. Certain CEE countries are still characterised by a degree of digital maturity below those of other emerging markets. These countries could be interesting to fintechs already offering digital solutions in these markets. Here, the digitisation of the financial sector is more a question of financial inclusion and institutional advancement. In other CEE markets, digitisation is about the use of cutting-edge technology.
Overall RBI thinks that the Czech Republic, Russia, Slovakia, Poland and Slovenia compare favourably with “true digital champions” (such as China and Estonia). Ukraine, Belarus, Hungary plus Croatia can be characterised as “regional digital flagship countries”, while Albania, Kosovo, Romania, Serbia and Bulgaria seem to be more “digital catch-up countries”. And Russia itself is among the global leading emerging markets when it comes to digital usage in banking and the fintech absorption, while growth rates in digital banking in Russia and several other CEE countries can well compete with the growth rates seen in China, Turkey etc.
That said, the diversity of the CEE countries in terms of their digital maturity also offers a lot of opportunities for leveraging the customer experience gained in leading CEE markets in other countries or using technology and product lifecycles transnationally. Moreover, there is a lot of room for cooperation between the largest (Western) CEE banks active on several CEE markets and innovative local or international players or players with established digital solutions due to small size of several CEE markets when it comes to (potential) digital users.
The CEE Fintech Atlas can be accessed via a separate homepage here