When I first visited Estonia 20 years ago, my first impression was that I had time traveled into the Middle Ages. In the capital, Tallinn, history comes alive in the incredibly well-preserved Old Town. As I returned to Estonia recently, I was again taken aback by this truly gorgeous medieval setting, but this time the history of the city felt even more dramatic. While the infrastructure and architecture surrounding me felt like it was from 500 hundred years ago, everything else in Estonia feels like stepping into the future. e-Estonia is breaking ground by embracing technology, with the government leading to create a digital society, transforming every economic sector.
While you’re in Estonia, you have a strong sense of how technology is affecting everything — from digitalizing court cases and travel to even small details like how doors and lights work. And money is no exception. Cash has mostly gone extinct in Tallinn. I traveled freely throughout the city, and I didn’t need any Euros. A small cup of coffee, street food, crafts from local vendors — whatever you need, you can pay with a card or with your phone.
At Accion, we want to make the digital revolution in financial services work for the 3 billion people who have little to no access to savings accounts, loans, insurance, and other life-improving financial tools. So, during my visit to Estonia, I considered what lessons emerging markets could take from Estonia’s model. These were my top takeaways:
- Strong institutions — primarily clear legal and regulatory rules — are crucial. Broadly, the government, the public sector, has a critical role to play to enable the success of the private sector. Rules can include plenty of space to innovate. And sometimes the government may make a strategic decision to have less regulations, though that choice should be conscious, not coincidental. As an example, Estonia has specific guidelines to enable quite a range of flexibility and advancements in terms of digital payments and certain digital services, like transportation.
- Be open to outside innovation. It pays to open your country or company to the best talent from other countries or regions. Estonia shows this through its e-residency program, which enables digital EU residency for attractive entrepreneurial talent. This program draws top-notch foreign talent to blend with and develop local talent.
- Effective digital transformation goes beyond finance. In my experience, you cannot have a successful digitalization of financial products and services without parallel digitalization of other infrastructure.
While urban poverty was highly visible in Estonia during the 90s, there’s little poverty today. Digitalization of all sectors has played a huge role in this transformation. Given its relative wealth and EU membership, Estonia has some inherent advantages in being able to successfully transform digitally. We know that emerging markets would face many more challenges when implementing a similar digital-first infrastructure. In these countries, public institutions, legal and regulatory, are not as strong, with a handful of exceptions. Plus, they sometimes have weaker infrastructure, technology, telecoms, and IT systems — though this is improving and changing rapidly. And beyond systemic barriers, one cannot underestimate the power — and constraint — of habits, norms, and culture. In my experience living in an emerging country, people still have a long way to go before they can trust and embrace digital cash.
But that’s not to say that emerging countries can’t be leaders in digital innovation. On the contrary, agile entrepreneurs in these markets are making an opportunity out of the many constraints they confront, creating inventive solutions for problems clients face. These solutions can then be adopted or adapted in more developed markets. While Estonia may have an advantage in country-wide digitization, entrepreneurship knows no geopolitical boundaries and can make an impact in each country.
Even in Estonia, there are still a few areas the digital economy hasn’t yet reached. As I was wrapping up the last day of my visit, I finally hit a snag in my cash-free trip. I had visited a historic church to climb the stairs to the top of the highest tower in Tallinn only to find myself grounded by a “cash only” sign. I suppose when you’re focused on eternity, digitizing payments doesn’t feel as urgent.