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Financial innovations

The rapid development of IT technologies creates demand for new digital solutions in finance. One can already notice the positive dynamics of the development of the regulatory component and substantial support from the state in the development of financial services


Over the past ten years, the financial services market has transformed rapidly, and at this stage, FinTech, as one of its segments, is demonstrating a phase of powerful growth. The most dynamic period of FinTech’s global market development was observed in 2014 and during the first half of 2018, as global investment reached $18 billion. Companies and banking institutions rendering financial services are actively introducing new technical solutions, offering innovative products to the market.

While Ukraine is not mentioned among the leaders of the global FinTech market, it is demonstrating serious ambitions, as evidenced by the rapid growth of the industry. According to the latest data, about 80 companies operate in the country’s FinTech market, the majority of which were established in the last three years. Moreover, the emergence of new players is conducive to the development of supporting infrastructure and attracts the interest of investors.

According to  USAID ("Map of FinTech Market of Ukraine"), as of the first quarter of 2018, payments and money transfers (31.6% of companies specialize in this area), technology and infrastructure (19.3%), lending (14%) and marketplaces (7%) are the most competitive segments of the Ukrainian FinTech market.

Among other things, the development of FinTech has also influenced the transformation of the structure of the financial services market.  The monopoly held by banks was shaken due to competition from small FinTech companies and start-ups that demonstrated high flexibility and adaptability to customer needs. However, banks retain their positions due to significant financial resources not available to small and medium businesses. In any case, such trends in the market dictate, even to large banks, the need to adapt to realities, optimize their strategies and increase their attention towards the digital segment.

The initiative of HSBC, Banco Santander, ANZ, BNP Paribas, Citi, Deutsche Bank and Standard Chartered Bank, which recently signed a letter of intent providing for the development of a global digital network for trade finance called "Trading Information Network", is a good example of the adaptability of banks. The platform will simplify the process by which banks provide financing for small and medium-sized businesses, making it cheaper and safer. It is expected that the platform will have a database where you can quickly find information about counterparties and their lending transactions, which will significantly reduce the risks of fraud and simultaneous financing of one borrower. While using the platform, borrowers will also be able to submit and verify loan applications. More than 20 banks are already taking part in the development of the Trading Information Network, and launch of the platform is scheduled for the second half of 2019. The organizers intend to create demand for funding in the amount of $1.5 billion per year.

The modernization of Oshchadbank, which in three years has undergone a transformation from a traditional state-owned bank to a modern and innovative bank with a digital database, mobile application, BankID system, contactless payments and other interesting features, is another good example in the Ukrainian banking sector.

At the same time, jurisprudence is the most important element in the evolution of technology and finance symbiosis. Statutory regulation is a guarantor of the correct development of financial market, protecting the rights and interests of suppliers and consumers of financial services. In Ukraine, the National Bank of Ukraine, the National Commission for the State Regulation of Financial Services Markets, and the National Securities and Stock Market Commission are the regulators in the FinTech area. Financial monitoring is carried out by the State Financial Monitoring Service.

Despite the fact that the legislative regulation of FinTech in Ukraine is not the most progressive, regulators and other market actors have a strong interest in its improvement and development in accordance with the experience of the European Union and obligations which Ukraine has assumed under the Association Agreement it signed with the EU.

For example, in November 2017, the Ukrainian Parliament adopted the Law of Ukraine "On Electronic Trust Services" (entered into force on November 7, 2018). In fact, this legislation is focused on EU Regulation of electronic identification and trust services for electronic transactions in the internal market (known as eIDAS). This law will help to improve the operation of the digital market, optimize work with electronic documents and data, make cross-border interaction more secure and easy.

In order to improve the situation on the payment market in Ukraine, a draft law on amending some legislative acts of Ukraine regarding the transfer of funds was prepared. The draft law is based on the Payment Services Directive (EU) (known as PSD2) and is aimed at supplementing the law on payment systems and money transfers in Ukraine, which has been in force since 2001, and other regulations. The purpose of the draft law is to improve the regulation and security of payment systems in our country so that it responds to the realities of the modern financial market. The aforementioned document is under consideration and, according to experts, needs to be improved.

In addition to legislative work, regulators adopt concepts and development programs in the financial sector, including in the area of financial technologies. In 2017 the National Bank of Ukraine (NBU) adopted the Comprehensive Program for the Development of Ukrainian Financial Sector Until 2020. The program contains a number of initiatives aimed at liberalizing regulation of the financial services market, digitizing and increasing the financial literacy of the population.

By the way, the NBU is actively involved in the development of FinTech in Ukraine. One of the latest innovations by the NBU, in terms of state regulation, was the adoption of a new version of regulation on BankID system establishing the procedure for connecting and using the system as a platform for verifying individuals for the purposes of rendering or receiving the services. In our view, the successful implementation of remote identification will enable full use of banking and other financial services online.

At the beginning of 2018, the Cabinet of Ministers of Ukraine approved the concept for the development of digital economy and society of Ukraine for 2018-2020 and the action plan to implement it. The concept contains specific directions, goals of the digital development of Ukraine and ways to achieve the intended goals. Special attention is paid to the importance of harmonizing national legislation and standards with the relevant European ones. According to the representatives of the executive branch at the central level, the concept is the first step towards stimulating the development of the domestic digital technology market. It offers the vision of transforming the traditional economy into a digital one, establishes primary steps and incentives for creating conditions for the economy’s digitization.

Growing demand for digital solutions in the area of finances contributes to the emergence of new proposals. And one can already notice the positive dynamics of development of the regulatory component and substantial support from the state. Thanks to the efforts and cohesive work of regulators and market participants, the goals stated in the concepts are gradually being implemented rather than remaining declarative.

In the near future, progressive harmonization of national legislation with EU regulations, the emergence of the first "regulatory sandboxes" and the development of a format for cooperation between regulators and business, are expected. It is also possible to move towards directions provided for in the FinTech Action Plan adopted by the European Commission in March 2018. However, in our opinion, we should focus on priority tasks related to the establishment of a developed regulatory framework in accordance with the EU standards for the purpose of successful integration of Ukraine into the global financial services market, including its FinTech segment.