Favorable trends for fintech growth in Hungary. Will they expand in CEE?

A number of favorable trends have been evolving in Hungary to facilitate fintech startups. However only a few have been able to successfully close their first round of institutional capital investment so far.

Most worth mentioning are the fintech actions of the Hungarian National Bank, the fintech incubation programs of the largest Hungarian banks, and the birth of the Hungarian Fintech Association (MAFISZ), which unites fintech startups.

Those Hungarian fintech startups that received investments are mostly using the fresh capital to speed up their go-to-market activities or to reach economies of scale. The founders are convinced that to fully achieve these goals, they have to expand internationally.

Hungarian fintech startups that are in the concept or preproduction phase before capital investments mostly focus on the domestic market. The majority of them argue that entering international markets depends on a successful capital investment.

9 out of 10 would expand in the CEE region

In the spring of 2020, a highly recognized professional jury with top managers from leading technology companies, financial institutions and investors selected the 20 most promising fintech companies in Hungary. A survey carried out in February 2021 amongst the HUNFINTECH 20/20 winners showed that 9 out of 10 companies would target the CEE region. However, there are some startups that, due to the characteristics of their services, can reach economies of scale only by operating in the global market. These companies belong to the fields of PayTech, WealthTech, InsurTech, BankTech and Mobile Payments.

The main reason for expanding is to reach economies of scale

Hungarian fintechs usually think of Hungary as a pilot arena and plan to grow via international expansion. Since the size of the Hungarian market limits the growth potential and the regulations are inflexible in some areas compared to those of the neighbouring countries, CEE regional expansion is inevitable. Besides, the potentials of regulatory arbitrage can also be exploited. Another key driver for expanding in the CEE region are the cultural similarities, which might contribute to reducing the risks of market entry.

Poland, Slovakia, Czech Republic and Romania are the favorites

According to the HUNFINTECH 20/20 survey, Poland is considered the main expansion target in the CEE region due to its supportive financial regulatory system and geography. Slovakia is in second place, while Czech Republic and Romania are tied for third.

International expansion tools and strategies

Depending on their business models, the Hungarian fintech startups mostly target the incumbent financial service providers in the CEE region.

Their preferred strategies and tools are as follows:

  1. Developing a Minimum Viable Product (MVP) with a local partner
  2. Using agile online content marketing
  3. Finding a local B2B sales partner
  4. Applying a white label market model and/or establishing a local presence

Challenges in international expansion

The experience of Hungarian fintech startups shows that expansion in the CEE region is mostly shaped by regulatory differences, language difficulties and challenges relating to local networking.

Furthermore, it is also quite challenging to establish the appropriate local representation and sales, to build integrity and credibility. Likewise, managing the finances between non-euro countries is a difficult issue to resolve.

Hungarian companies also mentioned that it is very difficult to compete with Western European companies, even in the CEE region.

The founders believe that the best way to successfully enter international markets, is to build a strong bond with the local network and create local business partnerships. Furthermore, employing a local country manager and carrying out thorough market research are key to successfully localising their business opportunities.

The speed and efficiency of international expansion are mostly influenced by acquiring an international reference. The majority of respondents reported that it is quite difficult to achieve a breakthrough in global expansion while they still lack the first reference from abroad.

Last but not least, a spotlight in the relevant international media, or being listed by global fintech incubators or influencers, would fundamentally contribute to a successful international expansion.