Until recently citing Estonia as the location of your FinTech firm drew looks of puzzlement despite Nordic banks generating healthy profits here, NASDAQ doing cutting edge Blockchain R&D and a red hot start up scene.
Today that same statement creates high interest and rightly so. At a time when Germany gets excited by Fidor, the UK agonises over identity and the world struggles to understand digital, the Estonia's capability is light years ahead.
Here is why...
Digital Identity
Since 1992 Estonia has operated with digital identity, developed in conjunction with banks and telcos and underwritten by the government via the ID Card and Mobile ID schemes. These schemes provide definitive proof of ID in a digital environment and are used daily by individuals and businesses to sign contracts, make bank transfers, sign contracts, etc. Individuals can also make mobile payments for travel/services using their phone instead of a credit card as the transaction is directly linked to the user’s unique ID. Contracts and transactions are time stamped and there is clear audit trail and legal treatment for all parties.
Implications: Financial Services firms can originate clients and deals online, be sure of identity and check that against AML lists in real-time. This in turn makes it possible to automate end-to-end processes in onboarding, deposit taking and lending. Estonian banks are among the most profitable and agile in Europe.
Cyber Security
In 2007 Estonia was subject to a wave of co-ordinated Distributed Denial of Service (DDoS) attacks on state, media and bank websites in an attempt to overload servers and systems. At the time this attack was unique in its scale and sophistication. Although minor service interruptions inevitably occurred Estonia successfully defended the attacks and in 2008 became home to the NATO Cooperative Cyber Defence Center of Excellence. In 2009 NATO and SEB signed a partnership focusing on Cyber R&D in financial services. The cyber security and digital forensics sector has grown strongly since and today Estonia is a world leader in the field, benefiting from a joined-up approach between academia, business and government.
Implications: Financial Services and FinTech’s have access to best skills, solutions and practices in cyber security and can test preparedness in a real world environment.
Cashless Society
On restoration of independence in 1991 Estonia made a considered choice to avoid expensive and fraud prone systems such as cheques, instead focusing on Online and Card payments. Based on World Bank statistics Estonia already possesses among the lowest number of bank branches and ATM’s in the developed world yet we see a trend towards both being reduced further.
Cash and branches have a role however what becomes clear is that Digital banking works (supported by high speed internet access with high security).
Implications Digital Banks become the norm and benefit from competitive advantages in efficiency and agility over traditional business models. Over time advanced analytics will allow the Digital Banks to transform their data into more personalised client service. Clients benefit too, be it pensioners seeking efficiency, tech savvy Millennials or busy entrepreneurs saving time.
Blockchain Based e-Government
For any IT project to succeed it needs a strong sponsor, in this case the government, a leading light of the D5 digital economies initiative and European leader in e-government. The way in which the government utilises IT is too varied to address here (see links below for more) but in general information and services are delivered through web portals, returns made online and data managed in X-Road, an ecosystem of decentralised, distributed databases which harmonise public and private sector e-services. Since 2012 X-Road has been augmented by KSI Blockchain.
Long standing commitments to educating children in IT from an early age, passing enabling legislation and making investments are supported my more recent innovations. Among these the Virtual Data Embassy project, where public data is stored in the cloud, and e-Residency, where business owners can register an Estonian company and manage it remotely using the national ID card, are noteworthy. The latter has now fueled demand for Financial Service providers to service non-resident clients by video and internet bank, two of the most cost effective channels possible.
Implications: Government commitment makes it easier to engage and make long-term investments. The regulator has detailed, real-time data on the sector, making for better decision making. Collaboration between stakeholders builds a better ecosystem.
Estonia is already applying technologies that Financial Services providers, FinTech’s and regulators are grappling with elsewhere – digital identity, immutable data, digital banks, cost effective payments, decentralised data, etc. Moreover there is clear evidence that all stakeholders can benefit from such investments, removing the sustainability argument many cite as a barrier to change.
Is it scalable to larger, more complex economies? Let’s see, but these are some of the reasons Key Capital is located in Estonia and why we expect Estonia to develop as a significant for FinTech over time. Why not jump on a plane and visit us in our time machine...
p.s. Kallid Eesti sõbrad! Vabandan võimalike ebatäpsuste eest ning soovitan kasutada energiat selleks, et olla ka tulevikus liider selles valdkonnas :) Digital identity www.id.ee and www.sk.ee / Cyber Security https://ccdcoe.org / Cashless society www.eestipank.ee / E-Government https://e-estonia.com and www.ria.ee
Neil Mathieson
16.06.2016