With abundant talent and an industry eager to make connections across Europe and the World, Romania is an exciting hotbed of new developments in the FinTech industry. Chris Farnell reports.
FinTech is a “technologically enabled innovation in financial services that could result in new business models, applications, processes or products with an associated material effect on financial markets and institutions and the provision of financial services”, according to the Financial Stability Board.
If that sounds like a fairly open-ended definition, that’s because it is. As our ability to handle and interpret data is undergoing rapid development on all fronts, the technology around financial services is evolving as quickly as we can keep up with it.
But a lot of the most exciting developments in this field are happening not in Silicon Valley, or on Wall Street, but in Romania.
It is taking place among firms such as the Romanian company, Lease Blocks, which develops FinTech products for the leasing industry.
“We are trying to build an ecosystem of applications so that a leasing company can unfold the entire leasing process from beginning to end through our tools,” says Radu Cirstea, CEO of business and product development for Lease Blocks.
What makes Lease Blocks products stand out is that its products are built in a modular fashion. Originally the firm developed analytical applications for the leasing sector but found that cleaning up IT systems while adding functionalities and replacing systems is very difficult with the number of interconnected systems involved.
“So we built a modular operating system that can fit on top of other applications,” Cirstea tells us. “We can replace parts of our clients’ systems step by step, replacing functionality so that by the end we can replace the entire legacy application.”
As well as being modular, these tools are cloud-ready and system agnostic, allowing them to be installed to feed into private or public cloud systems, supporting the specific growth requirements of each customer.
This is the kind of innovation and problem-solving that the Romanian FinTech industry is breeding at the moment.
A rapidly growing sector
In the spring a survey was carried out by a research team supported by the Bucharest Business School, RoFintech and Raiffeisen Bank. The data from that survey, combined with desk research and a series of semi-structured interviews, this team assembled a report on the Romanian FinTech industry that provided an overview of how the sector is progressing.
The report found that the sector was growing rapidly and that the gap between it and similar but more mature sectors in the region is closing fast. However, the report also recognised that the Romanian FinTech ecosystem is still in its early stages of development, and most of the companies in the sector or still small firms at the seed or pre-seed stage.
“The Romanian FinTech sector is still very small compared to other countries. There are not too many FinTech firms, and they are not very big so far,” Cirstea agrees.
However, those firms still form their own ecosystem, with RoFintech- the Romanian FinTech Association, acting as a kind of umbrella organisation for that ecosystem. Companies within RoFintech benefit from more effective communication with other players in the ecosystem, including the Romanian government, and the organisation can also act as a communication channel for banks, insurance companies, and large consulting firms to collaborate more effectively with those firms.
A national achievement, a global product
But while collaboration across the industry is on the increase, the report also found that many players in Romania’s FinTech industry feel that there is a lack of cooperation and coordinated activities between players in the industry, and that this is acting as an obstacle to development.
The report argues that through joint efforts between different ecosystem players such as FinTech companies, the Government and universities, those weaknesses could be mitigated. For instance, companies in the FinTech industry are keen to see more openness from regulators.
RoFintech brings together some of the voices in the industry, and market participants believe the organisation provides structured and coordinated activities while acting as an important lobbyist for dealing with public authorities, in both Romania and Brussels. However, the organisation still has a restricted budget and depends heavily on membership fees, and the report suggests more supporting members are needed to increase its visibility.
Forging international links
However, there are other factors that people in the industry believe are slowing down growth.
“The main reason for slower acceleration is that we lack access to the international markets,” Cirstea argues. “Having access to an international market and working with large international financial groups is difficult to do from Romania.”
According to the report from Bucharest Business School, foreign impressions of the Romanian business environment are that it is stable, and offers all the key ingredients a promising young FinTech company needs. Romania has a large financial sector with relatively easy access to early-stage capital, both private and public. It also has a rich pool of local talent. However, there is still a perception that local FinTechs will face difficulty expanding into international markets or building global companies.
Indeed as Cirstea points out, accessing international clients remains Lease Blocks’ biggest challenge.
“We have already succeeded in this, but it is still difficult, because the biggest institutions are international groups and it is difficult for us to access them for two reasons,” Cirstea tells us. “Either we are considered too small for them, or they demand more experience.”
The demand for experience creates a Catch-22 scenario- without these clients, these firms cannot build up the requisite experience, and without that experience, the firms cannot take on these clients.
“From our point of view, we are lucky because we already work with big international groups, which serves as a recommendation as we are already proven to have the required experience,” Cirstea points out. “When it comes to size we are still small for the moment, but we have two private equity investors behind us, and one of them is one of the biggest Romanian companies, which serves as a big risk mitigation feature.”
Lease Blocks still face obstacles in that it cannot afford to serve smaller clients, so the company must target more of its efforts at attracting larger companies.
A hotbed of talent
Fortunately, in attempting to attract those larger companies, Lease Blocks benefits from the fact that Romanian FinTech is an exciting area to work in at the moment.
“There are two different kinds of FinTech companies being founded in Romania right now. One type is the companies that are created to immediately scale up,” Cirstea explains. “The idea is that they scale up fast and get financing from VCs.”
Lease Blocks comes from the second school of FinTech firm. The kind that scales organically.
“That means it grows much more slowly, without financing from VCs,” Cirstea says. “This is because usually, the scale-up FinTechs are more single-issue orientated companies, designed around a single purpose. Companies such as ourselves are developing complex applications for business enterprises. We are spending our time and focus on the financial industry, which is one of the most complexes in the world, meaning it is difficult for us to grow in an accelerated way.”
Although Lease Blocks cannot access VC funds, it can still attract angel and private equity investors. In fact, it is a potential path to those international connections Lease Blocks is seeking.
“After investing for some time in coming up with good products and strong clients, you can be interesting to bigger software companies in Europe,” Cirstea tells us. “It is difficult for software companies to develop new products or upgrade their own technology. That would be a very inefficient use of effort for them. It is more attractive to buy another company that has already developed up-to-date technology. That is the path we chose.”
This is why Lease Blocks builds from the latest FinTech technology, building in all the functionalities and components required for digitalisation needs, with a constant focus on upgrading and updating.
“We always keep an eye on the newest technologies and take care to build our products as agnostic for different cloud vendors, so we can feed to everything,” Cirstea says. “Being a company that grows organically and has more time to develop products and R&D, makes it easier for us to stay up to date.”
But Romanian FinTech has one more card up its sleeve. Its people.
“Most of the big tech companies have head offices here in Romania, because some time ago we had a lot of educated people, but the salaries were low,” Cirstea insists. “Everyone came here to use the educated talent we have with reduced costs. Over the last five, six or seven years, salaries have gone up alongside demand, but it has meant that our people were able to work with major tech companies, building important software for major groups. We had this experience and learned a lot out of it.”
An evolving legislative environment
FinTech is bringing innovation and job creation to Romania, but with those benefits come challenges. The new technologies, tools and applications that FinTech presents can also be repurposed, misused or exploited to create new threats and new forms of crime.
For Romanian FinTech companies trying to create international opportunities, particularly in the European Union, it must learn to operate within the risk mitigation framework that the EU has established. The EU has announced and developed some initiatives to regulate the FinTech sector, including intra-EU payment services, data protection, crowdfunding and regulatory sandboxes. Currently, this regulatory approach appears fragmented, with Member States, including Romania, able to pick and choose to individualise their own regulatory framework. As Cirstea points out, the fact that Romania is a member of the EU positions the country well to be a key player in the FinTech sector.
“We are aligned to European Union legislation, and we are also aligned to European values,” Cirstea says. “It makes a lot more sense for companies to come here rather than going to far-away places. It is enticing for major companies to work in a country in the EU. It’s more of a sure bet.”
In Romania itself, the national authority responsible for regulation and supervision of the financial sector is the Financial Supervisory Authority, (Autoritatea de Supraveghere Financiara) or the ASF. The group was established in 2013, and one of its initiatives is the establishment of the FinTech Hub, a means to offer FinTechs a direct channel of communication with the authorities and mediate the communication with companies that develop FinTech solutions regarding the regulatory framework.
At the same time, the National Bank of Romania has launched the FinTech Innovation Hub, which will support innovation and the development of solutions in the financial sector. It is a project that will work to identify the risks of new products and services while finding ways to mitigate those risks. It will also be a way to provide start-ups in the Romanian FinTech sector with nonbinding guidelines regarding compliance with legal requirements.
Romania has strong international connections, a wealth of motivated local talent, and a history of activity in the tech industry. The country is well-positioned to play a powerful role in the FinTech revolution.
“I think the future looks very good. At the moment the need for financial institutions and the digitalisation transformation mean that everyone is looking for software built on the latest technology,” Cirstea says. “The older companies don’t have the latest technology, they are built on older frameworks and it is difficult for them to upgrade. That is why I think the future looks bright for Romanian FinTechs. We are built on the latest technologies, which is important for major financial groups. Once we put our roots into European financial markets with some major clients the Romanian FinTechs will bloom. We have very good specialists. We have a lot of major tech companies working here, with good resources and experienced people. We just need to succeed in the entrepreneurial area.”