Guest post by Miroslav Kravchenko at Vebtech
The term digital economy was originally coined in the 1990s when the influence of new technologies such as the internet emerged. It refers to economic activities that depend on or are enhanced by information and computer technology.
In other words, the economy is based on digital technology.
The banking sector has been transformed by the digital economy, and due to the new situation, digitization has accelerated. COVID-19 has forced banks to adopt new innovative technologies.
Before the pandemic, there was a high degree of reliance on face-to-face interactions by financial institutions, and that is changing now.
Around the world, padlocks make it harder to access physical locations. This has led many bank clients to switch to digital banking. The use of fintech applications has increased by 72% since the start of the pandemic in Europe.
The increase is supported by initiatives such as open banking, which allows financial institutions to securely share data with third parties. Open banking allows for more competition by making new services possible.
This trend will not reverse as current digital banking users indicate that they will continue to use online services after the pandemic is over.
Eastern Europe is in a special position when it comes to the adoption of digital banking.
A study by MasterCard called banking evolution 2020 found that Eastern European users are more likely to use apps to carry out financial transactions online or through apps compared to Western Europeans. In percentage terms, 50% of eastern Europeans vs 39% of western Europeans.
Regulators have created a favorable environment for IT companies in eastern Europe.
According to the CEE Fintech Atlas 2019 study:
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Fintech associations have been established and fintech incubation and mentoring programs have been introduced by several banking institutions in Central and Eastern Europe.
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Central and Eastern European countries, where local markets are changing and developing, have become hotspots for financial technology and the fintech community.
Furthermore, the study shows that investment in fintech in central and eastern European countries has reached its peak during the study.
Russia
The Russian government had an interest in digitization even before the pandemic. In 2018, the government implemented a national project called “Digital economy of the Russian Federation”.
The 3 objectives of the project are:
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A three-fold increase in domestic spending for the development of the digital economy from all sources (by share of GDP) compared to 2017.
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Create a sustainable and secure information and telecommunications infrastructure for the transmission, processing and storage of fast and large amounts of data accessible to all organizations and households.
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The use of software is mainly domestic by government agencies, local governments, and organizations.
Based on research from McKinsey digital from 2017, Between 2011 and 2015, Russia’s digital economy grew by 59%. In other words, the digital economy is growing 9 times faster than the country’s GDP. According to the study, Russia’s digital economy has the potential to triple by 2025 from 3.2 to 9.6 trillion rubles today. As for the bank’s profits, it has grown 4.5 times in the past 10 years, despite relatively slow economic growth.
As you can see, banks have not been left out of this trend. Based on data from Kommersant, in the fourth quarter of 2019, there were 30.4 thousand structural divisions, compared to 31.2 thousand before the year. On March 1, 2020, the number of branches was reduced to 30.3 thousand.
According to the results of a study provided by the NAFI Analytical Center in July 2020, more than half of Russians (56%) use digital channels for personal financial management, such as mobile banking or Internet banking.
People prefer to use services over the Internet rather than going to a local branch. As a result of the reduced demand for the physical presence of banks close to customers, the number of branches decreased by 26% in less than 4 years.
Banks have been able to save money by digitizing certain processes. VTB24, Russia’s main bank, has introduced a remote electronic registration system for queues in July 2017, expecting a cost reduction of 450 million rubles per year.
Sberbank, the largest retail bank in Russia, was able to reduce the loss of working hours of customers in queues from 440 million in 2006 to less than 100 million in 2015.
According to the financial services company BCG, in 2019 Russia ranked first in the world in terms of penetration of contactless payments using Apple Pay, Samsung Pay, etc., and also ranked third in terms of penetration of fintech services.
Going forward, Russia’s established banks may benefit from a first-mover advantage by investing heavily in innovation and digital transformation over the past few years.
Belarus
The digital economy has become part of the national strategy of Belarus.
According to the Global Services 100 rating, the Republic of Belarus is ranked 13th out of 20 leading countries in the field of IT outsourcing and high-tech services.
Some of the top 100 IT companies have Belarusian roots: EPAM Systems, IBA Group and Intetics Co.
In 2005, Belarus introduced the Hi-Tech Park, a tax and legal regime in Belarus, created with the aim of developing IT business. It is the Belarusian analogue of Silicon Valley in the USA. Companies registered in the HTP can enjoy all the advantages provided, regardless of the location of the Belarusian office.
On December 21, 2017, the president signed the Digital Economy Development Decree that aims to improve conditions for residents of the High Technology Park and make the country more competitive in digitalization.
The document specifies that legal entities in Belarus have the right to own tokens (including cryptocurrencies), store tokens in virtual wallets, exchange tokens for each other or for fiat money. Belarusian legal entities registered in the Hi-Tech Park now have a unique opportunity to create and place their own tokens in the Republic of Belarus and abroad through crypto platform operators and cryptocurrency exchange operators.
One example of such a platform is the so-called crypto platform Good size. The platform allows companies to issue interest-paying digital tokens. Investing is possible 24/7 from any point in the world.
In 2018, Priorbank became one of the first banks to offer access to the API to its clients. This happened in collaboration with the Swedish fintech company Asteria. Banks and startups work together to implement customer solutions where Asteria products are connected to banks via APIs. It offers predictive cash flow analytics based on banking data.
Most of the difficulties are related to user authentication and authentication protocols – OAuth2 and OpenID Connect. Due to the complexity of the protocol, the bank continues to receive questions about it today.
Many banks in Belarus are skeptical about using open APIs. However, Priorbank believes that APIs offer banks an easy, fast and seamless way to integrate into the dynamic digital ecosystem and grow their business. “The situation with APIs in Belarus has not been fully determined, but the digital transformation is taking place in all regions. We need to change if we want to be ready for the new reality and stay in the game,” said the Priorbank expert.
Another example of successful digitization in banking is the so-called BelVEB bank application UP. After its launch, daily transactions increased from 6 thousand to 20.8 thousand and the number of users compared to the old application increased by 3 times. This shows the growing interest among Belarusians in digitalization.
Ukraine
Ukraine has identified digital transformation as a policy priority. Digitization of Ukraine is led by the joint efforts of experts and the business community, and in 2018, the government adopted the Concept and Action Plan for the Development of the Digital Economy and Society of Ukraine for 2018-2020.
Priorities in Ukraine’s digital agenda include laws on digital economy and telecommunications, digital infrastructure, including broadband strategy, Cashless Economy Program in the field of e-commerce, e-trust and cybersecurity, as well as Smart Cities – Smart Regions. initiative aimed at decentralization and implementation of e-skills, e-health and e-commerce in the territory of Ukraine.
In 2017, Digital Bank entered Ukraine. Known as neobanks, these online banks are fast, easy to use, charge low fees, and serve customers through mobile apps, bypassing the slowness and bureaucracy of traditional banks.
As Ukraine strives to become a cashless society, competition between banks is increasing. However, experts say there is still room for growth.
Probably the leader in this market is Monobank. The company is worth more than $1 billion. The bank was established in 2017 and has acquired more than 4.4 million clients since then.
Monobank offers many services that traditional banks do. It allows users to save and withdraw money or keep savings in a deposit account at up to 10% per year. But Monobank also stands out from the competition. For example, it allows clients to split restaurant bills, transfer money in one click, pay salaries, cover utilities at no cost and return up to 20% of monthly expenses in the form of cashback. Monobank also plans to issue a card that allows trading in Bitcoin and investing in shares of foreign companies.
Very similar to Monobank is Izibank. It entered the market in February 2020 and reached almost 100,000 active users in July 2021.
Izibank also provides 1% cashback on all purchases and 2% cashback every Friday at cafes, clubs, and restaurants. Users are not charged for money transfers, cash withdrawals and deposits at City24 ATMs, as well as utility bills. With Izibank, users can plan their budgets and set financial goals.
Other notable examples include Sportbank, Todobank, Neobank and O.bank.
Conclusion
Governments in eastern Europe are eager to speed up the process of digitizing banking and the economy as a whole. Policies have been implemented to promote growth and active cooperation between the state and private companies.
The pandemic created a situation that led to the demand for digitization of banking. However, even before this event, interest was high.
The market has become attractive for fintechs as well as for partnerships between fintechs and established banks in the region.
Due to these factors, we can expect strong digital banking growth in the future.
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