Lithuania strives to become Europe’s fintech hub

Brexit was a shock for the European Union but, for many Member States, it was also an opportunity. Lithuania was one of them: while Frankfurt, Paris and Amsterdam vied to lure financial firms away from London, Vilnius made a play for the world’s fintechs.

His strategy – based on streamlining regulations to incentivize fintechs to set up their “European shop” in Lithuania – appears to be paying off. In 2014 there was just 55 fintechs based in Lithuania. Now there is 265. Forty percent of them have their headquarters in other countries.

It wasn’t all easy. The involvement of a local fintech — UAB Finolita Unio — in the wirecard the scandal has rattled regulators, and investors recognize it will take more than well-designed rules for Lithuania to catch up with the UK.

Even so, venture capitalists poured in a record €71m in Lithuanian fintechs in 2021, almost four times the 18 million euros invested in 2020.

Payments software startup Kevin is widely considered the nation’s fintech poster child. It is also Lithuania’s most valuable fintech, thanks to a $65 million Series A fundraising round in May, led by US venture capital giant Accel.

“The Lithuanian fintech scene is still small in terms of the number of individuals, but it is very fertile for entrepreneurial talent,” says Accel Partner Luca Bocchio. “We have traveled quite a bit there. »

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Part of the The country’s draw for entrepreneurs is, as policymakers hoped, the regulatory regime, which is managed by the Bank of Lithuania (BoL), the central bank. In addition to overseeing a well-respected “sandbox” facility that allows fintechs to test their ideas under regulatory oversight, the BoL has a reputation for efficiency and transparency in the licensing process.

A fintech can be up and running with an e-banking license in Lithuania in just three months – compared to an EU average of 12 months – and can also apply remotely. Without a license, companies cannot directly offer services such as mortgages, loans and overdrafts.

We chose Lithuania because the central bank promised speed, that’s what we wanted the most

Just over half of the country’s fintechs, 147, have now been licensed as e-money institutions, payment institutions or specialist banks – a figure Lithuania boasts of being the highest in the EU , France in second place with 90.

This factor played a big role in the decision of the British neobank Revolut to apply for its European banking license in Lithuania. She obtained a banking license specializing in December 2018which was upgraded three years later to a full European banking license.

“We chose Lithuania because the central bank promised speed, which is what we wanted most,” says Nik Storonsky, chief executive of Revolut, who was wait almost two years for a banking license in the company’s home country of the UK.

“The strictness of the regulations is the same everywhere, but in Lithuania it doesn’t look like a series of vague judgements,” he explains. “It’s just fast, clear and efficient.”

Understanding regulatory processes can take a toll on the resources of fledgling fintechs, but start-ups cite their positive experience of transparency from the Lithuanian regulator.

“When you try to sign up, they quickly communicate what to expect – you know exactly what you need to provide and when you’ll get your license,” says Ayelen Denovitzer, co-founder and managing director of the app. Solvo crypto investment.

In other respects too, Lithuanian regulators seem to be doing a good job. The country is the eighth lowest risk jurisdiction for money laundering in the world, according to the Basel AML Indexwhich ranks the UK 12th and the US 30th.

Last year, however, the FT revealed that UAB Finolita Unio – at the time a licensed Lithuanian payment company – had been used to fly over 100 million euros from Wirecard, the scandalized German payment processor, before its collapse in June 2020.

The Central Bank of Lithuania revoked Finolita’s license in June 2021 for a breach of anti-money laundering (AML) and counter-terrorist financing (CTF) rules. He said he had been investigating the company since fall 2020.

While other companies and investors operating in Lithuania recognize the seriousness of Finolita’s breach, they insist that it is not a sign that local regulators have put convenience above rigor, as the EU policy makers proposed at the time.

“I wouldn’t describe the process as ‘friendly’ at all, but very strict,” says Pavel Sokolovas, co-founder and COO of Kevin.

“And, yes, the Finolita breach involved a large sum of money but, if you look at the number of transactions Revolut makes each month, that pales in comparison.”

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So far this yearthe BoL has imposed 24 fines — five more than the United Kingdom Financial Conduct Authority. Six of them involved AML failures, including €200,000 in penalties for Revolut in March.

BoL board member Simonas Krėpšta admits the Finolita incident was an “unpleasant red flag”.

“We have zero tolerance for big risks and, if we have clear misconduct, we resolve them quickly and without compromise,” he says. “We now have an even clearer strategy.”

Krėpšta says this includes the development of new software that will collect data from the companies he oversees in “real time”, so the regulator won’t have to rely on site visits or quarterly reports. and will be able to react more quickly to violations in the future.

In May 2021, Lithuania launched a new “center of excellence” dedicated to fine-tuning AML legislation, and in June 2022 the government amended its AML rules to combat the risk of cryptocurrency fraud. New fintech guidelines for the next five-year period are expected to be released by the end of this year.

But no matter how “pro-fintech” its regulators are, investors say it will take a long time for Lithuania to match the breadth of London’s fintech scene.

Its tally of 265 fintechs is eclipsed by the UK 2,500although only about 7% of them (178) have been licensed by the UK financial regulator, which is a much lower proportion than in Lithuania.

Accel’s Bocchio says, “London’s advantage is not just the regulatory framework, but other variables that are largely skill-based. So if you do a good job of regulation, over time you will attract more foreign entrepreneurs, but that takes decades, not years.