As in the rest of the world, the evolution of the FinTech market in Ukraine was partly in response to the banking crisis of 2008. In Ukraine, about 20 European banks froze their lending and limited their presence in the local market. These processes were accompanied by a sharp devaluation of the national currency and high inflation, which undermined the purchasing ability of the population, contributing to the bankruptcy of businesses. The share of distressed assets grew rapidly in banks, which led to a further reduction in consumer lending by Ukrainian banks. In addition, there was a further decline in the total number of branches provided by banks, which further restricted access to banking services, increasing the loss of confidence in the banking sector.
During the financial crisis, the first FinTech startups started to appear in Ukraine. For the most part, these early FinTech initiatives focused on the area of payments and money transfers. However, the majority of FinTechs (over 58 %) have been launched since 2015. As for challenging the banks, PrivatBank (before its nationalisation) was probably the largest FinTech in the country, offering technological services that were not only ahead of the local Ukrainian market but also the European market. After PrivatBank was transferred to the property of the state, many of its technological specialists left the company to found their own FinTech startups.
Infrastructure factors specific to Ukraine that influence FinTech development
Internet penetration continued to grow dramatically between 2008-2017 with access to the internet being affordable for most of the population. In 2008, only 24 % of the adult population accessed the internet but this increased to than 63 % by 2017. Internet penetration and speeds in Ukraine continue to grow steadily, due in part to diminishing coasts and the increasing ease of access, particularly to mobile internet.
Continued investment and support for high speed internet will help increase the development and use of FinTech products and services in the country. The planned move to support open APIs in line with the revised Payment Services Directive (‘PSD2’) will further strengthen FinTech development services in Ukraine. Accelerator and incubator co-working facilities are being developed in Ukraine in response to the demand from FinTech startups. An important infrastructure factor that impedes the development of innovative financial solutions in Ukraine is the lack of electronic identification. Electronic passports have only recently appeared in the country. In order to solve this issue, a new Mobile ID initiative is being tested and is expected to be launched in 2018.
The National Bank of Ukraine (‘NBU’) is also actively engaged in efforts to support a National Bank ID system. Any client who has undergone a Know Your Customer (‘KYC) process with one bank will be issued with a National Bank ID, which can then be used to open accounts with any other bank. While remote account opening,and the use of tiered KYC is not yet in place, discussions are underway to follow PSD2 policies that would allow this.
Regarding human resources, it should be mentioned that Ukraine maintains high standards of education, especially in mathematics and science, and many Ukrainian IT specialists support the FinTech industry globally. A lot of local specialists are ready to work with the FinTech sector.
Ukraine’s FinTech market
The FinTech industry Ukraine can be divided into the following categories:
- Payments: Most FinTech startups are engaged in payments and money transfers (according to the last survey – over 31 %). Among them : EasyPay (a widespread payment system for online and offline payments), Portmone (an online payment service used to pay for utilities, mobile, card-to-card money transfers, payments with bank details and many other services), LiqPay (the online payments system of PrivatBank), iBox (a widespread offline payment system with many payments terminals), Electrum (a state-owned operator of electronic financial and payment tools), Fondy (an international payment platform for internet acquiring), and GlobalMoney (clearing and processing services for e-money)
- Lending and bank challengers: Companies include: MoneyVeo (the famous online lending service), CreditPlus (an online lending service), MyCredit (an online lending service), and Monobank (the first online banking project, maintained by the former tech crew of PrivatBank) etc.
- Insuretech: In Ukraine this category of FinTech is represented mostly by new startups, among them are: CIVILKIN a webbased service and mobile app to choose, buy, and manage insurance policies), EWA (a SaaS insurance platform), and Alfa Protection (a service that protects e-commerce companies from payment fraud).
- Blockchain and cryptocurrencies: Due to the lack of proper regulation many Ukrainian companies that are involved in blockchain technologies work for foreign markets. However, there are a lot of FinTechs that operate in the local market, such as: KUNA (the first and the most famous cryptocurrency exchange), Distributed Lab (a center for blockchain expertise which is focused on developing innovative products and architectures), and BitFury (an international company, famous for the implementation of blockchain technologies in the Ukraine state sector of the economy), etc.
Other categories of FinTech players are not represented by so many companies, but Ukraine has almost the full scope of popular FinTech directions.
The regulatory landscape
The main regulatory acts that fall within the sphere of regulation for FinTechs are the Laws of Ukraine ‘On the National Bank of Ukraine’ and ‘On Payment Systems and Money Transfer’. Electronic money in Ukraine is regulated by Resolution No.481 of 4 November 2010 adopted be the National Bank of Ukraine (‘NBU’), as well as by the Regulation on the procedure for registering payment system (Resolution No.43 of the NBU of 4 February 2014).
A FinTech that performs payment services is considered as a ‘financial institution’ and must have statutory capital of at least UAH 3 million. Such company must be registered in the state register of financial institutions, which is maintained by the National Commission, which implements state regulation in the sphere of financial services markets. To conduct activity in the sphere of payments, the company needs to obtain a license to transfer money to the NBU without opening an account, and, if necessary, also a general license for currency transactions. Unfortunately, as of today non-banks are not allowed to open accounts for consumers. Electronic money can only be issued by banks.
However, due to the recent initiatives of the National Bank of Ukraine, envisaged by the ‘Comprehensive Program for the Development of the Financial Sector 2020’, the most necessary steps for FinTech development are already being implemented. Among them: the transition to the latest standard for SWIFT payments ISO 20022, electronic digital signatures, cancellation of seals and stamps, and remote identification of Bank and Mobile ID.
The Parliament of Ukraine is currently considering draft Law No. 7270 on payment systems, the provisions of which are designed to simplify FinTech regulation and unify the legislation of Ukraine with the European Union Directive on Payment Services No. 2015/2366 (‘PSD2’).
The draft Law provides the norms that simplify payments regulation in Ukraine. In particular, the document contains the following innovations:
- Unification of the concepts of payment institution with PSD2;
- The ability for payment institutions to open accounts, e-wallets, issue payment cards and electronic money, and also have a network of agents;
- The possibility for residents of Ukraine to pay utility bills, taxes and charges with electronic money;
- The settlement of contractual write-offs by technical means; and
- The opportunity for banks to open accounts for non-resident legal entities.
Most of the provisions within the draft Law are supported by the NBU, and, therebefore, adoption by the Parliament is likely in the near future.
The regulation of cryptocurrencies is highly supported by the community and reflected in several draft laws, but these are still under consideration by the Government. According to the Mutual Letter issued on 30 November 2017 by the NBU and National Securities and Stock Market Commission, a cryptocurrency cannot be considered as money, currency or any other means of payment, electronic money, or a security. Although this letter does not answer questions relating to the regulation of cryptocurrency, it breaks the previous NBU practice of recognizing cryptocurrency as illegal.
As a conclusion of the Ukrainian FinTech market overview, it should be noted, that while the FinTech industry in Ukraine is at an early stage of development, 2017 saw a rapid growth rate that is expected to continue in 2018. Strong infrastructure with excellent mobile penetration and significant uptake of smartphones combined with a well educated and tech savvy, connected society should help to boost FinTech.
In addition, given the demand in the market, FinTech solutions that focus on inclusive outreach to the mass market have the greatest potential for growth in 2018. Moreover, the expected legal and regulatory support to align Ukraine with EU directives on e-money, remote account opening, tiered KYC, PSD2, open APIs and the use of third party agents are likely to promote FinTech development in Ukraine.
Sergii Papernyk, Partner, Head of Banking & Finance and FinTech