CEE fintechs step up as consumers dump cash

News and opinion on finance

Fintechs in emerging Europe have seen a surge in demand for their services since the start of the Covid-19 crisis as consumers move away from cash and businesses look for new sources of credit.

Three leading firms in the region tell Euromoney they have seen a sharp rise in both transaction volumes and new clients since March.

Ivo Gueorguiev, co-founder of Bulgarian fintech Paynetics, says interest in the group’s e-commerce products has soared as smaller businesses across Europe have rushed to go digital.

“Many traders didn’t have an online presence before the crisis, but with shops closed it’s the only way for them to survive,” he says. “We’ve seen increasing demand for virtual PoS [point-of-sale] terminals and other payment solutions.”

In April, Paynetics’ e-commerce processing volume increased by 20%, while average transaction value was up by more than 50%

A new software PoS terminal for Android phones, Phos, is also proving popular with the owners of shuttered restaurants and shops.

“They are trying to find ways to stay in business, and one is to deliver food or drink to people’s homes, but no one wants to use cash anymore and they weren’t set up to take card payments,” says Gueorguiev. “Suddenly being able to turn your phone into a PoS terminal is an attractive proposition.”

In Bulgaria, Paynetics has also seen increased demand for an e-wallet product launched in December in conjunction with Bulgarian telecoms firm A1. 

“Some people don’t even want to touch PoS terminals or cards these days,” says Gueorguiev. “For them, paying by phone is the safest way to shop.”

Lithuanian international payments firm TransferGo has also seen a big increase in transaction volumes and client numbers since the start of the Covid-19 crisis.

Given that its clients are mostly blue-collar workers from central and eastern Europe (CEE) sending money home, this might seem surprising at a time when jobs are being slashed across the continent. So far, however, any overall decline in remittances has been more than offset by a massive shift from cash transfers to digital payments.

“People still need to send money home but don’t want to touch cash, so they have to go digital,” says TransferGo’s head of branding, Marius Nedelcu. “Many are very uncomfortable at first because they’re not digitally savvy, so it has been crucial for us to keep our customer support available.”

Once people embrace digitalization, I think even after this is over it will definitely stick 

 – Ivo Gueorguiev, Paynetics 

With cash still accounting for around two thirds of remittances, Nedelcu sees huge potential for growth in digital transfers, even during a global downturn. He also believes digital remittance firms will be able to hold onto their new clients after the coronavirus crisis.

“I don’t see people going back to cash,” he says. “Of course, some will always prefer it, but for most people it doesn’t make sense to carry cash around and pay crazy fees for transfers. I don’t see them going back to that once they learn there’s a digital option.”

Gueorguiev agrees that digital behaviour patterns learned during the Covid-19 era will likely survive the crisis. 

“It’s really just the acceleration of a trend,” he says. “Once people embrace digitalization, I think even after this is over it will definitely stick.”

Demand for credit

Meanwhile, digital lender Lidya is hoping to capitalize on a surge in demand for working capital by small and medium-sized enterprises in central Europe. 

The firm, which began life in Nigeria in 2016, provides credit to smaller firms on a monthly basis. 

“It’s like a credit card for businesses,” says co-founder Ercin Eksin.

Lidya started operations in the Czech Republic in mid February, a few weeks before the start of the Covid-19 crisis. Despite the imposition of a national lockdown on March 12, the firm has so far seen no defaults on its initial loans.

“We have become a really important credit line for these companies,” says Eksin. “If they pay back, they can take out further facilities, so they want to focus on having a good credit score with us so they can unlock more capital.”

He expects to see a further increase in demand for credit over the coming months in both the Czech Republic and Poland, where Lidya began lending in early April. 

Even before the Covid-19 crisis, the World Bank estimated the SME funding gap for the two countries at $200 billion.

“The situation has only got worse since the start of the crisis,” adds Eksin. “At times like this, SMEs need more access to finance but traditional financial institutions tend to focus only on customers that already have a facility with them.”

While no one is really set up to cope with a crisis of this magnitude, our basic model is designed to be able to support businesses in markets that are significantly underbanked in terms of access to finance. That’s why it fits the current conditions 

 – Ercin Eksin, Lidya

He also notes that Lidya’s lending model, which is based on data and transactional history rather than collateral, is well suited to the crisis environment, as is its ability to issue credit remotely.

“While no one is really set up to cope with a crisis of this magnitude, our basic model is designed to be able to support businesses in markets that are significantly underbanked in terms of access to finance,” he says. “That’s why it fits the current conditions.”

Lidya is looking to lend $15 million in the Czech Republic this year and $20 million in Poland. The firm’s founders are also eyeing expansion into western Europe.

“We are looking into markets like Spain and Italy,” says Eksin. “They have been the worst hit by Covid-19, and they will have a lot of work to do to rebuild their economies once this is over. We would be interested in supporting that.”

He notes, however, that expanding into new markets will prove challenging while travel restrictions remain in place.

Nedelcu says TransferGo faces similar constraints. “We want to expand as fast as possible; but when we do, we want to make sure we understand the local market and have people on the ground,” he says. “That will be very tricky in the current situation.”

Availability of funding

The other big question raised by Covid-19 for fintechs in CEE, as elsewhere, concerns the future availability of funding.

Gueorguiev says financing for the sector “will dry up big time”. 

“It will be extremely difficult to raise any funding in the next year or so,” he says. “Even if investors have funds, they will be extremely cautious about signing up new investments when they can’t meet face-to-face.”

He also fears that fintech will fall out of favour with venture capital investors. 

“Specific areas of fintech which are well suited for the new normal will continue to attract attention,” he says. “But funds with a wide investment policy and strategy might move away from the funky fintech stuff to sectors like delivery, food production or pharmaceuticals.”