Financial technology is in its early stages in North Macedonia. The ability of alternative finance companies to utilize technology and provide products and services to underserved individuals enabled them to successfully penetrate the retail lending market and become the most embedded subsector in the fintech space. Incumbent banks, aware of the growing competition, are developing fintech solutions such as better credit scoring solutions, the digitalization of products and services, and facilitating peer-to-peer payments. Fintech players and incumbent banks alike are also experimenting with big data analytics, cloud computing, and artificial intelligence. There are no initiatives in blockchain and distributed ledger technology.
The focus of the fintech space is currently on payment services following the adoption of the highly anticipated Payment Services and Payment Systems Act (PSPA) in April 2022. The previous payment services regulations did not allow fintech players to access payment systems that banks could exclusively access. The PSPA, modeled on EU legislation, including the Second EU Payment Services Directive, will change this. Indeed, the principal objective of the PSPA is to open up the payment services market, currently dominated by complex pricing structures, difficulties in comparing products and consumer switching, and disproportionately high charges for consumers. To that end, the PSPA envisages liberalization of the market for payment services, the introduction of new forms of payment services, greater security of electronic payments, enhancement of consumer rights, and a basic payment account. The liberalization of the payment services market will present a myriad of challenges for both incumbent banks and fintech players.
Incumbent banks will need to re-think their pricing models and devise strategies to respond to the competition in the market. They will be faced with the challenge to provide a better customer experience at lower prices. Their principal advantages are their well-developed IT financial services infrastructure and a network of physical points of sales (branches) throughout the country. Under the PSPA, they will be required to allow access to their IT financial services infrastructure for fintech players, which will open many issues. There is a consensus among all stakeholders in the fintech space that fintech will expose the financial system to higher levels of cybersecurity threats, financial crime, money laundering, and, potentially, terrorism financing. Another concern is that, if fintech players do not comply with the regulations, they might expose the financial system to loss of trust by consumers.
Fintech players will look to break the banks’ hegemony in the payment services market by providing greater access to the financial system at lower prices. They will focus on the new millennial and generation Z customers who demand new technology channels to carry out their financial services transactions. These customers will expect competitive pricing, increased responsiveness, and the ability to purchase products and services on a pay-as-you-go basis. However, a less sophisticated or more traditional customer base will still expect old physical channels to be available. They will not trust online transactions carried out solely by machines. Fintech players will have to decide whether to rely on the incumbent banks’ IT financial services infrastructure or develop their own, for example, by deploying distributed ledger technology. Most of them will likely choose to rely on the incumbent banks’ infrastructure, as that will be more cost-efficient than developing their own.
Ensuring compliance with the applicable regulatory framework will be challenging for new fintech players. They will have to ensure compliance with competition, data protection, cybersecurity, money laundering, consumer protection, and other relevant regulations which apply to them. They might find it challenging to operate in an environment where enforcement of the applicable regulations by regulators is inconsistent – which might be the case here, as Macedonian state agencies and authorities have little to no experience in fintech.
The liberalization of payment services will provide an impulse to the growing fintech space in North Macedonia. The market will likely welcome many new fintech players, particularly in peer-to-peer lending, peer-to-peer payments, cryptocurrency, e-wallets, robo-advice, and regtech. Whether the increased competition will drive innovation and efficiencies in the market to the benefit of consumers remains to be seen.
By Gjorgji Georgievski, Partner, and Fani Dimoska, Associate, ODI Law