by Eva Rez
As a City of London Programme Fellow, I have the opportunity to participate in the Annual Alumni Event, where we discuss the latest in the financial sector. Being a principal in a venture capital company dealing with startups and interested in fintech I was asked to write about the Hungarian fintech landscape in comparison with the UK which is hopefully useful to identify directions of travel for the Hungarian fintech industry.
I start this brief comparison with some of the main factors influencing the emergent – disruptive, innovative – fintech in general because this will give the framework of what comes next: market readiness, the startup ecosystem, regulation and public support.
One of the key drivers of the spread of fintech and other disruptive technologies is internet and mobile penetration. It is hard to compete with the UK, with an internet penetration of 93% (2016) and mobile penetration (2014) of 124%. Yet even though the figures are not that advanced in Hungary – 80%; 118% respectively – I would not say that the outlook is bleak. On the contrary, there is hope for the future of fintech in Hungary!
E-commerce is also a generator of more fine-tuned financial solutions. In the UK 64% of the population purchases online, spending EUR 3,073 per annum on average. In Hungary less than 30% of the population buy online, and of those 30% the average amount spent per annum is EUR 346. (Source: Ecommerce Europe, 2014) It is also interesting to note the difference in the access to bank accounts: almost everyone (96%) in the UK has a debit card and they actually use it. Only 60% of the Hungarian population hold debit cards and are much less likely to actually use them to make payments. This is a huge gap between the two markets. It is not only about the standard of living, but probably also about the openness to new solutions.
But before getting tied up with these facts and figures, here are two charts about the Mobile Payments Readiness Index (MPRI) of the two countries from an international financial service provider. Not only do these snapshots speak for themselves, but they tell us how hot these markets are. While it is not surprising that the UK is more attractive than Hungary, it is worth highlighting the reasons why: environment, consumer readiness and regulation.
Mobile Payments Readiness Index (Source: Mobile Payments Readiness Index)
“The United Kingdom, with a sizable economy, large household spend, and a developed infrastructure, presents a very attractive picture for mobile payments readiness, as shown in its total score of 37.5 on the MasterCard Mobile Payments Readiness Index. Among its most attractive features is the intuitive distribution of familiarity, willingness, and usage of mobile payments by type across demographic segments…”
“Hungary combines a vibrant partnership scene—reflected in a very high Mobile Commerce Cluster score—a still-developing legal and regulatory system and Financial Services sector. These factors, coupled with Consumer Readiness scores that consistently trail the Index average, give Hungary a final score of 27.0, which ranks the country at number 31 on the overall MPRI.”
Market & Infrastructure
It is not really fair to compare the market size of the two countries as the UK is the financial centre of Europe, with a mature credit market. In Hungary, insurance and financial services give less than 4% of the country’s GDP and this proportion has shown a decreasing trend over the last couple of years. While every financial institution which would like to get on the map makes sure to be present in London, in Hungary around 50% of the banks are state-owned. Taxes imposed on this sector frightened away many global players from the relatively small market. However, this rather old-fashioned structure does not mean that local players are not open to innovation at all but it indicates that there is still a lot to be done. Here is an example of the approach of the biggest bank in Hungary:
“Hungarian OTP Bank could acquire startups or IT companies to expand its own digital services platform. OTP is introducing mobile applications and digital services to its retail customers, developed by OTP Mobil, the bank's own mobile application developing subsidiary. It would consider acquisitions in this space as well. The bank is not looking for payment systems or other fintech solutions, but could consider targets that can provide a large number of retail users or valuable products for OTP's digital services.” (Source: Mergermarket)
Regarding the capital market there are still many issues to be solved: education of debtors and investors, financing of SMEs, lack of liquidity, etc. However, the basic infrastructure is in place and it is in good shape. It is more about breathing life into the system: providing financing alternatives for companies at different stages; creating a firm investor base which remains active on the market; reducing uncertainty; and enhancing credibility and trust.
The Fintech Startup Scene
The UK fintech market generates GBP 20 billion (EUR 26 billion) revenue annually. This figure is hard to digest. Because the UK is the heart and soul of the emergent fintech industry in Europe, many different innovations have been developed, particularly in recent years following the financial crisis. Emergent fintech is about working around incumbent financial service providers and disrupting business models. This is why peer-to-peer networks and crypto currencies are already very popular. There is a huge database available in the UK on financial transactions, which can be worth a fortune, but it also reveals security and privacy issues.
In Hungary, the starting line is far behind the UK. The whole startup ecosystem is just evolving and all market players have a lot to learn. But it is looking increasingly promising and the fintech space is emerging. In 2015 there were 50 startups and SMEs working on some kind of fintech innovation. Out of these, 35 early-stage companies have appeared on the scene over the past three years focusing on various micro-sectors including payment solutions, personal finance management systems, roboadvisor solutions for wealth management, crowdfunding, bitcoin and insuretech. There is one area which has not been covered yet by any local fintech startup: lending. It is both surprising and understandable in the aftermath of the last couple of years’ drama - high level of indebtedness due to FX based loans. There are also SMEs trying to gain a foothold in this space. Thanks to mainly public money via the Joint European Resources for Micro to Medium Enterprises (Jeremie Funds) companies raised EUR 13mil to develop mobile payment solutions, credit scoring and risk assessment systems. (Source: Portfolio)
There has already been a notable transaction between the UK and the Hungarian fintech sector when Misys, the UK based financial services vendor, acquired the Budapest-based digital channel solutions vendor IND Group in 2014. The value of the deal was not disclosed but based on rumours it could have been as high as EUR 30 million. A partnership had existed prior to the takeover, from 2013. The IND Group provided online and mobile banking services, personal finance management and payment solutions to its 30 clients around the globe, while Misys wanted to add these retail banking solutions to its portfolio. The transaction had some positive outcomes for the Hungarian fintech scene:
- the founders of IND left Misys and became business angels, not only funding fintech startups but also helping teams improve their industry knowledge and make valuable contacts. They have joined startup events and accelerator programmes in order to share their experience and shepherd young talent;
- former IND employees would like to make their own ‘disruptive baby’ - the boost in the number of fintech startups is partly due to their efforts.
It is also worth mentioning that there are young enthusiasts with a good understanding of the space, IT developer skills and innovative ideas, who are building their profile in Hungary’s fintech scene. They are also keen on building a fintech community by organising various events and meetups (e.g. Fintech Meetup; Bitcoin Budapest). From a venture capital point of view it is always exciting to meet people who know their target market and potential customers.
In my opinion, supporting innovation requires education, a friendly regulatory environment and public acceptance. Let’s look at the fintech comparison from this angle. While not being an expert of the UK education system, it is clear that for finance, London is the place to be. Yet financial literacy must be improved in all countries. People need to be informed about financial innovations. In this regard, Hungary has a long to-do list and our universities have a crucial role in this (I’ve written about this previously on my own blog site). But as I mentioned above, successful ex-fintech company builders can also have important added value here.
Regulation is always a tricky point. In my view, UK regulators are very open minded and supportive with innovation. At the last City of London Alumni event we heard that there are regular discussions between the fintech industry and the regulator. Not only did the Financial Conduct Authority recognise the benefits of these new solutions, but the term ‘regtech’ was also born referring to “nimble, configurable, easy to integrate, reliable, secure and cost-effective” regulatory systems that helps innovators better understand and manage their risks.
Recent events, even if in a different market segment, showed that Hungarian society is not that ready for new ideas. Or at least a big part of it, including the regulators, is not. I am referring to the UBER case here in Hungary, which after several taxi demonstrations resulted in a law making it possible to ban the platform for a year. We all recognise that startups will not become the next big success story if they focus on the tiny Hungarian market alone. They have to prepare for the conquest of international markets, and this definitely brightens the picture.
Change will happen regardless of current Hungarian regulation. The PSD2 (Payment Services Directive 2 - EU Directive) will enable third parties – thus startups as well – to get access to clients’ bank account data with their consent. The directive will be implemented in Hungary as of 2018. If people start to discover that many of these fintech solutions help them manage their finances, provide them with cost-effective, tailored financial services and flexible cross-border solutions, there is a chance that fintech will become a common term in Hungary as well.
Having a background in finance and working for an open-minded venture capital firm – Day One Capital - makes me hope that we will not only keep plodding on behind the great fintech innovations of the UK, but that we will provide the rest of the world with some valuable solutions from Hungary. The evolution of the Hungarian fintech community is certainly happening, and it makes me optimistic about the future. I hope that in the years to come I will be able to report on a much more advanced Hungarian fintech scene.
Eva blogs regularly at https://medium.com/@evarez