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Because of the lack of legacy IT infrastructure within banks in Russia, the country has been listed in the top five leaders of digital banking in Europe, according to a new Deloitte and ID Finance report.
However, development of fintech products and services cannot be described as “uniform” because as Alexander Dunaev, COO and Co-Founder at ID Finance highlighted, “breakthrough projects are available primarily to residents of major cities with a population of over a million inhabitants, or clusters where technological infrastructure is purposefully developed.”
In addition to only developed areas having access to technologically advanced services, Dunaev revealed that what hinders this sector from advancing in Russia is “the unattractiveness of the Russian fintech for external investors, insufficient solvency of the population, geopolitical risks, the inflexibility of the tax system in relation to the features of fintech, as well as the imperfection of state regulation of the industry.”
Despite this, there is a demand for fintech in the country and the regulator and supply chain are welcoming of this. Like most places in the world, the most popular financial technologies in Russia are payments, money transfers and online lending – as the report stated. Artificial intelligence, machine learning, predictive analysis, deep learning and big data were also named as the most promising.
Dunaev explained that after Russia experienced a geopolitical crisis in 2014, “local companies have seen a dramatic re-rating of their prospects. The valuation multiples became dramatically compressed for the already listed companies, while the remainder saw the capital markets shut the door in front of them.
“As the capital became constrained, while the government consolidated the financial services space, the competition dried up. The lack of competition and the capital markets implies that there is no incentive to innovate as it simply won’t get rewarded via a valuation re-rating.
“Therefore, the B2C fintechs don’t have a realistic chance to raise financing required for growth, as the institutional investors don’t expect to get a reasonable return on their valuation as there won’t be any buyers for the companies they would invest into.
“At the same time, the Russian market is still relatively small (c.2 percent of the world’s GDP), so being a champion in this market (particularly in the B2B space) is frequently not enough for a sustainable business.
“Hence, it would make sense to target the bigger global market but there is a general malaise and lack of focus on international growth among the companies in Russia. As it slowly resolves itself (as some of the other Eastern European peers, like the ones in Belarus), the fintech in Russia will re-gain a stronger footing.”
The Deloitte and ID Finance report also found that Russia’s private fintech sector will continue to grow weaknesses in the economy and is expected to be worth $810m by the end of this year, representing a growth of 12 percent compared to last year.
“Fintechs in Russia are optimistic about the future but there are many issues to be solved,” added Alexey Minin, director of the Institute for Applied Data Analysis at Deloitte CIS. “The first is the lack of competition between the major incumbents which reduces demand for innovative new solutions. It is also very difficult for fintechs to expand outside of Russia due to the lack of funding.”
December 19, 2018 at 04:49AM
Forbes – Entrepreneurs