Fintech just made a big leap forward in this tiny country: Here's why

Innovations in digital payments is helping Balkan state Croatia develop its fintech industry.

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With its Adriatic coastline and breathtaking landscapes, Croatia is a Balkan country mostly known as a tourist destination. But now its fintech industry, especially the digital-payments sector, is also beginning to make its mark.

When Microblink, an R&D company based in Zagreb, Croatia, started out in 2013, it had to rely on its founders' finances, because outside investments were hard to come by.

But a year later, the company had its first big success: Photomath, an educational app that reads and solves mathematical problems by using the camera on mobile devices. Over the years, the app has had more than 100 million downloads and received over €5m ($5.95m) in investment.

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Nowadays, Microblink has a presence in the US, Europe, and Southeast Asia, developing AI-powered scanning and data-extraction products that are used by more than 100 million end users.

The company mainly works with banks and mobile banking software providers, which then implement Microblink's technology in their own mobile apps.

Microblink has also received numerous accolades from the fintech industry during the past few years. In 2019, Deloitte listed the company among the 500 fastest-growing companies in the Europe, Middle East and Africa region.

"We made a name for ourselves in the fintech industry, which will always have a special place in our heart. In fact, our first product, PhotoPay, has revolutionized the field with simplified bill payments," Microblink co-founder and CTO Jurica Cerovec tells ZDNet.

The company's success also prepared the ground for other Croatian companies that were ready to test themselves in the fintech market.

Another Croatian success story is Electrocoin, a Zagreb-based cryptocurrency brokerage, with an annual revenue of about €35m ($42m).

The company created a payment service that enables any shop to accept payments in cryptocurrency for free. The service was recently introduced in the Croatian city of Sveta Nedelja, where locals can pay local tax and duties in crypto, making it the first city in the EU that has enabled such a payment option.

With the Croatian digital payment sector projected to be worth €2bn ($2.38bn) in transactions in 2020, the potential of the fintech scene in the small Balkan state, with a population of just four million inhabitants including more than 30,000 active technology professionals, hasn't gone unnoticed by investors.

"Croatia has seen a tremendous improvement of its fintech scene in the past few years, which is mostly due to people developing their digital skills on their own," says Vlaho Hrdalo, chairman of the Croatian Association for blockchain and cryptocurrencies.

"Investors are beginning to notice the levels of digital skills of young Croats and have been starting to turn their attention towards Croatia. When I spoke to one VC fund, they told me they'll be moving some money to Croatia as they find it similar to Israel 10 years ago – 'a lot of brains and no serious money'."

In fact, Croatia is effectively using the Israeli example when it comes to the development of its fintech scene. Last year, the two countries signed a fintech collaboration agreement, which aims to expand cooperation and encourage innovation in the sector.

On the software development side, the talent is there. But most Croatian companies still need to focus on their business skills, something that's lacking at the moment, Zagreb-based analyst and branding consultant Ivan Brezak Brkan argues.

"As with the rest of the eastern European startup scene, it is business skills and scaling that is proving most valuable. One low-valued skill in the post-COVID-19 era is definitely content creation, inbound marketing and thought leadership," Brezak Brkan tells ZDNet.

"Most fintech companies in Croatia are B2B and have used events, such as conferences, for sales. Now, with virtual events not being able to fill the void, these companies need to focus on content marketing as a business sales tactic – and they have no experience in that."

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With most fintech companies in Croatia targeting foreign markets, Croatian laws, of which most are in sync with the EU, such as Payment Services Directive (PSD2), enable companies to compete on the vast fintech market.

"Since we have implemented the PSD directive which is in effect for some time, I expect that quite soon we will have a lot of different new ideas and proposals and value-added services," Zagreb-based technology expert Marko Rakar tells ZDNet.

With the country lacking solid legal frameworks to govern fintech, blockchain, and artificial intelligence, Croatia has tried to adopt a more accepting and laissez-faire approach to regulating these industries, according to digital lawyer Hrdalo.

"However, without exact rules in place, digital companies in Croatia need to discover where they touch the regulatory perimeter on their own, which isn't always the best way forward," he notes.