COVID-19 will shape the trajectory of FinTech development in the Europe and Central Asia Region

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Crowds enter and leave the public transport system. Bucharest.
Photo: Flore de Préneuf/World Bank

FinTech has tremendous potential in the Europe & Central Asia (ECA) region. A recent World Bank report notes high mobile phone and internet access levels and scope for increased use of digital payments as key drivers for FinTech adoption in the region. It also discusses the opportunities and risks related to FinTech and different levels of FinTech development in the region. In many ways—some countervailing—COVID-19 is changing the evolution of the FinTech industry. 

On one side, FinTech could receive a boost, given the renewed focus on cashless payments and digital identification methods to avoid human contact. Several central banks, including in ECA, have introduced measures to promote the use of digital payments to minimize cash handling. However, while the connection between the spread of infection and cash is unclear, discouraging cash-use also risks opening a divide in access to payment instruments, which could negatively impact unbanked and older consumers.

Meanwhile, countries are moving ahead with reforms to promote digital signatures and remote identification. Poland’s national payments processor has teamed up with a private firm to let citizens sign documents remotely through an eIDAS-certified remote qualified e-signature service. The UK’s Financial Conduct Authority has asked firms to accept selfies for client identification. The Financial Action Task Force is also promoting the use of digital ID technology to securely enable remote onboarding and remote financial services.

Nonetheless, FinTech companies, especially startups, are vulnerable to a market downturn through several channels. Business conditions or funding conditions may deteriorate and exit options may change significantly. The FinTech landscape and underlying market assumptions may be creating new “winners” and “losers”. One study suggests that contactless payment services, artificial intelligence, internet of things and software as a service might see renewed demand, while challenger banks, robo-advisory services and wealth management platforms are likely to struggle.  

Irrespective of future business trends, digital financial services (DFS) and FinTech is playing an important role in the current crisis response. Digital payments are enabling governments to rapidly implement direct transfers to households and small businesses, outside of traditional social protection mechanisms. In some countries, the crisis may be an opportunity to fast track reforms in areas, such as interoperability and mobile money adoption. Meanwhile, several FinTech firms and DFS providers have offered free services or lowered their fees to assist with the COVID-19 response.  

The Bank for International Settlements predicts that this pandemic is likely to amplify calls for issuance of central bank digital currencies (CBDCs) amid calls to reduce cash usage. The FinTech in ECA report discusses that several central banks were already examining the possibility of issuing CBDCs prior to the crisis. However, several policy and technical hurdles remain to be addressed.

FinTech can also help solve some of the key financial sector challenges that existed in the ECA region before the crisis but have now been amplified.  These go beyond the obvious contribution to reducing the excessive reliance on cash in the ECA region.

The pandemic-induced decline in cross-border remittances is of particular concern in the ECA region, given that as many as seven middle-income countries in the region have international remittances contributing more than 10 percent of their GDP. The FinTech in ECA report highlights how FinTech providers can leverage digital technology, advanced data analytics, and in some cases distributed-ledger technology, to significantly lower fees for sending remittances, which are  high for traditional channels. The report estimates that FinTech solutions could nearly halve the costs of sending remittances to the region. Lowering fees is a priority, given the decline in remittance volumes.

The anticipated slowdown of the global economy will make it more challenging to narrow the substantial gap in MSME financing compared with larger firms. The formal MSME finance gap in the ECA region stood at more than $745 billion prior to the crisis. It likely expanded considerably, as businesses face liquidity challenges and seek financing. The FinTech in ECA report describes how FinTech innovations such as big data and artificial intelligence technology can help develop new models for financing that rely less on solid financial accounts and strong collateral, particularly benefiting MSMEs. P2P lending and crowdfunding platforms can also contribute to closing the gap, though they may be affected by liquidity challenges. 

Several risks associated with FinTech innovations are also heightened during the crisis. Examples include risks of cyber-attacks, money laundering/ terrorist financing, and threats to data privacy and consumer protection. While statements issued by the European Data Protection Board (EDPB) clarify that the General Data Protection Regulation allows for temporary suspension of some data-protection rights in times of crisis, the EDPB admits to the difficult balancing act that is required in continuing to ensure protection of personal data while dealing with the pandemic.

The contribution of FinTech innovations will depend on countries’ level of FinTech development. The FinTech in ECA report categorizes ECA countries based on their level of FinTech development. Based on this, the potential seems highest in Central European countries along with Russia and Turkey. Challenges to FinTech development in other countries include lack of funding and investment, underdeveloped ICT infrastructure, lack of enabling regulations, small domestic markets, and scarcity of skilled workers.    

To enable FinTech development, authorities in the ECA regions will need to review their legal and regulatory frameworks to identify gaps and restrictions that may impede the use of digital channels.  This is especially necessary in the ECA region, because the region’s financial systems remain bank-centric with limited regulatory space for non-bank financial service providers. Some of the critical reforms required include: upgrading the FinTech-relevant infrastructure and encouraging interoperability; enacting enabling regulations to encourage development of seed, venture, and growth capital; strengthening the region’s cybersecurity and financial integrity frameworks; and education reforms to align skills with the digital economy. These should be underpinned by sustained structural reforms to improve the business environment and a competitive environment that enables non-banks to contribute to financial inclusion.

The region’s proximity to the EU presents it with unique opportunities for intra-regional collaboration. The rise of regional FinTech hubs throughout ECA also offers a timely opportunity for international collaboration among regulators and other FinTech players alike.  Some of the top priority areas of greater international cooperation for regulators and central banks in the ECA region include cybersecurity, AML/CFT, legal, regulatory and supervisory frameworks, and cross-border payments (IMF-World Bank Global Fintech Survey, 2019).

The World Bank stands ready to help the authorities with advice and technical assistance to address these or other emerging priorities.

Authors

Gunhild Berg

Senior Financial Sector Specialist

Harish Natarajan

Senior Financial Sector Specialist

Arpita Sarkar

Financial Sector Consultant

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