Wearing a hat but to pants: Why should Ukraine develop fintech?

Author : Nina Hlushchenko

Source : 112 Ukraine

In Ukraine, 52% of the population is out of the banking system
14:00, 13 March 2018

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Judging by the situation in the financial sector, Ukraine’s place is somewhere between the laggards and the developing countries. On the one hand, the number of non-cash transactions is growing rapidly in the country. Banks and ATMs cover all major cities, small towns, and even small settlements. In some places, there is a shortage of payment terminals, but this is an instrument for fighting for the cashless economy.

Related: Ukraine's economic vicious circle

On the other hand, although Ukrainian banks, in contrast to European banks, are more friendly to the customers in terms of services, the cost of services, and sometimes the product portfolio, they do not cover a number of critical needs and are accessible not for everyone. Moreover, these needs are not met by the other companies that have access to the end users. I mean, telecom, logistics, retail, technology companies. They just have a good chance to occupy this niche. Apart from them, fintech companies are also possible to make it.

Ukraine is certainly not the only country in the world where more than half of the population is outside the banking system. To change the situation, it is worth paying attention to other countries where this problem is successfully coped. The most successful examples are China and India, where in just a few years, thanks to the development of technology, a billion people have obtained access to the financial services.

In Ukraine, there are about 80-100 fintech companies. Not all of them are public, some are engaged in projects in the field of brokers and crypto-currencies, and this direction does not yet have state regulation. The main part is payments (31.6%), the credit sector is also developed (14%), but also a large percentage of companies invest in technology and infrastructure (19.3%).

Related: What should medium-term strategy of Ukraine's economic development look like?

60% of the fintech startups appeared in the country after 2015. According to Rostyslav Duke, the head of the direction of electronic financial services (USAID project "Transformation of the financial sector"), four factors contributed to this. First, it is human capital. In Ukraine, the financial sector is, in fact, a bank one, and during the crisis, the banking sector in the country has greatly shrunk, there was a reduction in specialists who subsequently created their own business. 70% of the founders of fintech startups are from the banking sector, 23% from business and 7% from IT (as the world practice shows, the latter often create fintech startups).

The second factor is the development of small and medium-sized businesses in the country. It has its own needs, which banks just do not solve. The third is the globalization and digitalization of the financial sphere. This is a global trend, from which Ukraine cannot stand aside. And, finally, the fourth factor is the liberalization of the legislation, which is happening recently. The National Bank removes unnecessary restrictions. In the near future, the service MobileID should be launched in the country; it will allow for the identification of users remotely.

The specificity and advantage of the Ukrainian fintech industry are that, due to difficulties with attracting investments, almost half of the projects (45%) live on their own money.

Related: Economy ministry seeking ways to attract $35 billion on infrastructure modernization

Experts estimate the capitalization of the industry at $ 100 million. The growth potential for the next year is four times if the situation develops in the same way, and even if Ukrainian fiintech startups oriented to the local market can scale and enter the markets of other countries. "This is a half-billion business, and there is a lot of opportunities for growth. But there is no linearity in the economies of tomorrow. Now Uber capitalization is $ 40 billion, and this is a company that has no profit. Ukrainian start-ups are profitable, they need to learn how to scale. Our domestic market includes 40 million users," says Rostyslav Duke.

Now the financial sector in Ukraine has a number of problems. World experience shows that the people from the remote places face the problems with access to the Internet, so agency banking can become a solution. "Brazil was the first country to use the services of agents, third parties, which made financial services available to people, another example is India, where the population can also access financial services through the agents. In Ukraine, in my opinion, this function could take over the mail," John Owens explains.

As for the infrastructure for accepting payments, instead of using such an expensive solution as payment terminals, Ukraine should use QR codes for small and medium-sized businesses to accept the payments.

Related: Ukraine in Top 10 of world's 'unhappiest economies', - Bloomberg

In addition to simplicity and convenience, the start-ups have one more advantage: they have a different order of expenses. Accordingly, the cost of their services can be significantly lower, which is important for a price-sensitive audience. "Look at PayPal, it allows people to transfer money with a small commission, instead of using old and expensive WesternUnion," said John Owens, Senior Advisor on Electronic Financial Services, "Transformation of the Financial Sector," USAID project.

The price factor plays an important role for small and medium-sized businesses. Often, if it wants to stay in the legal field, it still cannot afford to keep a lawyer, an accountant, a back office. Rostyslav Duke gives an example of the American service Square. It provides its customers with a device for accepting card payments that connect to the smartphone, as well as an application that deals with accounting, tax accounting and so on. In fact, this service is enough for the work of a small store. The store needs to pay a small commission, but there is no need to spend money on an accountant. Seeing the business's progress, such a service can provide loans, which would be cheaper than taking a loan from a bank.

Related: Not that free: in world rating of economic freedom, Ukraine is 150th out of 180

Another example is chat rooms that can help pay for services or money transfers. In Ukraine, instant messengers are popular; those used in our country have the support of the chatbots. As John Owens said, although Ukraine is not a consumer of this service, many developers of chatbots are from our country.

The developing countries of Africa and Asia, which do not have developed banking infrastructure, often face a problem with the security of cash storage, mobile purses have been gaining popularity for several years now. In these places, there are not so many smartphones users, but mobile wallets work on simpler devices too. They can be replenished at special points of sale, through agents, or through operators. With their help, you can transfer funds, pay for purchases and services. The most popular mobile wallet in these regions at the moment - M-Pesa - belongs to Vodafone.

At the end of January 2018, the Ukrainian government adopted Digital Digest 2020, a document that describes many vectors of the country's technological development. The digital economy is at the head of all the future transformations. Despite the fact that there are less than two years left until 2020, the interlocutors of the editorial office positively assess our prospects for digital transformation, since Ukraine already sees someone else's experience and can make a big step forward.

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