Fintechs have sprung up in Lithuania like mushrooms after a hot summer rain. But now the country – one of the biggest fintech hubs in Central and Eastern Europe – is stepping on the brakes.
The central bank is implementing tougher standards following a major international scandal involving a Lithuanian fintech. German prosecutors allege that UAB Finolita Unio, a fintech company registered in Vilnius, the Lithuanian capital, was used to steal more than €100 million from Wirecard in March 2020 just before the German payments company collapsed.
The Bank of Lithuania, under new broom Gediminas Simkus, stripped Finolita of its license in June 2021, saying it had handled anti-money laundering and terrorist financing rules “irresponsibly” and n had not assessed the risks of its clients.
The scandal sparked international criticism of Lithuania’s allegedly “light-handed” regulation, although the central bank pointed out that it had rejected more than 100 fintech license applications in 2020.
Giedrius Sniukas of the Bank of Lithuania said the money laundering scandals were a “wake-up call”. The central bank will now pay more attention to fintech, he says, given the expected further expansion of the sector and the entry into force of a unified EU regulatory measure in November 2021 The Bank of Lithuania says the quality, not the quantity, of fintechs will now be its main concern.
Lithuania is already the EU leader for the number of fintechs, partly because it only requires a minimum capital of 1 million euros. It now hosts more than 230 fintechs – half of which are Lithuanian-owned – most of which are small businesses focused on payments, financial software, digital banking and lending businesses. Big foreign names with big operations include London-based neobank Revolut, for which Lithuania is its European base.
Among more general measures, the central bank has already tightened borrowing rules and in 2020 created the Public-Private Center of Excellence for the fight against money laundering. He says he is now forcing new fintech entrants to higher quality standards. The bank spelled out its expectations for e-money and payment institutions in a letter to fintech officials.
“The Bank of Lithuania will pay particular attention to strengthening the culture of compliance, i.e. how financial market participants comply with requirements for the prevention of money laundering and financing terrorism, equity, protection of customer funds and quality of services, and seek greater leadership accountability,” says Bank of Lithuania Board Member Simonas Krepsta.
After a boom in new entrants over the past few years, there was a slight correction last year as the new, stricter rules came into effect. In 2021, 28 licenses were granted to new players in the fintech market, while eight lost their licenses, two for money laundering reasons. This compares to 35 licenses granted in 2020 and 28 in 2019. At the end of 2020 (latest figures available), the bank says there were 230 fintechs operating in Lithuania. He says he is currently evaluating 40 license applicants.
Balancing growth and compliance
The central bank says it wants to reconcile growth and compliance. “Most important to us is that market players associate business growth with compliance,” says Sniukas.
But market participants fear that the new, stricter rules will remove Lithuania’s competitive advantage and restrict its future growth.
Airidas Puodziunas, managing director of Contis, a provider of B2B banking and payment solutions, said bne IntelliNews: “Lithuanian regulators need to strike the right balance between heavy regulation that protects customers and the country as a whole, and a lighter touch that will allow a competitive fintech environment to thrive.”
Lithuania has two sandboxes that allow fintech companies to test their innovative solutions in a supervised and regulated environment before introducing them to the rest of Europe and then to the rest of the world.
Puodziunas says that by adopting the new quality standards, Lithuania is effectively creating a “new kind of sandbox”, where the regulation itself will be tested. “Not one where products are necessarily tested against regulations, but one where regulations themselves are tested against the needs of a thriving market. The price for sticking to internationalist principles is substantial,” says Puodziunas.
“Now, as the government issues new regulatory guidelines to institutions and market participants across the country, there will be a fine line to walk between creating value or flattening the impressive growth trajectory of Lithuanian fintech. “, he says.
While putting up new barriers may be doomed to fail, the government, says Puodziunas, also recognizes that stronger compliance structures could also attract larger fintechs that require greater regulatory scrutiny.
Titas Budrys, head of fintech association HUB LT, told Lithuanian media that it was vital the country did not waste its initial lead.
“Lithuania has appeared on the global fintech map… We see fintech companies from as far away as the United States, Canada, Africa, South America, China and the rest of the world. ‘Asia entering Lithuania… We’re just worried that this won’t change.. We can’t spoil the operational progress we’ve made and are known for.
Market participants claim that even with stricter regulations, Lithuania still has many advantages for fintechs.
Lithuania has become a fintech hub because of the way industry players have come together to build it, from the central bank as an innovative regulator with a streamlined application process, to the government, which understands the value from quick adaptation, to industry associations that create a tight-knit community.
Lithuania has one of the highest per capita ratios of ICT specialists in the world and has streamlined blue card and start-up visa procedures for non-EU talent. It also has world-class ICT infrastructure with fast broadband speeds.
This has helped create a vibrant fintech ecosystem, which is strongly supported by fintech hubs, accelerators, venture capital funds and service providers. Some 4,000 people would now work in the sector.
The amount of payment transactions carried out by electronic money and payment institutions in the first half of 2021 was almost six times higher than that of the same period in 2020 at 122 billion euros. Companies received €208 million in revenue from licensed activities, an increase of €168 million compared to the first half of 2020.
The government is now looking to the future to ensure the future of the sector. Mindaugas Liutvinskas, Deputy Minister of Finance, said bne IntelliNews that the ministry assembled an expert team consisting of representatives of public institutions and market players to prepare recommendations for the guidelines on the development of the fintech sector in Lithuania in 2022-2027.
“The recommendations will aim to identify the measures needed to further develop the sector, increase the use of digital financial services, promote the creation and use of innovation as well as strengthen risk management. The government has a clear political will to maintain and strengthen Lithuania’s position as a regional fintech hub The further development of the sector, both quantitatively and qualitatively, requires effective cooperation between public authorities and an open dialogue with stakeholders We are on the right track and it is important to move forward in a targeted and measured way,” he says.
One of the biggest future challenges for fintech regulation is how to deal with the cryptocurrency boom. Rising valuations of bitcoin and other cryptocurrencies are attracting retail investors, who need protection due to extreme price volatility. At the same time, cryptocurrencies are often still used for fraud and money laundering purposes.
Raymond Hsu, co-founder and CEO of cryptocurrency wealth management platform Cabital, said bne IntelliNews that Central and Eastern European countries have some of the most dynamic fintech hubs in emerging Europe. According to him, over the past few years, the region has “really embraced” innovation and cultivated talent, and all of this allows them to support the growth of their fast-growing fintech industry.
As the capital and economic center of Lithuania, Vilnius, he says, has become a natural choice for the crypto community, as they recognize that it would be relatively easier to hire experienced employees who would most likely be based in the financial services companies located there. .
“Lithuania was selected after a thorough feasibility study for a few key reasons. The first being the country’s rule of law and clear regulatory requirements for cryptocurrency businesses like ours. Having clear laws and regulations in English has greatly helped the company’s international team to clearly understand the requirements needed to incorporate the company and register its business with the relevant authorities.
“Secondly, Lithuania’s business friendliness for fintech startups like ours was another key factor. We noted that the country’s banking regulator, Bank of Lithuania, has a comprehensive newcomer program aimed at fintech startups, which would be ideal for our eventual business expansion into other areas of financial services such as fiat currency payment capabilities,” said the CEO of Cabital.
Hsu said that although the Bank of Lithuania has a solid track record in supporting the payment industry, his new team will need “time to clarify their position” on the emerging cryptocurrency industry. “Regulatory and compliance requirements will become more complicated as cryptocurrency adoption accelerates,” Hsu pointed out.
“I believe they will soon be back on track to adopt and regulate the cryptocurrency industry in a fair and sustainable way,” he said, adding that “crypto businesses that prioritize compliance and security will thrive in the region.”