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On June 30, the Ukrainian parliament adopted Bill 4364 on Payment Services, which represents the long-awaited regulatory reform of payment services and FinTech markets in Ukraine. With the exception of certain provisions, this law on payment services will enter into force within 12 months of its publication, giving market players time to prepare for the expected changes.
The Payment Services Law completely revises the regulation of the payment services market in Ukraine and disrupts the banking monopoly in many payment-related services. FinTechs with the status of payment institution will be able to broaden the scope of services available on the financial services market through the possibility of issuing payment cards and electronic money and opening customer accounts. Under current regulations, the provision of these services is restricted to commercial banks, which has made launching most FinTech businesses too complicated, if not impossible.
The Payment Services Act is expected to resolve current regulatory barriers, facilitate the improvement of existing business models and the development of new business models for FinTechs. Here are examples of how these expected regulatory developments are expected to affect FinTech companies.
New model for neobanks
Under the existing rules, a neobank has two basic options for entering the market:
- obtain your own banking license; or
- to use a banking license from the existing bank.
While the first option requires substantial financial, organizational, compliance, and other efforts, the second option requires finding and dealing with a partner bank. Although the two options do not seem advantageous, market practice shows that neobanks prefer the option of partnership.
Under the Payment Services Act, neobanks will have another option. With a payment institution license, a neobank will be able to provide virtually all of the services that neobanks currently provide, with the exception of the exceptions for receiving deposits on its own account. This option seems more advantageous compared to the existing one because the requirements relating to the constitution and the maintenance of the payment institution are much simpler than the burdensome requirements of a commercial bank. The owners of a neobank will be able to avoid the additional costs and risks associated with the partnership with a banking establishment likely to significantly increase the operating costs of the economic model. These new opportunities will facilitate the development of mid-sized neobanks in Ukraine.
Marketplace payment services
Although marketplaces offer their customers the option of buying goods on credit or paying in installments, such an option is only available if the buyer is a customer of banks supporting this type of loan. . Once the law on payment services comes into force, marketplaces will be able to provide their customers with financing services without the commitment of banks. Such a model seems beneficial to both the markets and their customers. The former will be able to generate additional income from the new business segment, while the latter will not be limited by banks.
Growth of Escrow Service Providers
The payment services law will likely create a new niche for escrow service providers. We have observed significant interest from market participants in escrow services, as this instrument can solve complex problems not only in M&A transactions, but in various other cases. For example, escrow accounts can be used by marketplaces to secure the proper transaction flows between buyers and sellers. In addition, an escrow account can be set up in the construction industry to ensure the accurate and timely fulfillment of obligations by construction developers.
Escrow account services are now only provided by commercial banks in Ukraine. However, escrow services are not normally a primary business for most Ukrainian banks. As a result, there is not much interest from banks to develop escrow account services in the market. With payment establishment licenses, marketplaces and FinTech companies will be able to create a new niche in escrow services. Unlike conservative and overregulated banks, FinTechs can be successful with a higher level of flexibility and a personalized approach to clients.
Loan Application Tools
Although the provisions of the Payment Services Act providing for an open bank come into effect 48 months after the publication of the law, market players are now able to consider new business opportunities created through access. to customer account data.
For example, customer account data can be used by loan application tools to aggregate, assess, and share the results of an assessment with a potential lender. These days, most lenders use their own scoring tools to estimate a borrower’s creditworthiness. The disadvantages of such an approach relate to the costs of the scoring system and the limited sources of information used for a respective analysis. As an alternative, loan application tools can provide advanced scoring services to lenders aggregating larger amounts of financial data about potential borrowers. Borrowers will benefit from the user-friendliness of the tools, while lenders will obtain more efficient rating procedures, improve the quality of their portfolios and be able to focus their resources on other lines of work. Another positive aspect is that commissions on consumer loans are likely to decrease. This could occur due to growing competition in the relevant markets and the ability of lenders to more accurately forecast loan repayments.
Personal finance planners
Cash planners are already available and widely used in Ukraine. However, the instruments provided by open banking can significantly improve usability, efficiency and customer experience. Using accounts receivable data, cash planners will be able to aggregate all transaction data in one place without the need to manually enter individual expenses. This innovative approach is expected to more accurately reflect a client’s expenses and financial situation and increase the popularity of the programs.
Digital wallets
An average banking customer uses multiple digital banking apps to make payments and other financial transactions, which is quite inconvenient. Digital wallets installed on a mobile device can serve as an alternative and consolidate in one place a variety of debit / credit cards issued by different banks and information about multiple accounts. With an emphasis on functionality, a digital wallet can be seen as a faster and more beneficial solution for customers. We expect digital wallets with a user-friendly interface and solid workmanship to become popular and can seriously compete with digital banking applications.
Peer-to-peer money transfers
Based on the Payment Services Act, peer-to-peer money transfer applications will allow the transfer of funds from one person to another (also internationally) without the intervention of a bank as a as an intermediary. Such an approach would allow customers to avoid the additional transactional commissions incurred by banks during transfers, making them more profitable. Using peer-to-peer transfers, users will be able to perform money transfers, payments, currency conversions, and split invoices.
Increase in the use of outsourcing
Over the past three years, many EU companies have reported an increase in outsourcing to external providers. The most popular tasks for outsourcing are operational and back office activities ranging from IT infrastructure and basic payment systems to accounting platforms and card processing. We expect that the outsourcing trend will develop further and Ukrainian SMEs will be able to find their niche in the outsourcing market to help Ukrainian and European companies.
Conclusion
The market expects increased competition in many segments of the traditional banking industry and among FinTechs. Now is the right time to reflect on new products and opportunities generated by regulatory developments in Ukraine. These developments offer market players the opportunity to conquer new niches in financial services. While we don’t expect new competitors to be able to quickly consume a significant slice of the pie of major Ukrainian banks, their slice could become a substantial threat to small and medium-sized financial services players. During the transition period, we recommend that all financial service providers prepare for the anticipated changes.
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