3. Enabling environment for FinTech innovation in the Czech Republic and EU
EU initiatives in the FinTech sector are instrumental for the development of the Czech FinTech market. Some of these relevant initiatives are related to access and use of data, the revision of Payment Services Directive 2, the Regulation of Markets in Crypto-assets and Artificial Intelligence Act proposals, and the establishment of regulatory sandboxes. The Czech FinTech sector has a solid background of industry-led initiatives and a supporting enabling environment. Young Czech start-ups lack sufficient funding sources because of limited development of capital markets and scarce venture capital availability, which is in line with many OECD economies. There is an openness towards new digital financial products or services, and both the business sector and financial consumers are relatively quick in adopting financial innovations. The demand side scores well in basic digital skills. However the country lacks ICT specialists. The Ministry of Finance has published a National Strategy on Financial Education.
FinTech companies that combine innovative business models and technology to enable, enhance and disrupt financial services have a strong position amongst European Tech companies. Indicatively, four out of the top ten of Europe´s most valuable Tech companies in 2021 were FinTechs (i5 invest, 2022[1]). Based on the same source, nearly EUR 26 billion was invested into FinTech in Europe in 2021 through more than 750 financing deals, sometimes multiple rounds per company, with the biggest single investment reaching approx. EUR 900 m.
The European Union has been consistently supportive of FinTech and actively works towards supporting its safe development. In 2018 the European Commission adopted an action plan on FinTech (European Commission, 2018[2]) to foster a more competitive and innovative European financial sector, enable innovative business models to scale up at the EU level and support the uptake of new technologies such as blockchain1, artificial intelligence, and cloud services in the financial sector. The main object of the Action plan on FinTech was to enhance supervisory convergence toward technological innovation and prepare the EU financial sector to better embrace the opportunities brought by new technologies.
Building upon the Action plan on FinTech, the European Commission introduced in 2020 the Digital Finance package which came as the result of public consultations and outreach. The package consisted of a Digital Finance Strategy, a Retail Payments Strategy, and legislative proposals for an EU regulatory framework on crypto-assets and proposals for an EU regulatory framework on digital operational resilience. The goal was to foster competition in a financial market, enhance supervisory convergence, support the access to innovative financial products and prepare the financial sector to better embrace the opportunities brought by new technologies, all while ensuring consumer protection and financial stability (European Commission, 2020[3]). The Digital finance strategy aimed to further support the digital transformation of the financial sector by enhancing the digital operational resilience by mostly focusing on removing fragmentation in the Digital Single Market, adapting the EU regulatory framework to facilitate digital innovation or by promoting data-driven finance. All that while trying to mitigate the associated risk and ensure a level playing field among providers of financial services by implementing the principal of same activity, same risk, and same rules. Those initiatives were designed to unleash European innovation and create opportunities to develop better financial products for consumers.
The most recent EU initiative in the field of digital finance is the EU Digital Finance Platform, which was announced in the EU Digital Finance Strategy of 2020 as one of the key actions (European Commission, 2022[4]). The EU Digital Finance Platform is a website which is supposed to foster a dialogue between innovative financial firms and supervisors in order to overcome fragmentation and support the scaling up of digital financial services across the Single Market. The EU Digital Finance Platform will initially consist of two main building blocks: an Observatory offering interactive features such as a FinTech Map, events and a section where users will be able to share relevant research material, and a Gateway which will act as a single access point to supervisors, with information about national innovation hubs, regulatory sandboxes and licensing requirements (European Commission, 2022[5]). This part of the Platform will also host functionalities linked to cross-border testing – a novelty enabling firms to involve multiple national authorities in the testing of new products or applications. In a second phase, to be launched in 2023, new features are set to be added to the EU Digital Finance Platform, building on user feedback (European Commission, 2022[5]).
3.1.1. Data and Open Finance
The European commission has been promoting several initiatives in recent years related to access and use of data, all being a part of its longer term strategy on data (European Commission, 2020[6]). The strategy aims at creating a single EU market for data, personal as well as non-personal data, including sensitive business data, where EU law can be enforced effectively, and where all data-driven products and services comply with the relevant norms of the EU’s single market (European Commission, 2020[6]). Within the scope of this broad strategy, the European Commission has recently proposed two legislations – The Data Governance Act (European Commission, 2022[7]) and the Data Act (European Commission, 2022[8]). The first sets regulation on the re-use of publicly held, protected data and applies regulation to data intermediaries. Both personal and non-personal data are in scope of the Data Governance Act, and for personal data, the General Data Protection Regulation (GDPR) applies it also aims to facilitate the voluntary sharing of data by individuals and businesses. The second legislative initiative sets up rules on who can use and access what data and for which purposes.
More specific to financial data, in 2021, the Commission established an expert group on European financial data space to engage with stakeholders. A year later, a subgroup on open finance was created as open finance is considered to be an integral part of the European financial data space, along with data contained in public disclosures of firms as well as supervisory data (European Commission, 2022[9]). The access and reuse of customer data, with consent, across a range of financial services has already been referred to in the EU digital finance strategy.
The Digital Finance Strategy adopted by the EU in 2020 sets out Europe’s regulatory framework on the digital transformation of finance in the coming years, with emphasis on risks, data sharing and level playing field. The strategy sets out four main priorities: removing fragmentation in the Digital Single Market, adapting the EU regulatory framework to facilitate digital innovation, promoting a data-driven finance and addressing the challenges and risks with digital transformation, including enhancing the digital operational resilience of the financial system (European Commission, 2020[3]).
In May 2022, the Council presidency and the European Parliament reached a provisional agreement on the Digital Operational Resilience Act (DORA), one of the components of the Digital Finance Strategy, focused on harmonizing and improving the management of Information, Communication and Technologies (ICT) risks at financial institutions and critical ICT third-party service providers. DORA is expected to order the enactment of a financial services digital operational resilience act that will set consistent rules addressing the digital operational resilience needs of all regulated financial entities and establishing an oversight framework for critical ICT third-party providers. The regulation will cover a range of financial entities regulated at EU level, namely credit institutions, payment institutions, electronic money institutions, investment firms, crypto-asset service providers, central securities depositories, central counterparties, trading venues, trade repositories, managers of alternative investment funds and management companies, data reporting service providers, insurance and reinsurance undertakings, insurance intermediaries, reinsurance intermediaries and ancillary insurance intermediaries, institutions for occupational retirement pensions, credit rating agencies, statutory auditors and audit firms, administrators of critical benchmarks and crowdfunding service providers (European Commission, 2022[10]). The one-off costs associated with the proposal are mainly due to investments in IT systems. For large financial firms, implementing the measures are likely to be low due to previous investment. For smaller firms, the costs are expected to be low as well, as they would be subject to less stringent measures proportionate to their lower risk (European Commission, 2022[10]). However, given the CNB dissatisfaction with the level of applications for payment service provider licenses, the additional requirements set in the DORA regulation might negatively affect the already lengthy process of authorisation in this sector.
Revision of Payment Services Directive 2 (PSD2)
Sections 1.2 and 4.2 point to the fact that many Czech FinTechs operate in fields related to Payment services and that access to data provided by standardised APIs are a valuable component of their business. Thus, the PSD2 regulation and the open banking framework that it introduced are a significant component of the FinTech industry in the Czech Republic. Hence, it is expected that the revision of PSD2 currently underway at the European commission and the open finance framework that is being promoted will have a substantial effect on local FinTechs and their prospect of growth. The European Commission launched in May 2022 a Public Consultation on the Review of the Revised Payment Services Directive (PSD2) (European Commission, 2022[11]). This consultation was addressed to the general public and to a broad range of stakeholders and aims to report on the application and impact of EU rules on payment services and to assess whether PSD2 application remains fit for purpose. Such revision is closely interlinked with the open finance initiative, and according to the Consultation, lessons learned from PSD2 as regards third-party service providers’ access rights to payment accounts upon customer request will be taken into account when designing the open finance framework. The Commission has an ambition to propose legislation on a broader open finance framework which would allow for customers’ data to be shared beyond the scope of PSD2 provided that there is a customer agreement as well as the effective application of data protection rules and security safeguards (European Commission, 2022[11]).
A separate targeted consultation on Open Finance framework and Data Sharing in the financial sector was launched in May 2022 (European Commission, 2022[9]). As opposed to the general public consultation, this targeted consultation aimed to gather input from more professional stakeholders (such as individuals and organisations e.g. interest groups, member associations, and representative bodies that have more in-depth knowledge and/or (working) experience in the field of payments, such as PSPs, national- and EU authorities and – regulators, payment experts, etc.). However, the objectives of both consultations are the same.
Given the large proportion of Czech FinTechs operating in fields related to Payment Services, access to data provided by standardised APIs is a valuable component of their business model. Thus, the PSD2 regulation and the Open Banking framework that it introduced are a significant component underling the FinTech industry in the Czech Republic. Hence, it is expected that the revision of PSD2 currently underway, and the Open Finance framework that is proposed, will have a substantial effect on local FinTechs and their prospect of growth.
The European Single Access Point (ESAP)
In November 2021 the Commission also adopted a Capital markets union package which among other things announced a legislative proposal on the European Single Access Point (ESAP) or initiatives regarding new open finance framework. ESAP will be a common source of public, free information about EU companies and investment products and will be established by the European Securities and Markets Authority (ESMA) and should become operational from 2024. Apart from financial data ESAP should also provide sustainable-related information and product data and by that enable better digital use and re-use of information and tackle national data-related fragmentation (European Commission, 2021[12]).
The Capital market union package also suggests that the new ‘open finance’ framework beyond the scope of the PSD2 will be based on the principle of a level playing field for existing and new entrants. The Commission will work with stakeholders and recently established expert group on a European financial data space on a first set of specific use cases (European Commission, 2021[12]). This effort should later result in a legislative proposal for a new open finance framework, building on and in full alignment with broader data access initiatives. The Commission will furthermore adopt a supervisory data strategy to enable EU financial supervisors to efficiently collect and effectively use the data they need to perform their tasks and to minimise the cost and burden for reporting entities.” (European Commission, 2021[12]).
3.1.2. Regulation of markets in Crypto Assets (MiCA) and the DLT pilot regime
The ‘Regulation on Markets in Crypto Assets’ (MiCA) intends to boost innovation while preserving financial stability and protecting investors from risks related to crypto-assets (European Commission, 2022[13]). This regulation offers legal clarity and certainty for crypto-asset issuers and providers and will create a single licensing regime across all member states. The framework is expected to bring such assets providers into the financial regulation perimeter in the Czech Republic for the first time. It is to be expected that such entities will become subject to authorisation and supervision by the CNB, after local legislation will be put in place.
The rules allow operators authorised in one Member State to provide their services across the EU (“passporting”). Safeguards include capital requirements, custody of assets, a mandatory complaint holder procedure available to investors, and rights of the investor against the issuer. Issuers of significant asset-backed crypto-assets (so-called global ‘stablecoins’) would be subject to more stringent requirements (e.g. in terms of capital, investor rights and supervision) (European Commission, 2022[13]).
The Commission also proposes a distributed ledger technology (DLT) pilot regime for market infrastructures that wish to try to trade and settle transactions in financial instruments in crypto-asset form. The DLT pilot regime represents a so-called ‘sandbox’ approach – or controlled environment – which allows temporary derogations from existing rules so that regulators can gain experience on the use of DLT in market infrastructures, while ensuring that they can deal with risks to investor protection, market integrity and financial stability. The intention is to allow companies to test and learn more about how existing rules fare in practice (European Commission, 2022[13]).
A parallel effort on the side of the EU around the use of crypto-assets as a payment transfers venue, is the proposal to amend Regulation (EU) 2015/847 of the European Parliament and the Council of 20 May 2015 on information accompanying transfers of funds, extending to crypto assets the information requirements currently applying to wire transfers (European Comission, 2022[14]). These information sharing duties already apply to wire transfers through Regulation (EU) 2015/847 and are often referred to internationally as the “travel rule”. This present amendment proposal aims at introducing in EU law requirements suggested by FATF to align the regime of transparency for payments services providers for transfer of funds to Virtual Asset Service Providers (VASPs). The amendment will oblige these actors – VASPs – to collect and make accessible data concerning the originators and beneficiaries of the transfers of virtual or crypto assets they operate (European Comission, 2022[14]). Though the Czech Republic already requires a wide range of service providers in crypto assets to be registered, it does not supervise them on an ongoing basis, in particular, the payment providers’ regime does not apply. Thus the implementation of this proposed amendment will require significant adjustments, as in other EU countries. According to the impact assessment of the European Commission, the easiest option for application would be to modify the transfer of funds regulation to also encompass transfers of virtual assets. The implementation of the “travel rule” will introduce new specific requirements for both the newly-covered VASPs and those already covered in AMLD, requiring them to obtain, hold and share required and accurate information on virtual asset transfers users and make it available on request to appropriate authorities (European Comission, 2022[14]). Thus, a more ongoing framework of supervision will perhaps be called for, which could be entrusted to the Financial Analytical Office (FAÚ) or the CNB.
3.1.3. Artificial Intelligence (AI) Act Proposal
In 2021, The European Commission came forward with a proposal for the AI Act, a regulatory framework on AI systems. The chosen design of the framework is to set up regulatory harmonised rules predominantly for high-risk AI systems, with the possibility for all providers of non-high-risk AI systems to follow a code of conduct. The requirements will concern data, documentation and traceability, provision of information and transparency, human oversight and robustness and accuracy and would be mandatory for high-risk AI systems. The proposed rules will be enforced through a governance system at Member States level, building on already existing structures, and a co-operation mechanism at Union level with the establishment of a European Artificial Intelligence Board. With regard to financial services, AI systems intended to be used to evaluate the creditworthiness of consumers or establish their credit score, with the exception of AI systems put into service by small scale providers for their own use are regarded under the current proposal as high risk AI systems. The Commission may expand the list of high-risk AI systems used within certain pre-defined areas, by applying a set of criteria and risk assessment methodology (European Commission, 2021[15]). Thus, the direct effect on conduct of regulation and supervision in the sector of consumer credit is expected to be substantial, and indeed CNB official have assessed the expected impact of this regulation to be important.
3.1.4. Regulatory sandboxes in the EU
European Union supports the establishment of regulatory sandboxes throughout EU and considers them to be tools for an innovation-friendly, future-proof and resilient regulatory framework that masters disruptive challenges in the digital age. The benefits are seen mostly in the opportunity for innovation and growth for businesses, especially SMEs and businesses at a very early stage, and in promoting proactive regulatory learning, enabling regulators to gain better regulatory knowledge and to find the best means to regulate innovations based on real-world evidence.” (European Union, 2020[16]). Apart from the financial regulatory sandboxes, EU supports them also in other fields such as AI or blockchain (European Union, 2020[16]). Further to this, the EU has published a call for tenders to contract a consortium, the mission of which would be to facilitate and operate a pan-European regulatory sandbox for DLT that would accompany the use cases developed on top of the European Blockchain Services Infrastructure (EBSI) (European Commission, 2022[17]).
According to the European Forum of Innovation facilitators (EFIF) as of August 2022 there were ten sandboxes operating in the EU/EEA namely in Austria, Denmark, Italy, Lithuania, Malta, the Netherlands, Norway, Poland, the Slovak Republic, and Spain (European Banking Authority, 2022[18]). Added to that list is a sandbox in Hungary operated by the Hungarian National Bank, Nemzeti Bank (Magyar Nemzeti Bank, 2022[19]). The European Forum for Innovation Facilitators is a platform for supervisors to engage with each other and share experiences and expertise on innovation facilitators. It is supposed to help co-ordinate views on the regulation and supervision of innovative financial services and products and to strengthen co-operation. Recently new initiative under the Digital finance platform appeared, specifically the cross-border testing framework, which enables the involvement of more than one national competent authority.
This section provides a brief overview of industry associations and initiatives of the FinTech sector in the Czech Republic, focusing on the work of associations and other networking activities.
3.2.1. The Czech FinTech Association
The Czech FinTech Association was established in 2016 and is with over 40 members as of September 20222 the biggest representative of Czech FinTech companies. The association´s role is to support innovation in the financial sector and represent the member´s views in dealing with the public or private sector. The association organises expert working groups, networking events, and aims to constitute a point of contact for innovators, investors, regulators, and business partners (Czech Fintech Association, 2020[20]).
3.2.2. The Technology Platform for Communication Tools and IoT (CTIT)
The CTIT was established with the aim of supporting the Czech organisations in the digital economy, with the main focus on FinTech and the digitalisation of the financial sector. They do so through conveying knowledge in the field by organizing conferences, lectures, publishing and collecting and compiling information and literature, by providing expert opinions and advice on digitalisation and FinTech and by providing information on funding opportunities. They also publish FinTech podcasts, overview of Czech FinTech companies or FinTech Roadmap (CTIT, 2022[21]).
3.2.3. FinTech Media and related initiatives
There are two main FinTech focused online media sources in the Czech Republic. FinTech Cowboys, an e-magazine that publishes FinTech news from home and abroad, tests the latest products and services, writes reviews, publishes interviews, and connects professionals (especially from start-ups and financial institutions) and the general public (FinTech Cowboys, 2022[22]) and Fintree.cz, also e-magazine that focuses on articles, reviews and tips from the world of FinTech (Fintree, 2022[23]) Fair Fintech is a group of young FinTech companies which created this initiative for the goal to cultivate the market and the industries in which they do business and to help their clients to avoid bad deals. They also offer “fairness audit” for other FinTech companies. This service provides the other FinTechs with an evaluation which confirms whether their service, product and/or terms and conditions are “fair” (Fér Fintech, 2022[24]).
3.2.4. FinTech Hub
The FinTech Hub was established in 2021 in the Slovak Republic by Mastercard and Vacuumlabs in co-operation with the Slovak FinTech Association. Since then, already 15 companies from the Slovak Republic, the Czech Republic, Hungary, Romania and Ukraine (all from CEE region) have joined. In April 2022 a branch office was established in the Czech Republic where Seed starter by Česká spořitelna and Czech FinTech Association joined as partners. FinTech Hub aims to increase the level of innovation and competitiveness of the digital market in the Czech Republic and Central Europe and for this purpose offers variety of services for the young firms, such as legal and other advice, mentoring, independent testing environments or connecting them with investors or other key partners (Fintech Hub, 2022[25]).
3.2.5. CzechInvest
CzechInvest is a state contributory organisation, business, and investment promotion agency, which is subordinate to the Ministry of Industry and Trade of the Czech Republic and has a combination of regional, central, and international operations. One of its activities is focused on start-ups. They offer broad scale of initiatives for start-ups, such as mentoring (technology, business strategy and marketing), consulting services, arranging participation in international conferences, providing mentors and offices for three months abroad, airfare reimbursement, brokering investments for both investors and start-ups with reaching out to domestic and foreign partners, customers and investors. Their ecosystem consists of hundreds of start-ups, but also top experts in the Czech Republic or abroad. According to the CzechInvest’s annual report for 2021, 92 innovative companies were provided with incubation, mentoring, or assistance when expanding abroad last year through the programs CzechAccelerator, CzechDemo and CzechMatch (CzechInvest, 2021[26]).
This section provides a brief overview of the demand side in the Czech Republic, focusing on financial assets and credit to the non-financial private sector, level of financial literacy and digital skills of Czech consumers and their overall financial behaviour.
The savings rate within the Czech economy is relatively high, about 29% of gross national income (MFCR, 2019[27]). However, Czech households rank in the bottom of OECD countries with regard to overall financial assets held (Figure 3.1). More than half of households’ savings are held in cash and deposits and only a tiny fraction of savings enters the capital market (MFCR, 2019[27]). This is mainly due to the very conservative investment outlook of Czech households, which has not fundamentally changed over the past decade and a half; the total portion of household assets placed in exchange-traded shares, debt securities and investment funds (i.e. traditional capital market products) was 12.3% in 2016 (MFCR, 2019[27]). In addition, compared to OECD countries, the Czech households have in particular low ratio of financial assets held through financial intermediaries (institutional investors)(Figure 3.2). These “intermediated assets” include investment fund shares, life insurance and annuity entitlements and pension entitlements. Indeed, Czech households have low amounts of assets accumulated in both pension funds and life insurance reserves due to low amounts of retirement savings flowing to defined contribution schemes (see Annex A).
Source: OECD stat.
Source: OECD stat.
3.3.1. Financial literacy and financial behaviour of consumers
Financial education is the competence of the Ministry of Finance of the Czech Republic (MFCR) (see Section 2.1.1). The MFCR, based on discussion with the Working group on financial education, published in 2020 a National Strategy on Financial Education which sets out the direction that financial education in the Czech Republic should take in the coming years (available in Czech) (MFCR, 2020[28]). Among other initiatives in this regard, the MFCR runs an informational website about financial literacy which provides a lot of useful tips for consumers, including a national registry maintenained by the MFCR of on-going financial education projects (MFCR, 2022[29]).
In 2020, the MFCR also conducted a survey on the level of financial literacy among adult citizens (MFCR, 2020[30]). The evaluation of the survey provided a very detailed insight into the level of financial awareness and financial literacy of retail consumers in the Czech Republic. For example, in the field of money management it showed that 69% of adults realise that it is a good idea to spread their investments over several places. 10% of households use collective investment, up from 2% in 2015, but only 5% of people have invested in stocks or shares in the last 12 months. In the area of saving, it for example concluded that 56% of households now use a savings account (compared to 32% five years ago) or that 51% of households use supplementary pension or retirement savings. Regarding the financial mindset 28% of people admitted to spending rather than saving for the long term (mainly among young people under 30). The opposite view was held mainly by people over 60, those with a university degree and the self-employed. 64% of households (similarly to 2015) were building up a reserve in case of loss of income. In 31% of cases, they used a savings account and in 28% a current account (MFCR, 2020[30]).
The data of the survey showed that Czech citizens have long preferred saving to investing. Saving is mostly done through saving in bank account (three-quarters) or through building savings. Compared to 2015, the proportion of those who also saved in cash has increased significantly from 34% to 58%. Czech citizens were also starting to take a more proactive approach to their own finances compared to 2015. The proportion of those who have started saving (from 35% in 2015 to 69% in 2020), set a clear financial plan (from 39% in 2015 to 64% in 2020) or cut back on some of their spending (from 35% in 2015 to 62% in 2020) has jumped. However, saving still prevails over investing, Czech citizens hold 12% of their savings in the capital market (and a further 7% in pension products) and 51% of their financial savings in bank accounts (citizens in the 15 countries that joined the European Union before 2004 hold 14% of their savings in capital market investments and 30% of their financial savings in bank accounts) (MFCR, 2019[27]).
When compared to the results of the 2015 survey, the final conclusions of the 2020 survey showed that the level of financial literacy, which consists of financial knowledge and economic responsibility, has increased slightly over the five-year period since the last survey. The level of economic responsibility of citizens has increased, however the level of financial knowledge is stagnating. Czechs were also performing worse in simple mathematical examples (simple division, fractions, percentages, trinomials, simple and compound interest). However, a positive tendency emerged, for example, in a more active attitude of citizens towards their own finances. In fact, people have started to save more, set financial goals, and cut back on some of their spending, and two-thirds of households have built up a reserve in case of a loss of income. There has been an increase in the proportion of people who consult their relatives or experts before signing a contract or in case of financial difficulties, but only a fifth of people know what Annual Percentage Rate (APR) is. When it comes to pensions, 95% of people expect part of their pension to be funded by the state, and since 2015 the proportion of those with a more responsible alternative plan has increased – they also want to fund their pension from savings, a private pension plan or by earning extra income (MFCR, 2020[30]).
When it comes to crypto-assets, Czech consumers are a bit hesitant to invest in these assets. According to the market research agency STEMMARK, only 9% of Czechs have tried investing in crypto-assets. The research further provides more detail stating that the source of crypto-assets for Czechs are mainly (53%) cryptocurrency exchanges or cryptocurrency exchange offices, with cryptocurrency wallets (20%) and traditional stock exchanges or exchange offices (12%) also being used as alternatives. In any case, 93% of the money circulating in crypto-assets is for savings that Czechs willing to put at risk without any serious repercussions if the capital is lost. The most frequent amounts invested are up to approx. EUR 2 000 (CZK 50 000).3 Perhaps due to the current downturn in the value of crypto-assets, trust in crypto-assets has declined: In 2021, 39% of people did not trust them, while in 2022 the scepticism is up to 47% (STEM/MARK, 2022[31]).
3.3.2. Digital skills
Digital solutions in financial sector are in general quite widespread amongst Czechs and the population has a high uptake of some FinTech solutions. For example, in 2020 97% of Czech were using online banking (to compare, it was 82% in 2018). The population in the Czech Republic holds a relatively high score in the use of online banking among EU countries (Figure 3.3). Even though electronic banking is a popular tool among Czechs, 42% of them do not believe that the digital banking can completely substitute meeting with the banker in person, out of which 10% exclude such claim absolutely. However, using cashless payment methods and online solutions is very popular among Czech consumers as 61% of them prefer to pay by card when shopping offline (meaning all forms of contactless payments such as via smart phones, smart watches, etc.), 79% of respondents use internet banking at least 2-3 times a month and 69% use mobile banking as often as every day. Across European countries, Czechs are among the heavy users of online shipping (Figure 3.4). It can be therefore concluded, that even though a significant number of Czechs don´t want to rely on digital solution completely and prefer human interaction is some aspects, the majority in general prefers to communicate with their banks remotely.
Source: Eurostat.
Source: World Bank Global Financial Inclusion database https://databank.worldbank.org/source/global-financial-inclusion
According to the Digital Economy and Society Index (DESI), which monitors EU member states’ digital progress, the Czech Republic scores well in basic digital skills but the economy lacks ICT specialists (Table 3.1). According to Eurostat, 76% of Czech firms reported difficulties in finding ICT specialists, limiting digital transformation (European Commission, 2022[32]). According to DESI, among employed individuals aged 15-74, 4.6% are ICT specialist, which is slightly higher than the EU average (4.5%). DESI also concluded that 60% of Czechs have at least basic digital skills (EU average is 54%) (European Commission, 2022[32]).
3.4.1. Access to finance
Start-ups and young SMEs play a leading role in diffusing innovation in financial markets (by the introduction of new products, services or processes, new organisational methods or marketing techniques). Fostering innovation can raise productivity and spur economic growth.
There are well known barriers for innovation: access to finance, access to skilled human capital and access to networks (all along the supply chain – suppliers and clients). In particular, young Czech firms lack sufficient funding sources, in particular access to capital markets. There is also a little venture capital available (see Figure 3.5 reproduced below), which creates a finance gap for early-stage innovative firms. Bank credit is available but not always accessible for young start-ups without any previous financial history or finished product (OECD, 2020[33]). Access to finance is therefore difficult for young start-ups which can be seen also from the results of the questionnaire (see Chapter 4).
International Finance Organisations (European Investment Fund) have signed agreements with the Czech Government in order to stimulate growth-oriented firms seeking capital for their further development. Guarantees for SMEs and innovative projects are also provided by The Czech National Development Bank.
Because the financial system of the Czech Republic is bank-centric (see Annex A) and banks have a 74% share in the assets of the financial system the consequences are that the sources of financing of Czech companies are heavily dependent on (1) bank financing, (2) own resources and (3) subsidies from the European Union (in 2016, the value of loans amounted to 25.5% of corporate capital, listed shares 4.2% and bonds 3.6%). Most of the capital contributions of Czech companies come from the owners’ own resources and reinvested profits, while most of the debt financing is obtained from banks. The share of financing through listed shares and bonds in Czech companies is half that of the EU average and one-third that of Germany or the UK (MFCR, 2019[34]).
Venture capital/private equity
In 2019 fundraising activities for start-ups in the Czech Republic in general generated almost EUR 100 m (CZK 2.54 bn)4 and the volume of invested money increased by 127%, however a trend of growing investment activity of local funds and the weakening presence of the international ones can be noticed. Another trend that can be seen is the increased focus on financing small and medium-sized enterprises (Deloitte, 2020[35]).
Note: (*) North Macedonia, Kosovo, Montenegro, Bosnia and Herzegovina.
Source: Google for Stratups, atomico and deealroom.co (2021[36]), Coming of age: Central and Eastern European startups, https://dealroom.co/reports/coming-of-age-central-and-eastern-european-startups
Note: *North Macedonia, Kosovo, Montenegro, Bosnia and Herzegovina.
Source: Google for Stratups, atomico and deealroom.co (2021[36]), Coming of age: Central and Eastern European startups, https://dealroom.co/reports/coming-of-age-central-and-eastern-european-startups
The Czech Private Equity and Venture Capital Association (CVCA)
CVCA is an association representing the interests of companies active in the area of private equity and venture capital in the Czech Republic. CVCA´s main objective is to promote and support private equity and venture capital and its development through, among other, elimination of administrative and legislative obstacles, and to increase awareness about the possibilities and importance of private equity and venture capital in the Czech Republic (CVCA, 2022[37]).
The Czech Business Angel Association (CBAA)
CBAA is the national association connecting angel investors in the Czech Republic and representing their interests. According to the Association, their aim is to build a vibrant investment climate that follows high professional standards and ethical principles. The main objective of CBAA is to nurture and promote active relations between investors and start-ups in the Czech Republic so that they provide a stable foundation for innovation and progress (CBAA, 2022[38]). In addition to networking across angel investors and start-ups, the association raises awareness of angel investing and represents the interests of investors at the national and international levels.
3.5.1. European Investment Fund (EIF)
The EIF supports entrepreneurship and innovation in Europe by helping European small and medium sized companies (SMEs) with access to finance. EIF does not provide the funding or guarantees directly to individuals or companies but offers targeted financial products to intermediaries such as banks, guarantee and leasing companies, micro-credit providers and private equity funds. The final funding approval therefore lies solely with the financial intermediary.
One of the EIF initiatives is to provide venture capital and micro-financing for SMEs, particularly new and innovative companies or guarantees for financial institutions, to cover loans to SMEs. By that helps the EIF to the EU countries with developing their risk capital markets. EIF also invests in independent management teams that raise funds from a wide range of investors to provide risk capital to growing SMEs. The projects which are indirectly funded by EIF usually aims at fostering EU objectives, notably in the field of entrepreneurship, growth, innovation, research and development, employment and regional development.
The shareholders and key partners of EIF are the European Investment Bank (EIB), European Union, represented by the European Commission, and a wide range of public and private banks and financial institutions. The investment activities are carried out using either EIF’s own resources or those provided by the European Investment Bank, the European Commission, by EU Member States or other third parties (EIF, 2022[39]).
3.5.2. European Investment Bank (EIB)
The EIB is the European Union’s investment bank which funds projects that achieve the policy aims of the European Union by providing loans, guarantees and technical assistance. The focus of EIB is in areas such as climate, environment, small and medium sized enterprises (SMEs), development, cohesion and infrastructure. The loans provided by EIB are usually long-term loans that typically cover up to 50% of a project’s overall cost. The investments flow through intermediated lending partners to both public and private sector (mostly SMEs) in order to support growth and jobs. The intermediaries can then provide local and targeted funds. Only loans exceeding the amount of EUR 25 m are invested directly. Apart from debt financing, project financing and equity financing EIB also provides advising and technical assistance.
The EIB is jointly owned by the EU Member States and raises money from international capital markets. No money comes from EU budget, but EIB borrows money on capital markets and lends it on favourable terms to projects that support EU objectives. As an independent body, the EIB takes its own borrowing and lending decisions. It co-operates with other EU institutions, especially the European Commission, the European Parliament, and the Council of the EU (EIB, 2022[40]).
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Notes
← 1. Blockchain is a type of distributed ledger technology (DLT) that records transactions as a chain of blocks. For the purposes of this report, Blockchain and distributed ledger technologies (DLTs) are used interchangeably.
← 2. Based on figures provided by the Czech FinTech Association.
← 3. Based on exchange rate as of 31 December 2021 which was CZK 24.860 for EUR 1.
← 4. Based on exchange rate as of 31 December 2019 which was CZK 25.41 for EUR 1.