In Poland, it is banks, not just start-ups that spearhead the FinTech revolution. They have strived to remain at the cutting edge for two decades now. With the introduction of the PSD2 directive, they may face some competition from start-ups, but some are already prepared for the changes and others may be looking to buy tech firms that will put them ahead of the curve
By Beata Socha
Warsaw is the 45th most competitive financial center in the world and 12th in Europe, according to the Global Financial Center Index (GFCI). Not that impressive in itself, but Poland’s capital is an undisputed leader in CEE as a financial center. The country as a whole was placed 24th in the Doing Business 2017 ranking, which is a relatively high score, particularly compared to the Global Innovation Index, where Poland ranked 39th and continues to trail other European economies. “Poland is not particularly innovative when compared to other European economies. The financial sector is an exception here. It is highly innovative compared to other industries,” said Artur Martyniuk, director, Financial Advisory at Deloitte.
The FinTech market is worth some €2.2 billion in Central and Eastern Europe, with Poland accounting for €860 million (PLN 3.6 billion) of that sum, according to a report prepared by Deloitte. However, unlike in other countries, start-ups are not the chief disruptive force of the FinTech market. In fact, Polish banks are considered some of the most innovative in Europe and their technological solutions are already licensed by other countries, according to Martyniuk.
One of Poland’s highly popular mobile payment services was in fact created by the country’s six biggest banks, which banded together to improve customer experience. In 2015 they introduced BLIK, which currently has over 4 million users. It allows them to pay in stores, make banking transfers and even withdraw money from ATMs using nothing but their mobile phones. No credit card is required. “In Poland, banks, not start-ups, do FinTech,” as Aleksandra Sroka, principal in consultancy BCG Poland, told the Financial Times.
From the get-go
In the early 2000s, Polish banks were among the first worldwide to offer internet banking, led by the creation of mBank, then an entirely internet-based bank (only later did it open regular bricks-and-mortar offices). In order to remain competitive, others followed suit, including Alior bank, and even the biggest of the country’s lenders, like PKO with its Intelligo online service. By the mid-2000s Poland’s banking services, including money transfers were among the fastest in Europe. A regular money transfer between banks was completed within one working day. Seeing how impatient Polish bank clients can be, a number of websites were created showing exactly at what time money would appear in the recipient’s account, for example kiedy-przelew.pl (English meaning: when’s the transfer) or kasanakonto.pl (English meaning: money in the account). But even that proved too slow for the demanding Polish shopper. The surge in e-commerce has led to the development of online payment systems, such as przelewy24.pl (English: transfers24), which effected payments 24/7 eliminating any delays arising from bank transfer sessions. These days, it is not uncommon to purchase an item online from one of the thousands of online stores and have it delivered the very next day. “Most internet retailers have integrated their electronic stores with banks, which allows clients to pay for their online purchases in just a few clicks. You can pay for shoes purchased in an online store directly from your account,” explained Grzegorz Pawlicki, director of Innovation and Customer Experience Office at PKO Bank Polski. It doesn’t take Amazon’s drones to achieve expediency if all the pieces of the puzzle fit so well.
Don’t touch my card
A similar revolution came with payment cards. In the mid-2000s chip cards were introduced, replacing the less secure magnetic striped ones and also increasing customer convenience. The proliferation of contactless payments, where you put your card near a terminal to effect a transaction (in transactions of less than PLN 50 you don’t even need to enter your PIN number), is the standard today. So much so, that many customers feel uneasy these days when the shop assistant reaches for their card. Gone are the days when a dishonest clerk could swipe your card through a skimmer to capture its details and then sell the data that would later be used in fraudulent charges online or with a counterfeit credit card.
Perhaps another payment card revolution is just around the corner. In early 2017, Poland’s biggest bank PKO BP acquired ZenCard, a tech start-up founded in 2013, which has developed technology allowing for a full virtualization of loyalty cards. One can’t help but wonder what Poland’s biggest lender could do with this technology.
But financial institutions are not stopping there. “Banks are investing in artificial intelligence, e.g. chatbots and intelligent OCR systems that reduce operational costs and make business processes faster,” explained Michał Grams, CEO of TogetherData, a Data Science House with a strong focus on FinTech and banking.
He believes that the biggest changes in the finance market have yet to come, with the implementation of the PSD2 (Payment System Directive 2). “PSD2 will revolutionize the FinTech market. It will force banks to open their system to third-party service providers, such as SMEs and start-ups,” Grams explained. It will not only increase convenience for bank clients, who will be able to use a single app to access their different accounts, and offer them access to more information about different financial services available, but also increase security by lowering the number of unauthorized transactions. “The costs of financial operations and card payments will also decrease,” he added.
PKO’s Pawlicki agrees. “This will create a new area for services at the intersection of banking and technology. It will no longer be only in the domain of banks to provide a mobile payment application, open a current account or offer a loan. A third party, like a travel agency or a store will be able to do that by accessing the bank, of course upon the client’s consent.”
In fact, Polish FinTech firms are ready to take full advantage of the new regulation. Some of them have already been snatched up by financial moguls. Such was the case with Kontomatic (previously known as Kontomierz), established in 2009, which developed an API system that verifies client identity and allows read-only access to bank accounts, thus facilitating cooperation with any bank worldwide. The company was acquired by German Kreditech for a seven digit figure.
Consolidation is coming
More M&As are probably underway, though the list of acquirers may not be limited to banks. Investment funds are also looking eagerly at the FinTech world. “Banks are the natural acquirers of some of these businesses globally but their balance sheets aren’t always in the best of shape. Also they may not be the best cultural fit and most natural home for the type of innovative executives who work within FinTech start-ups. There has been very significant consolidation globally in areas such as payments (Vantiv/ WorldPay) and this is likely to continue in sectors where scale and global reach matter,” said Andrew Young, principal and head of FinTech at Permira, a private equity firm which recently invested in Swedish FinTech start-up Klarna. According to TechCrunch, the investor paid some $225 million for a 10 percent stake in the FinTech business, which focuses on payment services for e-commerce companies.
However, while Poland is the leader of the FinTech business in CEE, Polish venture capital investments constitute a mere 0.005 percent of the country’s GDP. Deloitte analysts stated that the private sector should increase its involvement in financing investments in the sector. As much as 72 percent of start-ups are predominantly financed by the founders themselves. A necessary prerequisite for Polish FinTech firms to achieve success is expanding beyond Poland, the report said. So even if Polish venture capital firms and private equity investors are still cautious with getting into the FinTech game, money is clearly out there waiting for firms with innovative ideas and a proven concept. All they have to do is grab it.
What about Brexit?
Poland is already called the “back office” of London’s City, with support and outsourcing centers of Credit Suisse, UBS, Citi and BNY Mellon all located in Poland. Whether the upcoming Brexit hinders or accelerates the development of Polish FinTech firms remains to be seen. There are concerns as for many Polish FinTech start-ups London is a very important piece of the puzzle. If UK-based financial institutions lose the financial passporting rights, the cooperation could become problematic. Several Polish FinTech firms have even moved their headquarters to London, like Billon, a distributed ledger instant payment system, or even started out there, like Azimo, a digital international money transfer service. The founder of the latter, Marta Krupińska decided to launch her firm in London to utilize the regulatory environment, which is far less restrictive than Polish banking regulations, as well as access to capital. “Of course Brexit has an impact on the functioning of my company but it is not going to break it,” she told the Financial Times. However, others see Brexit as an opportunity, the least of which could be more financial outsourcing finding its way to Warsaw and other Polish tech hubs.
What is blockchain?
Blockchain was created in 2008. It is a distributed internet ledger which is revolutionizing the way transaction between regular users are closed, settled and registered, as it circumvents a central institution such as a bank. It is most commonly used for transactions (the most popular use of blockchain is cryptocurrency bitcoin). It can be also used in any transaction between users that requires high security level, such as document authentication, digital signature in state administration and notary services.
Michał Grams, CEO of TogetherData
Who will come out on top?
FinTech companies are increasingly competing head on with banks. Some have complementary business models but many are attacking attractive margins on products that have historically been poorly served by banks. This is true in areas where banks have failed to invest in technology and failed to put the customer first, effectively giving FinTech companies a blank sheet of paper to rethink a product or service. One only needs to look at what start-up companies (such as TranferWise) are doing in the FX transfer market as an example. In the UK, you also find digital-only banks that offer current accounts, well-priced travel FX or P2P payments all through an app and they can also issue debit cards. We believe it is only a matter of time before they get into lending.
Andrew Young, Principal and Head of FinTech at Permira