Ecosystem SWOT Analysis: The Bulgarian Fintech Industry

“Although the Bulgarian Fintech industry is considered a small contributor to the national GDP, it is one giant leap towards a high-value-added economy. In fact, for developing countries such as Bulgaria, the Fintech industry is one of a few opportunities for catching up and promoting a highly efficient economy,” states the Bulgarian Fintech Association (BFA). 

The Fintech sector in Bulgaria has indeed continued to grow in recent times – in the past 18 months, the number of fintech companies has been steadily increasing, while aggregated operational revenue for the industry rose by at least 25% in 2019, reaching over €350M.

In light of this, for the second year in a row, BFA is releasing comprehensive market research aimed at measuring and showcasing the progress of the vertical. The report, which will be presented on November 24th at the virtual conference “Bulgaria on the European Fintech Map”, will reveal the investments in the sector for 2020 and will be accompanied by the first Bulgarian Fintech Mapping. During the 4-hour event, BFA will reveal the progress and the place of the Bulgarian Fintech sector in Europe and will discuss with the participants the strengths and weaknesses, as well as the prospects for 2021. 

To warm-up for the event, we got in touch with Georgi Penev, the director of the Bulgarian Fintech Association, and asked him to do аn actual SWOT analysis of the current state of the Bulgarian fintech ecosystem. During our meeting, we discussed the strengths and weaknesses of the Bulgarian fintech ecosystem and we talked about the opportunities and threats that stand before this ecosystem.

Trending Topics SEE: First of all, what does the word fintech mean to you?

Georgi Penev: Financial innovation and technology in Bulgaria could be considered present from the late 1960’s when the first computers were installed in the Bulgarian banks. From that point, no matter what the political or economical agenda was in power, Bulgarian financial technology has always kept its pace. In the last couple of years, the buzz word Fintech appeared to represent any company whose core business is related to the creation or use of technologies, enabling innovations, facilitating the offering, access, and/or usage of financial services, including technologies in payments, money transfer, etc.

So, what are the main strengths of the Bulgarian fintech ecosystem?

The Bulgarian fintech ecosystem has several strengths. First, we have the IT sector – without it, we wouldn’t have been able to develop and move forward. Every company, regardless of whether it is a startup or a foreign company that is entering the Bulgarian market, can take advantage of this IT sector. According to our report, there are 100 companies that we classify (according to our criteria) as fintech companies. 

Apart from this, there are more than 90 IT companies that support fintechs. These are developer teams of all sizes – ranging from 2-3 to 200 and more people, who are building various applications, part of which are fintech products, yet this does not make them fintech companies.  IT supporting companies add value to the fintech companies without which the latter wouldn’t have been able to exist.  

Our second strength is education. Bulgaria has 180 000 college students, with 8000 of them studying Computer science, which means that they will eventually come to our sector. When it comes to education, we have a lot of opportunities, including a Master’s degree in fintech, in Sofia University, more specifically, in its Faculty of Economics and Business Administration. 

Here, there is an interaction between the public sector (the University) and the private one (in this case, the private companies that organize lectures). This is a big initiative of ours that we started this year, yet we hope to continue it in the Faculty of Mathematics and Informatics and other universities and private software academies where we will create serious cadres for the fintech sector (fintech-ITs). 

Another strength of Bulgaria is that it is a part of the European Union (EU). This gives many privileges to the companies in the country – they can participate in many European programs, such as the Vienna Startup package, and most importantly they can attract VC funding from аround the EU. The fintech sector can also take advantage of the fact that the PSD2 in Bulgaria is transposed and a big part of the legislation is similar to the European. Although the legislation is similar to the European, Bulgaria’s business climate is better and this is our fourth strength. Here, we are talking mostly about corporate taxes and the fact that they are among the lowest in Europe, which attracts foreign investments. The fact that we are now heading to the Eurozone will attract more investors.

A factor that is a double-edged sword is the fact that ‘we are yet to be discovered’. While not being among the most popular fintech destinations is certainly more of a weakness, there are many players around the world who’ve seen positive signs from our ecosystem and are interested in getting to know more about an emerging market.

For example, for Dubai and Saudi Arabia, we are a remarkable place that has not yet been researched and there is no information/knowledge of what could be found here; we’re like America for Columbus. They have only heard about our “gold” – our IT sector. The Association has already had several projects with them. Together with Abu Dhabi Global Markets, we organized a Bulgarian virtual event as part of their Startups Global Tour during which several Bulgarian companies presented their offerings.  Phyre won the battle and now are going to pitch at the FinTech Abu Dhabi Festival

How about the weaknesses of the ecosystem?

This anonymity of the Bulgarian fintech in the EU is one of our weaknesses. EU countries, who could have been using our products and services, do not know us. 

Because of this, we organized an event, a public consultation in partnership with the European Commission regarding the digital finance strategy and the package they were about to release. We invested a lot in this event and it turned out to be the second most attended public discussion, we had over 15 speakers and it showed the EC that we have a lot of potential and, in spite of our size, we want to develop. 

Our second weakness is that we do not have a unicorn yet. The idea that a country has a unicorn can be of crucial importance because it can be featured as a flagman initiative. In this way, we can prove that we can stand next to more than 50 unicorns from Europe. 

Romania from the regions has already proven itself when it comes to that. We are definitely falling behind, and not only when it comes to having a unicorn. If we manage to create a fintech unicorn, it will be wonderful, but I don’t think it will happen fast. I don’t think this will happen by itself. We should invest heavily in this direction and create a better business climate for ideas to thrive.

The third weakness of the Bulgarian ecosystem is the lack of education and knowledge in certain areas. While the country is strong in IT, expertise in sales and business development, product management and legal is often missing.

When it comes to sales, we need people who are familiar with the fintech products well and know how to sell them. Practically, fintech companies have to go through the whole process of training talent, which costs them a lot of time, resources, and money. This is valid for business development too, where we also lack product managers. 

The other important thing is that contemporary fintech is very new and it’s a field that’s still shaping. It is shaped by companies such as Revolut and Klarna, which are quite different from the things one studies in finances. Today, financial management is much more technical and computerized. A person who lacks technical knowledge can hardly become a CEO or a development manager because technology is the trend and if he does not understand it, he will not be able to cope with the responsibilities of the position. 

When it comes to the legal part, there are not enough fintech lawyers.For example, it is very difficult for us to be at the forefront of public policy and create opinions on every regulatory proposal because there is still not enough interest from third parties. This stops our development and restrains our prospects of speaking out the voice of the Bulgarian Fintech sector before the EU authorities, respectively scaling up within the EU.

We should also discuss a topic that is inconvenient and, because of which, we already suffer negative consequences: the Bulgarian institutions are not at the required level. More concretely, I am referring to regulatory bodies, which have not reached the level of development of other countries and cannot provide us with the resources that bodies of other countries can. This means that we will always fall behind. Here, we are not talking about the regulatory framework only, but also about the opportunities that could have been offered. 

When it comes to other countries, there exist institutions such as Innovation Hubs and Regulatory Sandboxes, where regulators provide companies with an opportunity to test their products, thus enabling them to find out the weaknesses of the products that you need to work on in order to be in compliance with the regulations. In Bulgaria, at this very moment, there is no such thing. Bulgarian regulators do not have the cadres and not even the departments required in order for this to be done. In this context when it comes to innovations, it is still very hard to work with them because they often say “No, you can’t do that,” whereas institutions in other countries say “Okay, let’s test this” and, based on the strengths and weaknesses they observe, they proactively make legal changes, so that such innovative ideas are developed on their territory, which adds value and influences their GDP. A lot of companies in Bulgaria say “I will go to Estonia for a license and will then return here,” because Estonian regulators work much more efficiently than our regulators. 

Are there any potential opportunities for the ecosystem?

Starting with regulations, where we last left off, there is an opportunity for cooperation with some local regulators. One can contact them and describe their idea and possibly receive more investment resources than you would have received in a developed country. For example, in the non-banking sector, there exists the so-called “Innovation Hub,” where you can pitch your business idea and ask about the regulations this business has to be in compliance with. The Financial Supervision Commission (FSC), which is the regulatory body for this sector, does not have a lot of requests of this kind, so it can set aside more time and resources to explain with which regulations the business has to be in compliance with. Every Bulgarian fintech company can reach out to the FSC asking about regulations. Not knowing which regulations you have to be in compliance with can cost you a lot of money, and even the whole business idea. The Innovation Hub is free and you can take part in it even before you have started your business, or even before you have raised funds. If you do not do it, the FSC will come to you, sooner or later, to check on you. The problem with the Innovation Hub is that it is not popularized and promoted enough. Last year, only a couple of requests were made. 

To compare, the Greek Innovation Hub had a total of 36 requests last year, and the country is similar to ours in terms of population number and the overall progress in the finance sector. Another thing that can be considered as a viable option is Bulgaria to take advantage of the Eurozone that it will hopefully be entering soon, as this is a good starting point. 

Another development opportunity is the VC funds, not only the Bulgarian ones but also the European, as companies that are part of the Bulgarian ecosystem can take advantage of European VCs and development agencies, such as the one in Vienna. This means that fintech companies have better development and expansion prospects in other EU countries. In Bulgaria, there are a total of 14VC funds. Six of these funds actively invest in the development of the fintech ecosystem. Eleven are the most active, they had the second season of their Visa Innovation Program, in which they gave a fast start to one of the most promising companies in the fintech sector, and this was connected with investments. VC funds are quite open to investing in fintech companies if these companies have proven that their business models and the teams behind are adequate enough. 

The last thing that I would like to mention is the Bulgarian diaspora. Each Bulgarian company that is looking for strong additions to the team can turn to people who are currently studying, have graduated, or are working in Europe. This is a big opportunity for our companies, but it has not been exploited. Our Association will take care of that by creating a program, sponsored by Bulgarian fintechs, so that we can use this resource of IT, sales and business development cadres, that is developing in European fintech companies, similar to ours, but would like to come back to Bulgaria. 

Some people from the Bulgarian diaspora do not want to return to Bulgaria because they believe that they do not have any opportunities for development, which is not true. We have high-tech companies here that are growing fast and are as good as their European competitors – for example, Paynetics, Klear, Iuvo, Nexo. For sure, these are not all the opportunities of the Bulgarian fintech ecosystem, yet, it is a basis. Soon the Association will see what it can do when it comes to each of these points.

Finally, what are the threats to the ecosystem?

Firstly, there exists a growing threat of outside fintech companies. We have strong competitors in the Balkans and in other parts of Southeastern Europe. The competitors have not woken up yet, but it is a matter of time before they bypass us. This is especially true when it comes to Romania and Greece. Greece is currently working on creating the so-called ”Regulatory Sandboxes,” a very good initiative led by the Bank of Greece, which is the central bank of the country. In the next year and a half, the structure will start working. The 36 inquiries to the Greek Innovation Hub demonstrate good communication between regulatory bodies and companies; the Regulatory Sandboxes will further improve this communication and will have a positive impact on the business climate of the country. Romania also has an Innovation Hub and is working on its Regulatory Sandboxes. 

North Macedonia has already announced the beginning of a new project for electronic identification, which will stimulate their fintech sector, as a big part of the problems the sector is facing currently (for example, how to certify the identity of a person who is trying to take a loan) will be resolved. This and many other projects will improve Northern Macedonia’s climate. 

Secondly, there is a threat coming from the redline regulation from the EU and the EC, which can stop the development of the Bulgarian fintech. Currently, various regulatory changes concerning the digital financing package are being proposed, and if Bulgaria does not stand up for its interests, the country risks to lose its position. An example is the MiCA regulation, proposed by the EC on September 24, regarding cryptocurrencies. The EC suggests that the interaction between regulatory bodies and companies basing their business on blockchain should happen according to a set of rules. According to the proposition, all blockchain businesses would be regulated (the institutions will have rights to study the activity of the companies), not only the financial tools but also the regular blockchain companies. In this case, taking into serious consideration the discussions is very important.