Competitiveness in the FinTech Sector: Case of Russia

The application of innovation decisions in the financial sector led to the appearance of FinTechs, tech-driven companies that disrupt or contribute to traditional financial services. The appearance of new actors has changed the relationships between incumbents, regulators, consumers, and other actors and intensified competition in the financial sector. Building on the modified Panzar-Rosse model, we examine the competitiveness among FinTechs on the dataset of 75 FinTechs from Russia. The results show monopolistic competition, close to a monopoly among FinTechs in Russia. The revealed situation is explained by high barriers to the entry to sector and also by country features, as imperfect legislation, lack of financing of FinTechs' activity. The results of the research highlight the necessity to attract attention from policymakers to improve the competitiveness environment in the financial sector in Russia.

Competitiveness; FinTech; Panzar–Rosse model; Tech-driven companies

In the conditions of the modern economy, there is fierce competition between business entities, which forces companies not only not to stop at improving existing methods but also to create completely new technologies that will contribute to the automation of processes in all spheres of society (Dobrolyubov, 2020; Pratiwi et al., 2020). The successful penetration of financial technologies into the financial sector makes one think about how widespread their development is in the future (Berawi, 2004; Gozali et al., 2020). Therefore, the competition between high-tech companies providing financial services, as a result, is a relevant topic and requires detailed study (Palmié et al., 2020; Zetzsche et al., 2020). The recent literature review by Kavuri and Milne (2019) highlights the need to estimate the changes in the financial sector. We address this gap from the perspective of estimating the competitiveness among FinTechs.

FinTechs are high-tech companies that apply innovative decisions to provide financial services and are an alternative to traditional financial institutions (Wamba et al., 2020). The goal of any commercial company is to get profit by attracting the maximum number of consumers (Hassan et al., 2018; Berthilde and Rusibana, 2020). In the case of FinTechs, this statement also applies, so we can conclude that competition plays a huge role in their development. The most talked-about (and most-funded) FinTech start-ups are meant to compete with traditional financial service providers (Stulz, 2019). The growing influence of FinTechs has been proven by increasing its quantity. In comparison with 2018, the quantity of FinTechs doubled at the beginning of 2021 and reached 26,045 companies (Statista, 2021). Moreover, in 2019, the investment in FinTech composed $135.7 billion with 2,693 deals globally (KPMG, 2020). Various financial services are provided by FinTechs.

There are RegTech, payments, insurance, credits, analytics, etc. (Pantielieieva et al., 2020). According to the Global Fintech Market (2018–2023) (2019) report, among these segments, payment services are the main driver of growth in the global market. Moreover, there is no financial service that is not realized by FinTechs. Thus, FinTechs are expected to play a significant role in the financial sector (Giglio, 2021).

In the scientific literature, various studies have aimed to analyze the FinTech sector. The work of Nikitina et al. (2017) states that FinTechs currently cannot fully compete with representatives of the banking sector; moreover, 95% of innovative financial developments belong to professional participants in the financial sector. Koh and Koh (2019) suggest that the banking sector in the future will be represented by cooperation between FinTechs and banks. In research, Koposov (2017) reveals that the emergence of high-tech companies contributes to increased competition. In contrast, Shkhalakhova (2018) proves that FinTechs in Russia do not pose a real threat to traditional banks due to their investment opportunities. To the best of our knowledge, no previous paper has investigated the competitiveness among FinTechs.

We use the dataset of Russian FinTechs. Despite the historical background and economic and political features, Russia is an interesting case due to the following aspects. The FinTech Adoption Index in Russia achieved 82% in 2019, exceeding the global average rate. This means that 82 of 100 people have already used the services of FinTechs. Also, Russia is in the TOP-20 countries in the Global FinTech Index (FinDexable, 2021). Also, it is among the top 20 globally in terms of the quantity of FinTechs established in the country (Laidroo and Avarmaa, 2019).

We examined the competitiveness among FinTechs in Russia. Specifically, we used the modified Panzar–Rosse model on the dataset of 75 FinTechs from 2014 to 2018. The results reveal monopolistic competition among FinTechs in Russia. Moreover, the situation is close to a monopoly. It emphasizes high barriers to entry into the financial sector (Silva et al., 2018). Barriers are connected to legislation and finance in the case of Russia. According to Claessens (2009), competition policy in the financial sector is often already behind and restrains the development of financial technologies. In the case of Russia, it can lead to crowding out small companies by large IT companies or banks oriented on digital technologies. The lack of finance also exacerbates the revealed situation. FinTechs are difficult to find investors due to high risks and the lack of protection of investors from legislation (Shashkova et al., 2020). That is why many companies prefer to register in other countries with more developed legislation e.g., Cyprus (Aparna and Nair, 2016). The results attract attention from policymakers to improve the competitiveness environment in the financial sector in Russia.

Our paper contributes to FinTech literature by being the first to investigate the competitiveness among FinTechs and thus fills the gap revealed by Kavuri and Milne (2019). We also modified the Panzar–Rosse model (Mamonov, 2010) for measuring competitiveness in the FinTech sector. The paper also contributes to FinTech literature in Russia (Koposov, 2017; Shkhalakhova, 2018; Soloviev, 2018; Koh and Koh, 2019), which is restricted by different analyses and reviews.

The paper is structured as follows. Section 2 presents the data and methodology. We analyze and discuss our results in Section 3. Finally, Section 4 includes the main conclusions.

New financial technologies and business models radically change the competition between financial institutions, from brand competition to competition in consumer characteristics of products and services, thereby contributing to the formation of a favorable competitive environment.

The results of the Panzar–Rosse model for the period from 2014 to 2018 showed that the FinTech sector is in the condition of monopolistic competition. However, due to the low value of the H-statistic, a monopoly may appear in the near future. The analysis of the model’s results over the years confirms the results obtained using the structured approach and proves the high monopolization of the FinTech sector (Efimov et al., 2021). The correct strategy of policymakers, aimed at improving legislation and increasing the investment attractiveness of the FinTech sector, will reduce entry barriers to the FinTech sector and will lead to an increase in the level of competition in the financial market. If the recommendations for eliminating entry barriers proposed in the study are implemented, the level of competition in the financial market will increase; otherwise, FinTechs, as separately functioning companies, may disappear and become part of large incumbents.

The research involves FinTechs registered in Russia as developers of innovative technologies and financial service providers, except for incumbents. The financial statements were taken from open sources of information: reports of public companies and rusprofile.ru. As part of further research, it would be interesting to expand the dataset and include companies that operate in Russia and are registered abroad. One of the largest representatives of such companies is QIWI plc, which is registered in Cyprus. It is also possible to analyze foreign FinTech sectors to compare the degree of competition development of the industry in different countries.

In 2020, the COVID-19 crisis jeopardized the entire banking ecosystem, and the need for personalized digital solutions, a solid capital base, and visionary leadership has become more important than ever. Most FinTechs have been existing for less than 10 years, and only a few of them demonstrate operational profitability. In most cases, FinTechs rely on investor funding, which is not guaranteed in the near future, especially as revenues have dropped since the pandemic. Obviously, there will be winners and losers among both incumbents and FinTechs, so it will be useful to assess the impact of the coronavirus pandemic on the FinTech market in a few years.

Moreover, recently, FinTech development has been aimed at digitalizing incumbents and creating an ecosystem within them, so when several large players appear on the Russian market, such as Sberbank and VTB, it is possible to analyze the degree of competition among such companies, excluding the effect of obtaining income from traditional operations.

The modification of the Panzar–Rosse model proposed in the study, which allows it to be used to study competition among not only banks but also nonfinancial organizations, as well as the results of the FinTech market research, makes a significant contribution to study further and determination of development prospects.

     The authors appreciate the insightful feedback from colleagues at the Graduate School of Industrial Economics, Peter the Great St. Petersburg Polytechnic University.

     The research is partially funded by the Ministry of Science and Higher Education of the Russian Federation under the strategic academic leadership program 'Priority 2030' (Agreement 075-15-2021-1333 dated 30.09.2021).

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