The year 2020 that’s drawing to a close has been an exceptional year for all Lithuanian and international business sectors, including Fintech companies, due to the COVID-19 pandemic. However, according to the Lithuanian Payments Market Review 2020 published by the Bank of Lithuania, the latter companies have been quite successful at responding to this challenge, having expediently reorganised customer service flows and having guaranteed secure payment methods in e-commerce.
This is also evidenced by a significant rise in the sector’s turnover. The statistics show that income of Fintech companies, electronic money and payment institutions from licensed activities grew by as much as 1.8 times during the first quarantine.
In addition, the sector has kept on developing, since the Lithuanian market has been entered by new well-known global brands. Payrnet, associated with Railsbank Technology Ltd, has obtained an electronic money institution licence in Lithuania. These licences have also been issued to UK financial institutions: Curve Europe (a subsidiary of Curve OS Limited), DiPocket (a subsidiary of DiPocket Limited) and others which aim at continuing provision of financial services in Lithuania after Brexit. According to recent news, Sezzle, a popular e-shop in the US and Canada, has also been planning its launch on Lithuania’s market.
We should nevertheless admit that pandemic-induced uncertainty has left its mark – some businesses have been more cautious about their future expansion and have suspended their foreign development plans.
However, it is encouraging that our country’s attractiveness to Fintech businesses and their development in our country have been determined by some external factors rather than a stricter regulatory environment, as is often the case with new generation businesses emerging all over the world. Although this year has recorded quite a number of amendments to legal acts relevant exclusively to this sector – over 20 have been adopted, the majority of them have been targeted at the improvement of legal environment for the sake of more clarity and concreteness. Thus, due to this clarity and the regulator’s additional efforts to share the best practices and organise round-table discussions on issues relevant to the market, it is safe to assume that this year Lithuania has become an even more attractive destination to honest Fintech businesses, and the companies that have already been operating here have made perfect use of the global crisis and local market friendliness for their maximum development.
Remote identification of new customers grants advantage to the Fintech sector
During the pandemic, which requires society to avoid social contacts and businesses as well as public authorities to reorganise their work and provision of services towards remote mode as much as possible, the need to identify the customers of financial institutions and provide services at a distance has become as crucial as ever. Fintech companies had already implemented and tested technical solutions, since prior to the pandemic they have been communicating with their customers remotely, thus their adaptation to the new reality has been fast and easy. On the other hand, the changed market conditions have widened the divide between Fintech companies and traditional banks in favour of enhanced competitiveness of the Fintech sector. This transformation has become a challenge to Lithuanian banks which normally serve their customers physically in their branch offices: the processing of customer requests made by phone or email has been lagging, the solution of technical faults in e-banking has been delayed, hence longer waiting time for the customers.
The pandemic has further accentuated other problems related to remote service of customers. Although Fintech companies had no difficulties with remote identification of natural persons, this does not apply to legal entities, higher-risk persons or those who do not have adequate technical means (e.g. senior persons rarely own smartphones). The quarantine showed that this aspect of regulation must be improved and should be included among top priorities.
Flexibility opens up new business opportunities. A more favourable regulatory environment also helps
The contribution of financial intermediaries while allocating state support has been particularly considerable. Thanks to them all granted support has been distributed efficiently. This national challenge has become a new business opportunity to financial intermediaries which could make use of it only due to their flexibility and ability to quickly adapt to market developments and respond to new needs.
In addition, after banks tightened their lending conditions to customers in 2020, funding from traditional banks has become hardly accessible to SMEs in particular; therefore, the need for alternative business funding has significantly increased. Thus, business segment oriented Fintech companies that are able to offer alternative financing have been lately exponentially gearing up.
Legal environment that has been developing in favour of these companies also offers new avenues to this sector. The amendment to the Law on Companies initiated by the Ministry of the Economy and Innovation establishes that new companies will be allowed to open accumulative accounts not only in banks, but also in electronic money institutions. This will definitely increase the number of e-money institution customers. Consequently, an established contact with customers in the first stage is very likely to be maintained and electronic money institutions will find it easier to offer settlement accounts for such customers.
Anti-money laundering and counter terrorist financing at a close-up
Despite the fact that in most areas Fintech regulation has only been focused on its specification without putting new bridles on market players, it has been further tightened in the area of anti-money laundering and counter terrorist financing (AML/CTF), and the fines for improper compliance with AML/CTF have increased, since this area has been a priority for the Bank of Lithuania. This is evidenced in fines imposed on market leaders: EUR 370 000 on Paysera, EUR 120 000 on Via Payment, EUR 110 000 on Connect Pay.
A clear indication of a closer look by the Bank of Lithuania at AML/CTF is the updated guidelines to financial institutions, aimed at AML/CTF, which entered into force in March 2020. These guidelines highly focus on AML/CTF risk management, which is one of the biggest challenges that financial institutions have been facing. They also point out the involvement of the management of financial institutions in the organisation of AML/CTF implementation, as well as staff competence and training. These aspects are highly important and demonstrate a wider approach of an institution, since financial institutions usually forget these underlying issues hoping that their duties and responsibilities in the area of AML/CTF end having appointed an employee responsible for AML/CTF in their organisation.
This year, to enhance AML/CTF, the Bank of Lithuania has taken the initiative to start implementing a private and public sector cooperation project, i.e. to establish the Centre of Excellence in Anti-Money Laundering. Although the founders of this centre are the Ministry of Finance, the Bank of Lithuania and commercial banks, its functioning and performance will definitely also affect Fintech companies which will be later invited to join the work of the centre.
It can be expected that similar initiatives and AML/CTF regulation will remain a priority next year as well.
Banks have been using the derisking strategy to build barriers to Fintech companies entering the market
In the last two years, commercial banks in Lithuania have rejected 160 applications of electronic money and payment institutions to open bank accounts or have decided to discontinue their business relationship with these Fintech companies. Thus, this year there have been louder talks about the derisking strategy followed by commercial banks. It is a strategy where customers categorised as a higher-risk AML/CTF group are not provided with services instead of choosing a risk management way.
Due to the nature of their activities (i.e. keeping customers’ funds in their accounts) Fintech companies are considered to be higher-risk customers; therefore, they find it particularly difficult to open accounts for their operation at commercial banks. This is a considerable barrier to entering the market.
Although Lithuania is not exceptional in this respect and the derisking strategy is a global challenge to Fintech companies, the position of the Bank of Lithuania on this issue, which has been formulated this year, is expected to restore the situation in Lithuania to normal. In its position regarding the right of electronic money and payment institutions to use bank accounts opened in credit institutions, the Bank of Lithuania states that in those cases where the bank accounts opened on behalf of Fintech companies are used to keep the funds of the customers of these companies or to make payments of such customers whose identity and/or transactions cannot usually be directly verified by banks, the inherent risk is higher. Yet this cannot be regarded on its own as a prohibition for Fintech companies to hold bank accounts for current payments (e.g. payment of wages, taxes, etc.).