Doug Mackenzie travelled to Lithuania to see how the country has brought together public and private organisations to create a fintech hub. Here, he talks to Mantas Katinas, General Manager of Invest Lithuania, about attracting foreign capital and raw talent.
That a country of just 2.8 million people, which hadn’t previously pulsed on anyone’s radar as a serious tech challenger – let alone one snapping at the heels of Europe’s leading financial services hub – stole into the spotlight, is perhaps an indication of how atomised financial services have become. Eight of the world’s 20 most important financial centres do not feature in the Index’s top 20 biggest fintech hubs.
On the other hand, it might reflect the Lithuanian government’s ruthless determination to create a greenfield site for fintechs and treat them like A-listers – which, indeed, many look certain to become.
Invest Lithuania’s recent analysis of the sector indicates that the number of fintechs operating in the country increased by 24 per cent to 210, and the jobs they generated rose more than 30 per cent to 3,400 during the 12 months to February 2020. Among the best known to have already taken up residence are trading platform Stockinvest.us, alternative currency payment gateway CoinGate and peer to peer investment platform NEO Finance. Shortly after the report was published, Israel-founded Clearshift announced it would be expanding its Vilnius office by hiring anti-money laundering and compliance specialists on the back of an electronic money institution (EMI) licence issued by the Bank of Lithuania. Revolut, the UK-based EMI, which also holds a banking licence, as of last year, in Lithuania, has beefed up its Vilnius base as it migrates Central Eastern European customers to Revolut Payments UAB, the Lithuanian entity set up as surety against a hard Brexit.
Regtech and identity services, along with digital banking and lending firms, have increasingly sought to join the Lithuanian fintech ecosystem, which has until now been dominated by payments and remittances.
Around a fifth of these fintechs and paytechs expect to raise at least €5million over the coming year, says Invest Lithuania, and 16 per cent are looking to raise between €1million and €3million. Companies in regtech, wealth management and digital currency anticipate the strongest growth, supported by government-backed development of the financial services infrastructure, which prioritises developing robust risk mitigation and cybersecurity, with a focus on anti-money laundering (AML) and combating the financing of terrorism (CFT).
Mantas Katinas, general manager of Invest Lithuania, is confident that the country will hang onto its newly recognised status and achieve the government ambition of becoming ‘one of the financial powerhouses of Northern Europe’, attracting global inward investment.
He explains Lithuania’s sticky inward investment strategy: “We select specific industries, worldwide, in which we believe Lithuania could create a better competitive advantage. We have about 15 of those and we try to develop the specific, unique selling points for every industry with an existing infrastructure, talent, scalability and regulatory environment. We are looking for companies which would consider investing in Lithuania, just through those USPs.
“For fintechs there is a complex regulatory environment, because they need something that is not common in other industries: they need a licence and a central bank that is quite customer-oriented, and an infrastructure headed by a customer-focussed commercial bank. In some countries, it’s just hard to cooperate with commercial banks. Companies need to have a supplier chain that is helping you collect the product, but you don’t need to build everything here in Lithuania.”
The government’s and regulator’s ‘can-do’ attitude is a distinct advantage, says Katinas.
“The mindset here in Lithuania is aligned with our goals. When fintech companies say ‘we need something’, our political leader says ‘we’re going to get that’. For instance, we are focussing a lot on compliance and technology, on customer onboarding procedures. We see that fintechs have specific demands in their KYC procedures; some compliance procedures for big banks or for medium companies might need to be adapted for specific business models. So we select the data, highlight the things that need to change and negotiate with central banks and some of the other authorities to implement them.
“It’s not easy to create such things in other countries, because you need to connect the different industries, associations and government to play into the same vision. And that’s happened here with fintech.”
A signal of that buy-in going all the way to the top in Lithuania was the presence of the President giving a keynote speech at Fintech Inn, the international fintech conference held in the Baltics in November.
“The conference is the place to connect with the world, talent, companies and venture funds,” says Katinas. “In the last three to four years, our investor numbers have grown by 50 per cent year-on-year. We had 170 fintech startups a year ago. In November there were 100 new e-money licences being considered by the central bank. I hope that Lithuania, in the near future, will have at least 500 fintech companies, including international ones, and companies from Asia and Israel, that could foster some really important innovation in this region.
“Once a quarter, we invite our foreign investors into the Invest Lithuania office to meet with the central bank, and we have a two or three-hour debate about what’s happening around the sector, and what, if anything, needs to change. We also survey our clients to ask ‘what do you think could be changed?’.”
His organisation is now looking to connect with fintech innovation centres and universities to test some of those suggestions. There is certainly no shortage of technical expertise to handle it.
“I am 40-years-old and I remember, about 15 years ago, when the younger generation decided we needed to build a business that was export-oriented,” says Katinas. “It was naturally easy for us to build this with technology. For the younger generation, technology was our blue ocean to connect with the western world and compete as equal partners. Twenty years on, we see that ecosystem is mature enough to compete, and even outcompete, western colleagues, with old-fashioned industries. So, yes, Germany is very good in the automotive industry, but we can build the software for autonomous driving,
and it can be better than theirs.
“Young challenger countries don’t need to compete in old industries; we compete in the new ones, and here we are all equal.”
Holding a balance
Marius Jurgilas is known to many as ‘the godfather of fintech’ in Lithuania. A Board Member of the central Bank of Lithuania, he explains how the regulator is integral to digital transformation and how it manages the trade off between innovation and risk.
The banking system in Lithuania can be classified as highly concentrated, efficient and profitable. It’s concentrated due to there being very few players in the market, with most of those being foreign banks from Scandinavia. It’s efficient because Scandinavian banks utilise cutting-edge technology. And it’s profitable because the banks operating here think of it as a captive market; they don’t feel any pressure.
Consumers tell us that new fintech services are being provided but we don’t know what the right price for those services should be. As regulators, we believe that the market should set the price, but that the market should also be fair. Since I took office, we have been trying to increase both that fairness and the ability for fintechs to compete across multiple and different market segments. All the changes that we have introduced as a central bank have been targeted on that. How do we create an environment that brings in more competition, that provides incentives for established market players as well as new market players to innovate and do that at a fair price?
Supervisors are designed to avert failure. But, if, all of a sudden, you realise that you are supervising a market with no activity, then what exactly are you doing? You need to balance instilling innovation and the new risks that brings with ‘controlled failure’. If you create a system with no failure, then that provides the wrong incentives. If you do not care where you put your money, because the state, or the supervisor, or the system, protects you, there will be abuses. But, to believe that every single individual in the economy understands your financial system, and, if they mismanage their funds, it’s their problem, is also pushing to the limit the notion of market freedom. We need to have a balance.
That balance is between consumer protection – how much should we protect an individual and how much should we ask him to make his own decisions on accepting or not accepting risks – and providing incentives for firms to innovate.
The incentive to innovate is an incentive to spend money. And no company in the world will spend money if it doesn’t have to. So, you have to create the possibility for consumers to switch, to ensure that there is no captivity of consumers formed by long-term and tie-in contracts – something that regulators all around the world right now are investigating. Why is it the case that people are changing their partner much more frequently than their bank? How do we make sure that they know they have a choice? How do we make sure that society has been weaned from the things that we have been used to doing – things, like using cash, because it’s convenient?
Maybe we have been convinced it is convenient. But it costs society a lot of money, in the order of two per cent of GDP in fact. That’s how much we can save, if we move to much more efficient ways of facilitating economic transactions. Are there costs associated with that change? Yes. Change is difficult, as always.
The Bank of Lithuania does not position itself as only a national regulator. We believe the companies operating in Lithuania can go global – and we are encouraging them. So, to remain relevant, the Bank of Lithuania is required to be part of global discussions, to be shaping the policies in the European Union, and to address the concerns of multiple stakeholders, be that consumers or small and medium enterprises. All their issues need to be understood by us.
So, what do we need to do? Invest in capacity, invest in understanding new business models and adjusting to the changing society.