Last September 20th, I attended the Ukrainian Tech Forum held in Luxembourg which was organized by the Luxembourg Chamber of Commerce and the Ukraine-Luxembourg Business Club. On the agenda were two trending topics which I thought may be of interest to a number of FI Hub readers: fintech, and outsourcing to Ukraine.
Regulated fintech space in the European Economic Area (EEA)
The key message from the guest speakers was that the European Union now wants more competition in the payments sector so the revised version of the Payments Services Directive (PSD2), which came into force earlier this year, created an internal market for new players. These are so-called “account information service providers” (payment account information aggregators) and “payment initiation service providers” (entities helping consumers initiate payments from their payment accounts). This regulatory initiative was supplemented by the launch of the SEPA Instant Credit Transfer (SCT Inst) scheme earlier this year. The SEPA Inst scheme now allows the processing of instant payments among participating payment service providers.
Incumbent Luxembourg financial institutions (FI) used to disregard local fintech companies. That has changed over time as an increased amount of collaboration can now be seen between the two. However, it is noteworthy that incumbents are not willing to collaborate with fintechs domiciled in some of the EU member states which have more liberal regulatory treatment and prefer to work with fintechs based in Luxembourg.
The inevitable question arose: Are fintechs likely to outsource some of their business processes to Ukrainian fintechs to make their services to incumbents more efficient? The Ukrainian government certainly seems to be counting on it as it is about to implement certain elements of PSD2 by the end of this year. It is also considering implementing the General Data Protection Regulation (GDPR) in due course. The regulatory environment in Ukraine will therefore be very similar to the one in the EU. In addition, the fintech sector can benefit from the favorable trade regime under the EU Ukraine Association Agreement, i.e., European and Ukrainian fintech players are likely to find mutually beneficial ways to cooperate with each other.
It remains to be seen, however, whether the risk managers of incumbents in EU may consider such structures sufficiently robust from the European perspective. This aspect is especially relevant in view of the forthcoming new outsourcing guidelines, which is now being developed by the European Banking Authority.
Outsourcing to Ukraine
Ukraine possesses a unique IT talent pool. Its IT industry is growing at a rate of 20% per annum. This creates favorable conditions for business process outsourcing, which does not involve a transfer of technology to outsource. Ukrainian companies are able to build cheaper and more effective solutions. During the conference, speakers shared examples of successful outsourcing projects where European companies, including insurance companies, had outsourced some of their internal processes to Ukraine.
Projects which involve the transfer of personal data outside of the EEA may be problematic from the GDPR perspective. However, this is likely to be addressed if the Ukrainian government adopts the GDPR. IP protection remains a major concern which has made the outsourcing of projects often based on personal relationships between the beneficiaries of the European and Ukrainian counterparts.
Outsourcing (even outside the EEA) can often be tax-driven. In response, Luxembourg is about to implement new law which makes a substantial amount of outsourcing cost tax-deductible. Fintech companies based in affected jurisdictions will therefore benefit from additional incentives for outsourcing their activities while having the added advantage of making their services to incumbents even more competitive.