Poland’s potential as a financial-services power

Michael Wodzicki, partner in PwC’s Strategy& team in Poland, talks to the BPCC’s Michael Dembinski about the shape of Poland’s financial services sector, the opportunities that lie ahead, technology, geopolitics and solving the one significant bottleneck to growth – people.

How is business coping with the high cost of money in Poland and across Central and Eastern Europe?

We currently have central bank divergence where, in an uncommon move, the European Central Bank (ECB) cut its reference rate before the Federal Reserve (Fed). Usually developed-market central banks follow the lead of the Fed. Given the ECB rate cut and with no anticipated decreases by the Fed in the near future, we should expect a stronger dollar. In Poland with still above-target inflation, but downward trending, the Polish zloty reference rates could follow the ECB, but more likely will follow the Fed, which would mean  a decrease towards the beginning of next year; however, no one knows whether that will happen, so you have to hope for the best and prepare for the worst. We certainly see Polish companies holding back capital investments across the economy; the level of investments by Polish firms is lower than it was historically. This is a big concern because investments drive future growth. We also see that their deposits are at a high level; businesses do have money to finance that investment on their own, but they’re not doing that. They’re earning a return on deposits now that inflation appears to be under control. Another thing we’re seeing is interest from foreign investors in debt and private equity and mezzanine lending for Polish entities; this is creating new competition for Polish banks. We see funds from London, New York, Frankfurt, saying “we can issue debt to Polish companies and get a nice return” – this is a new dynamic in the lending market. And it’s a huge opportunity for Polish enterprises – in the past, they could only go to banks. This is a new threat that banks will have to face – new competition, which in more advanced Western economies is the way business works. It’s healthy that it’s finally reached the Polish market.

Why aren’t Polish businesses investing as they were? Investment’s down to about 17% of GDP from about 24% around 2006. To what extent is this the result of geopolitical uncertainty, and to what extent is it just the economy’s cyclical nature? What could prompt it to back up again?

For some international investors, today’s political risk is lower than in the past. I’d divide that risk into two categories, one being relations with our neighbours and trading partners – talk of being in disagreement with the EU and with Germany, by far Poland’s most important trading partner, created negative sentiment around Poland. The second is legal risk – not just questions about the rule of law, but also the speed of law – how quickly legal proceedings were settled by the courts, which recently reached record levels in terms of average length of proceedings. So businesses were asking whether they could trust the Polish legal system to take care of justly and resolve quickly disputes as they came up. And then there was the issue of the EU’s Recovery and Resilience Facility money coming under question, blocking a big injection of EU funds. Then on top of that you have the geopolitical risks.

Our members, UK companies who’ve been here for a long time investing in Poland, generally have no problem with reinvesting and upping their investments, opening new operations, new hubs, new factories, warehouses. It’s the businesses with no experience of Poland who are drawing back.

I remember one meeting with a US company which had decided that it wanted to invest in Poland, as well as moving significant operations from Western Europe, but then they came back and said that they’re not willing to make this investment and move to a country where there’s a war going on. Of course, there’s no war going on in Poland, but that was the board’s decision and its perception of the country. And yet of those companies who have invested in Poland, the large majority are ecstatic about the returns they get on those investments, the stability of the economy, the growth of the economy, the skills of the labour force, the year-to-year improvements to the infrastructure, and the all-round improvement in quality of life. These things have all made those who are invested here loyal to those investments.

That posits a positive future. Uncertainty over Russia and Ukraine is still present, but from the internal political risk perspective, things look much better. There’s an expectation among our members that the second half and in particular the fourth quarter of 2024 will see strong growth.

I agree with that. And I just want to add that the new government has this idea of building an Iron Dome over Poland, and an Eastern Shield. It reminds me of what Israel has done in a geopolitically difficult location. We’re an island of stability in this region. An Eastern Shield may reduce the perception that Poland is a dangerous place to invest because there could be a war here. But as well as changing that narrative quite effectively, if the government goes forward with those in defence investments, that will have a spill-over effect of defence companies investing in Poland and doing part of their production here, a direct result of that defence spending. It will also attract investment from the West’s defence-sector companies, especially if the EU decides to partially finance the Eastern Shield. If the Polish government plays this politically in the right way, by securing EU funding, the Iron Dome and Eastern Shield could be a win-win for Poland and the European defence industry as well as be positive for the financial sector, because it removes this risk element – and for the financial sector, that’s what it thinks about the most – risk.  

Let’s look at the structure and condition of the Polish financial services sector.

On the retail and small business side, Poland’s banks demonstrate an incredible level of sophistication in their offer to customers. I’ve done multiple benchmarks globally; the top countries that we see in terms of retail banking are Poland, Spain, Turkey and Singapore. Very sophisticated, very advanced, and driven by competition. We have a very healthy banking sector in Poland with ten banks competing fiercely against each other; this level of competition is great for customers. It’s a mix of Polish banks and foreign banks from different countries. That competition drives innovation. And because most Polish banks introduced new core banking systems  in the late 1990s/early 2000s, Polish banks have  much more robust IT infrastructure which allowed for those innovations to be more easily implemented than in the legacy banks in France, Germany, UK or US, where the core systems were built in the 1960s and 70s. Poland’s retail banking is recognised globally as being world class. Poland should be very proud because it has built that. As a result, the level of disruption which can be done to Poland’s banks by FinTechs is much lower than what remains to be done in the US or Western Europe. In the US especially, the cost of simple payments transfers is high, and the time a transfer takes to get through is long. This is down to the fact that, incredibly, cheques are still widely used and accepted and don’t seem to be going away. It shows that the banking system is ripe for disruption, unlike Poland’s. So I think FinTechs here have a harder competitive landscape than in countries with legacy banking systems. That said, when I think about Klarna as a FinTech example, I think they gave a nice signal to the market about buy-now-pay-later, and neobanks like Revolut have made some inroads on the market with some innovative ideas and product offerings – which were quickly copied by Polish banks –  but it’s peripheral; I wouldn’t describe it as disruptive.

While retail and small business banking in Poland are world-class, I think that in corporate banking, the UK, US, German and French banks are more sophisticated than Polish ones. That’s because of the nature of their corporations – large multinationals with a global footprint. So while Polish banking is sophisticated at the retail end, it is less sophisticated at the corporate end,  

So how do you assess the condition of trade finance in Poland at the moment?

I think there’s a lot of catch-up that Poland needs to do. Polish corporate bankers are less sophisticated than their opposite numbers in the UK, France, US or Germany who have the skills to do the supplier verifications, to monitor supply chains with audits and site inspections, and then use data analytics and AI to feed this continuous monitoring. So for Polish banks, that’s a real uphill battle to try to compete against. Foreign banks have special relations with markets outside the EU; HSBC with the Far East, for example, BNP Paribas with French-speaking Africa or Santander with Latin America. If I were a Polish exporter, I would look to those banks who best understand a given market and specific sector. I would tend to go to those sophisticated international institutions rather than a Polish bank. So it’s not a one-stop shop; I can imagine cooperating with a number of different entities to do that trade finance and in a safe way, picking the right one; that probably will mean you’ll have to pay a little bit more for that service. This competition with Polish banks is very positive for the economy, it makes it more efficient, more transparent, giving people and businesses more choice about where they can get their financing.

On to project finance. Our members in construction and real estate say that the market is held back temporarily because of the high cost of lending. But at the same time we’re seeing new foreign investors coming into Poland and looking at projects to get involved in; this seems like the right moment in the cycle to look seriously at Poland in terms of project finance.

Yes! There are big infrastructure investments being planned. We’re going to need a lot more energy than anybody predicted even a year or two ago. There’s certainly no slowdown in the power consumption of data centres. This is true for every country. We’ll need more power, so this will again require project finance. Google recently announced that it is considering to build its data centres near nuclear power plants to ensure they get the power they need! Given Poland’s geography, mostly flat, (only) 300 kilometres of off- shore wind potential and a northern climate, the county will need to build nuclear power plants. Nobody in the new or previous government or even any environmentalist is seriously questioning that Poland needs to do that. We have the energy transformation aside from those power plants, offshore wind turbines along the coast that are only now being permitted and constructed. It’s all planned. It all will be built and there’s no question that they’re going to do that. Then there’s the whole energy infrastructure which every country needs to reconfigure. The Polish energy sector was very much centred in the south of Poland, producing electricity there from coal and sending it north; now we’re going to see the opposite because the nuclear power plants will most likely be built by the Baltic because you need the water to cool it. And you’ll have wind turbines offshore. So actually we’re likely to see in the 20 or so years the north will be producing a lot of energy and exporting it to the rest of the country. This implies a change in how the transmission works. Project financing is needed. And then you got the whole defence area we talked about with the Iron Dome and Eastern Shield, as well as, the massive investment in the Central Airport (CPK) and associated high-speed rail infrastructure that the new government has indicated it will continue with. This will be billions. That’s maybe why we’re seeing private equity and other lenders looking at going to existing Polish corporations.

Will future growth be held back by a lack of labour availability? Poland is undergoing a demographic crunch. Although Poles have a stellar reputation for their ability to learn new skills and continually rise up that value-added ladder in outsourced services, where will the people come from in future? How do you see financial services centres in Poland developing?

Poland has developed a good niche for itself in shared services. It didn’t focus on the lowest value-added services that can be outsourced; rather, it found those things which were quite high value-added. So the low-end stuff went to places like India, Philippines or China. The result of finding that good niche is that Poland doesn’t have to be so competitive on cost, because it’s adding more value. But what’s the future? I think there’s still room for the sector to get bigger. The numbers are now around 430,000 people working in Poland’s shared service centres (SSCs); that’s expected to go up to 480,000 or 490,000. Growth can continue, but there’s a limit to it. The SSCs are taking away from other parts of the economy which still have pools of inefficiency. These pools of inefficiency are being eliminated because it just becomes expensive and people look for ways to save money by becoming more efficient, doing things in a different way. One such pool within the SSC sector centres on operations that could be more efficient with the use of generative AI. SSCs could continue and deepen the level of IT implementation and integration; you could improve call-centre efficiency through the use of digital tools such as sophisticated chatbots. For those of us who have experienced AI chatbots, you have ones that are horrendous and frustrating, but then there are ones which are very good and very efficient. Within the Polish banking sector there are still pockets of inefficiency which can be pulled out. And then the second pocket is across the general economy; the overall productivity level in Poland is still (well) below Germany’s.

One area and I want to highlight, one thing that’s very positive, is that Poland’s education system has really adapted to the shared service centres. Universities have adjusted their curriculums and increased the number of graduates that fit into this. They’re supplying it in a market-oriented way, driven by demand from the market; the universities are supplying that demand.

Does Poland need to recruit more people with specific skills from outside of the EU? The old government was pushing the narrative that it was protecting Poland against an influx of migrants, while at the same time handing out visas and work-permits wholesale.

We see at PwC in our shared service centres that we have many foreigners working there representing 40+ countries. We will require a very smart immigration policy to attract and retain those skilled foreign workers. Europe is an incredibly attractive place to live and work. It just needs a well thought-out plan and process in place, so that people who come are not random and meet certain requirements. With its relatively low tax rates and improved quality of life, Poland has become one of the most attractive places in the world to live and work; we have this incredible geography and culture and lifestyle and low crime rate. And now low unemployment rate. This is an incredible magnet for people; we should leverage that to bring the best of the world here.

The facts on the table versus what the old government had been saying were completely different. They would have been better to say that immigrants are coming and we need immigration, but let’s design a process, do it right and decide what type of immigrants we need. What skills they bring. Let’s check them and make sure they meet whatever criteria we want them to have. What has happened was somewhat haphazard. I don’t think there was a plan behind it. It’s better to have a plan than to just to let mass immigration happen and then wake up 20 years later and realise that you have a problem. Government needs to think carefully about what society and the economy wants, and how it wants to look in the future. Government has to play a role in this, because there are so many issues that need to be considered such as healthcare, or calling people up for military service in a conflict situation. Should immigrants go into our military? You have to think through it. I’d encourage the government to put together a robust policy paper on migration.

One observation of mine is that since foreign direct investment started pouring into Poland, especially after 2004 that for an investors are saying to Poles can you do this? They say yes, we can. Yes, Poles can do it for foreign investors – but can they do it for themselves?

This is the right time for Polish financial institutions to think about foreign expansion. Poland is a Top 20 economy in the world, with a very open market in terms of the imports and exports, yet it doesn’t really have a presence from the financial perspective outside its borders; it has a little but not enough. So this is a time to think about expansion. Certainly it’s the big guy in this part of the world, with Russia now ring-fenced, isolated from the Western economies and off-limits to everybody. From Poland going through Central Europe you then have Ukraine, and into the Caucasus and then across to Kazakhstan and Mongolia. Poland is by far the biggest economy in that ring without Russia in it. So given its position, given its wealth level and given the sophistication of the Polish banking offer, especially in retail and small business – and these economies are mostly about retail and small business – Poland is dominating in that ring. Technology platforms and banking skills means that Poland can bank the unbanked, bringing them into the economy and driving growth. Then there are SSCs which create a lot of knowledge in the market and a capability to deliver sophisticated IT solutions or banking solutions. Then the trade elements that Polish companies, trading with all of those things point to this being a good time to export those technologies, those skills and take advantage of the current position Poland has created for itself to start moving in and start opening up banking operations in Ukraine and prepare for the next steps when peace comes. So it’s time for Polish banks to think about foreign expansion. But I think they can learn sometimes from a foreign investor as a partner; you could imagine a British company that knows little about Ukraine, Kazakhstan, Uzbekistan or Georgia using Poland as a platform to move into those markets by looping underneath Russia all the way to Mongolia, with Poland as your platform for expansion into other regions.