Commentary by Trevor Culbertson
This is part 3 of an ongoing series focused on the financial and payments-related repercussions of the invasion of Ukraine by the Russian military. Part 1 | Part 2
Imagine all the upheaval currently in the U.S. economy, and the massive challenges we are facing to best address them. Now imagine that, but over half our country is being bombed. No doubt a scary thought. Yet the people of Ukraine do not need to imagine such a scenario. Instead, they imagine what they can do to prevent the crumbling pieces of their society from falling through their hands. And they are indeed succeeding in important ways, a surprise perhaps to some but perhaps not to many Ukrainians. How have they been resilient? Particularly from a consumer confidence and fintech perspective? Pragmatic central banking practices, rapid digitization of services and businesses, and strong support from Europe have all been key in keeping the civilian and military engines of Ukraine churning as Russian troops have taken roughly a fifth of the country.
Brutal resiliency and slow-burning land grabbing may be the predominant headliners, but a milestone policy was reached on June 23rd when Ukraine (Moldova too) was granted candidate status into the EU. This was the first, but arguably most difficult, step for a nation to join the bloc, since its members must unanimously agree upon admittance.
Government helps Business, Vice Versa
While Ukraine’s economy appears to have shrunk by over 30% since March, two-thirds of small and medium businesses that halted operations at the onset of the war have since resumed some level of operations. The National Bank of Ukraine and the Ministry of Digital Transformation (a barely 3-year-old department) have been working in tandem to fight economic fallout through monetary adjustments, such as increasing interest rates from 10% to 25%, and through economic and social rejuvenation, like releasing the world’s first official digital passport, or strong regulatory support for their 2nd strongest sector, IT.
It is difficult to quantify exactly how many fintechs are still operating in Ukraine. However, if one considers “peak” capacity, fintech firms based in Ukraine had more than doubled from 2018 to the end of 2021. Out of the roughly 200 companies still operating, those able have moved their team members to safer areas in Ukraine, typically in Kyiv and the west of the country.
Another cardinal proponent of Ukrainian fintech is the UAFIC (Ukrainian Association of Fintech and Innovation Companies), who has been vital in advocating on behalf of the industry, and nurturing and retaining talented professionals and partnerships. For example, Mastercard partnered with PrivatBank, the nation’s highest-valued commercial bank, to launch the country’s first fully digitized bank branch.
Covid Adaptation becomes War Resilience
For most countries, the effects of the pandemic, particularly in retail and payments, have induced dramatic market shifts and consumer behavioral changes. However, Ukraine has leveraged these adaptations in unexpected but genius ways. Pre-war digitization has, for example, eased the struggle to staff physical locations during wartime and therefore protect revenue streams. This has allowed nearly 80% of bank branches to remain open.
Another example; while the Ukrainian diaspora may open foreign bank accounts or utilize their domestic financial services, over 3.5 million are active users of the new government-backed portal Diia; an app that gives access to digital documents (such as the world’s first digital-only ID), public services (like welfare payments), payments for fees or fines (like vehicle registrations), and can even register a business. That last offering gives Ukrainians one of the fastest business registration nations in the world. According to the Ministry of Digital Transformation, it takes up to 15 minutes to become an entrepreneur in Ukraine, and 30 minutes to form an LLC. The service has been used by over 370,000 entrepreneurs and more than 4,500 companies since spring 2021.
Deep (IT Talent) Bench
Ukraine’s pool of IT-literate professionals initially grew due to 1) its attraction as a low-salary-demanding overseas option for companies needing developers, 2) its relatively high number of English speakers, and 3) its more forgiving time zone than Asia for EU and North American companies. The community has upgraded significantly in size and stature in the past decade. Although it can be difficult to get an accurate idea of the current fintech ecosystem in Ukraine, the numbers are still impressive for a nation with less than $4,000 GDP per capita:
- Over 200 fintech companies, roughly 20% of those being payments-focused
- 30% were founded after 2017
- 50% operate internationally
- Roughly 220,000 IT specialists, with 23,000 annual IT college graduates
- 25% of the nation’s exported GDP is from fintech companies
- Over 100 R&D centers for international companies
- Over 100 Fortune 500 companies use Ukrainian IT services, including Microsoft, Google, Samsung, Oracle, Snap, and Ring
Ukraine professionals also thrive as eCommerce engineers. The largest open-source website development platforms, like WordPress, Drupal, Magento, and PrestaShop, are written in PHP. The U.S. has around 7,000 PHP developers proficient in PHP; Ukraine has over 9,000. As more SMBs become eCommerce capable, simple but efficient website building will continue to grow in need. Magento, a leading open-source eCommerce software that powers hundreds of thousands of online stores, was developed by Ukrainians. Wix also has significant operations in Ukraine, and BigCommerce has over 100 employees in Kyiv. The latter opened an R&D center there in 2019, comprising approximately 10% of its workforce.
Some household names originated in Ukraine, like Grammarly and GitLab, but also payments companies with unique platforms like LEO, a payment processor within the video game space, or Jetbeep, a mobile-to-physical payments platform.
Countless companies, especially in financial technology, are giving special attention to Ukrainian workers who have lost their jobs. Pleo, a business expenses payments firm, has “fast-track” applications that promises to provide new hires from Ukraine with free flights for them and their family to relocate, their first month of accommodations paid for, and funded counseling services. This is in addition to the Temporary Protection Directive, a measure adopted by the EU Council 20 years ago but triggered for the first time this spring, which gives a temporary exception to standard asylum status applications.
This massive disruption in talent no doubt is already having a profound impact on tech companies based in the U.S., Europe, and elsewhere. Startups in Seattle and Silicon Valley often work with teams in Ukraine, tapping the country’s large pool of English-speaking programmers, project managers, and other technologists. Western tech firms will find that without them, their talent shortage will get even worse. Even for Ukrainians who have been able to reach relative safety, connectivity problems caused by Russian attacks on their infrastructure have made communicating from Ukraine an arduous process.
Ukraine Plays its Own Cards
PROSTIR, the National Bank of Ukraine-issued official card for payments and settlements in hryvnia, partnered with UnionPay International back in 2020 to allow international transactions via a co-badged card. At the time, 98% of all transactions with cards issued by Ukrainian banks were domestic, leaving only 2% abroad. The increasingly larger Ukrainian diaspora now appears to rely on UnionPay payment rails for any PROSTIR transactions.
While Visa and Mastercard comprise the majority of cards issued by Ukrainian private banks, PROSTIR partnered with PrivatBank in May 2022. PrivatBank’s goal to grow the 600,000 card network by expanding its issuance options from the National Bank to third-party banks. The overarching objective of PROSTIR is to promote and enable a cashless economy for all, and to improve the agency and security of Ukraine’s consumers. Among the countless relief programs and subsidiaries allotted to Ukrainian businesses and civilians, the National Bank removed interchange fees for PROSTIR cardholders from March to May of this year. While fees have since resumed to a rate lower than pre-war (0.3%), a zero-interchange fee still applies for funds allocated to charities, social services, and war bond purchases.
Inspirational is a word rightfully thrown around a lot when discussing Ukraine these days. However, the financial consequences of waging war will burden any nation, and foreign aid will become more imperative. Multiple reports estimate Ukraine is borrowing $5 billion a month, but budgetary revenues are about half that. Germany looks to increase its support, both monetarily and militarily, and the economic sanctions against Russia will only grow in impact as time passes. However, the outlook of many leaders in Ukraine appears to be long-term, and therefore hopeful. The Deputy Governor of the National Bank, Oleksii Shaban, recently stated “The development of the fintech ecosystem, in particular the startup environment, is an integral part of our strategy… even as Russia’s war on Ukraine continues, we must already think about where to direct the financial system to meet the needs of postwar recovery and economic development.”
Sources: Ministry of Foreign Affairs of Ukraine, Ukrainian Association of Fintech and Innovation Companies, National Bank of Ukraine, Money 20/20, PYMNTS, Finextra, Global Government Fintech, Razoyo