Can neobanks reach the underbanked in Eastern Europe?
I wrote about the underbanked phenomenon in Eastern Europe a few weeks ago. Mainly I talked about which basic services are used, not used, and why.
You’d be forgiven for thinking that that was the complete state of Eastern European finance, but the slow uptake in financial services hasn’t stopped new technologies from entering the market. In this article, I will concentrate on less popular services like investment and savings and more tech-driven financial services.
What’s the market opportunity?
The first thing to note is that disposable income is unevenly distributed in Europe. For instance, compare the EU Member States with the highest and lowest ratios in 2021 - the average level of gross household adjusted disposable income per inhabitant in Luxembourg was 2.3 times as high as that recorded in Slovakia. Some of this disposable income finds its way into savings. In 2021, the savings rate (household savings divided by disposable income) was 24.3% in Ireland, 23.9% in the Netherlands, and 22.9% in Germany. In Poland, it was only 2.8%. To understand the full scale of the situation, note that in countries like Romania, 66.5% of the population never had savings accounts. Of those that do, 77.6% had less than €10,000 of savings over a lifetime. Four-fifths of Bulgarians don't have savings.
I don’t know about you, but I see a huge opportunity here. While there are technical reasons why the numbers are so low, lack of education is a key factor. 71% of Romanians don’t have a routine for saving - they do it ad-hoc. In 2019, only 36% of Romanians considered savings a necessity. After the pandemic years, the number jumped to 51%.
It’s also worth mentioning that the above statistics refer to official savings. Remember mine and Ivet’s grandmas? They keep savings in the closet. Nobody has stats on that. And while it looks odd, it’s explainable. Let's not forget this region was plagued by hyperinflation in the 90s, followed by the demise of large banks like Romania’s FNI in 2000 and Bulgaria's Corpbank in 2014. But it proves that there was always an appetite for savings, and past traumas are starting to be forgotten.
But it proves that there was always an appetite for savings, and past traumas are starting to be forgotten.
What does the investing landscape look like at present?
Traditional investing is not a popular thing in eastern Europe. 6 out of 10 investors on BVB (Bucharest Stock Exchange) have less than €3600 in their account. The total value of all institutional investors’ portfolios combined is less than €20m. Older people are lacking in financial education, so view it as suspicious and risky, while millennials prefer fintech trading platforms like eToro.
There is one category of financial investment on the rise in eastern Europe: the crypto markets. Eastern Europe accounted for 10% of global transaction activity between July 2021 and June 2022 - $630.9bn received on-chain. Unsurprisingly, the countries that see the most activity are Russia and Ukraine. Russia has sent over $16.8bn worth of cryptocurrencies, receiving around $16.6bn back, while Ukraine has sent $8.2bn and received $8bn. But the conflict is not the main reason for their popularity. In countries like Serbia, 200,000 people own crypto assets, while in Romania 4 in 10 people owned them in 2022. Education is lacking, but popularity isn’t. 96% of adults in Romania have heard about them, for one reason or another. When Ivet asked her friend in Bulgaria what she thinks of crypto, she called it a scam. And I can’t blame her. Coindesk has marked Eastern Europe as high-risk, with 0.5% of all activity in the area considered risky.
Everything you see in the west from a technology standpoint, you can find in the east. mBank, which originated in 1986, is still the most popular digital bank in Poland, and extends to other territories. Neobanks are popular in searches and numbers of app downloads but aren’t used as much for day-to-day activity. Looking at numbers, Revolut has over 2m customers, while BT has 3.6m and only 1.9m mobile app users. BT is the largest bank in Southeastern Europe, with over $460m of assets under management. It’s the preferred bank for most people living in Romania. And trust isn’t easy to find in Eastern Europe, especially among the elderly population. They trust a traditional bank. The bank allows customers to withdraw money from any ATM, not just their own, for free. Cash is still king in Romania, so this service is widely used.
And trust isn’t easy to find in Eastern Europe, especially amongst the elderly population.
And the bank isn’t sitting still - it’s constantly improving. It allows customers to pay someone by phone number alone, taking advantage of the AliasPay technology developed by the government. The team also developed their own wallet inside the app so that you can pay with your phone. Most Romanians only have one bank card, so this works well. The bank also allows you to manually mark a transaction as a recurring payment and allows you to add a standing order by scanning the QR code from the paper bill.
How could a neobank compete with these advancements?
Look at how Revolut has evolved over time. To begin with, this card was used only when travelling abroad or buying services in another currency because of the advantageous exchange rate. Then buying crypto took off in Eastern Europe, and vindicated its status as a Super App. But ultimately, Revolut grew due to its reputation in the West. In 2021, Western users sent €316m to Romania.
This proves that neobanks that offer a better version of traditional bank services are too late to the party in the East - big banks are already there. But there is a clear appetite for new services that enable retail investment and give access to new financial instruments. Just look at the growth rate for Revolut and eToro!
This proves that neobanks that offer a better version of traditional bank services are too late to the party in the East - big banks are already there.
The World Bank upgraded Romania to the high-income group of countries in 2020. Hungary, Slovakia, the Czech Republic, and Poland were already there. That is 5 out of 9 of the Eastern European states. This region is not poor anymore - it’s maturing. These states have robust banking systems and the governments invest in technology. The region is also characterized by a large and highly skilled labour force. All these signs suggest that growth isn’t likely to stop soon or slow down.
Payments, debt, savings, investments - every area of the financial system is underused here. Those who manage to educate and gain the trust of these populations will take a giant leap forward.