How Lithuania is becoming Europe's new fintech capital
The Bank of Lithuania is positioning the country’s capital Vilnius as a hub for payments-related fintechs wanting to enter the European market — a move that's timed to take advantage of the uncertainty Brexit has cast over London's claim to the title.
Under the EU’s passportable licensing scheme, a payments institution or electronic money institution license issued by the Bank of Lithuania provides access to all the EU and European Economic Area (EEA) member countries in Europe. The Bank of Lithuania also offers a “Lite" bank license for challenger banks, which is five times smaller than standard bank capital requirements.
In July 2018, the Bank of Lithuania launched an e-licensing tool that makes it cheaper and quicker to submit the information necessary to obtain an operating license. This month, the Bank of Lithuania introduced a regulatory sandbox, where fintechs can test their products under the supervision of the central bank.
As of October 2018, 81 credit and payments-related fintechs from a wide range of countries are listed on the Bank of Lithuania’s website as holding licenses from the central bank.
Fintechs which have obtained Lithuanian licenses include U.K.-based Revolut, Singapore-based InstaRem, Israel‘s Nayax, London-based TransferWise and London-based TransferGo, whose founders are Lithuanian.
"The reason why the Lithuanian regulator has taken this approach is because of the country’s financial services industry. The market is very concentrated, with three Scandinavian banks, SEB, Swedbank and Luminor (the DNB-Nordea joint venture) holding 80-90 percent. Our local banks have a small market share," said Marius Jurgilas, a member of the board of the Bank of Lithuania and a former economist at the Bank of England and at Norges Bank.
Jurgilas said the big foreign-owned banks don’t see Lithuania as a primary market.
“They are very innovative and efficient, but only in their home market and are lacking in terms of bringing innovation to Lithuania,” he said. “The reason is that innovation is an expense on your bottom line, and you only innovate if you are under competitive pressure. Our domestic banks can’t compete with the Nordic banks, so they had a perception that nothing could be done.”
The elephants in the room
The Bank of Lithuania saw an opportunity to create competitive pressure using fintechs.
“Our aim was that fintech newcomers to Lithuania would make the incumbent banks start to react to their potential competitors,” Jurgilas said. “I tell people that we have three elephants in the room which aren’t moving. So, as the regulator, we let the flies into the room and hope they’ll irritate the elephants and make things change.”
And indeed, things are changing in Lithuania.
The major banks in Lithuania are now opening innovation centers and inviting fintechs to develop joint solutions with them, said Jurgilas. Several years ago, the big banks were adopting a wait and see attitude to fintechs and to innovative technologies.
So the Bank of Lithuania streamlined its licencing processes for payment institution and electronic money institution (EMI) licenses.
“We didn’t cut any corners, as the European Banking Authority (EBA) guidelines apply to everyone,” said Jurgilas. “But we ‘parallelized’ processes, which means we look through the fintech’s ownership structure and simultaneously examine its KYC processes. If there’s nothing exotic in its business model and it’s seeking a straightforward EMI license for online shopping or processing online payments, we’ll award the license.”
The Bank of Lithuania is responsible for the country’s payments infrastructure. It runs the equivalent of the Bank of England’s CHAPS system and the Federal Reserve’s Fedwire, and two years ago allowed direct access to its CENTROlink network, said Jurgilas. This meant that non-banks are able to settle funds in central bank money via CENTROlink, without a sponsoring bank.
“CENTROlink allows companies to execute payments in all 34 SEPA countries, thus avoiding additional intermediaries,” said Inga Karulaitytė, an attorney with Ecovis ProventusLaw. Her law firm assists foreign fintechs in obtaining Lithuanian licenses.
The Bank of Lithuania appreciates that time is of the essence for fintechs, as they are funded by their investors and they have a specific solution they want to promote.
“The leadership of the Bank of Lithuania is visionary and very supportive of fintechs,” Daumantas Dvilinskas, TransferGo’s CEO and founder, said. “I think Lithuania will become a fintech powerhouse very soon. Lithuania is very well positioned against Berlin or Frankfurt as the Lithuanian regulator is small and not bound by bureaucracy.”
Brexit and the regulatory sandbox
The prospect of Brexit has proved an unexpected bonus for the Bank of Lithuania.
“We had already started on the fintech path and then got bombarded by U.K. firms who said ‘we need to have a presence in Europe to hedge against Brexit by getting a European license,'" said Jurgilas.
Most of these U.K. firms aren’t going to cut their British ties and will maintain a U.K. operating base and a license from the Financial Conduct Authority (FCA) in London, said Jurgilas.
“But they need the ability to settle in euros plus a European presence,” he said. “So the Bank of Lithuania will award them licenses provided they offer their services here. Also, fintechs from other countries are saying that, instead of getting a U.K. license for all of Europe, they will go to Lithuania for a European license and apply for a U.K. license for later on after Brexit.”
In addition to its new regulatory sandbox, which started accepting applications on October 15, the Bank of Lithuania has established a blockchain lab, LBChain. Operated by the Bank of Lithuania, LBChain allows Lithuanian and international companies to carry out blockchain-oriented research — testing and development — in a safe environment. According to Jurgilas, the blockchain lab is similar to IBM Hyperledger.
“Our regulatory sandbox is equivalent to the U.K. Financial Conduct Authority’s (FCA) regulatory sandbox,” said Jurgilas. “We consulted with the FCA and the Monetary Authority of Singapore, and learned a lot about what to do and what not do to do. For example, we learned that you have to be very selective and not have an open call, or you end up with 500 applications and won’t have the resources to handle all of them.”
“Applying for payment institution and electronic money institution licenses in Lithuania is two to three times faster than in other EU countries,” said Karulaitytė, the attorney with Ecovis ProventusLaw. “It’s important to note that the regulator providers fintechs with special support and advice for the first year of operation in Lithuania."