Lithuania is pushing to become Europe’s fintech hub

Brexit was a shock for the EU, but for many member states it was also an opportunity. Lithuania was among them: while Frankfurt, Paris and Amsterdam battled to lure financial firms away from London, Vilnius made a play for the world’s fintechs.

The strategy – based on streamlining regulation to entice fintechs to set up their “EU shop” in Lithuania – appears to be paying off. In 2014, there were only 55 fintechs based in Lithuania. Now there are 265. 40 per cent of these have their headquarters in other countries.

It hasn’t all been ordinary. The involvement of a local fintech – UAB Finolita Unio – in the Wirecard scandal rattled regulators, and investors recognize that it will take more than well-crafted rules for Lithuania to catch up with Britain.

Nevertheless, venture capital investors poured a record €71 million into Lithuanian fintechs in 2021, almost four times the €18 million invested in 2020.

Payment software startup Kevin is considered the nation’s fintech poster child. It is also Lithuania’s most valuable fintech, thanks to a $65 million Series A round of funding 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 Luca Bocchio, Partner at Accel. – We have traveled a lot there.

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

A fintech can get up and running with an electronic banking license in Lithuania in as little as three months – compared to a European average of 12 months – and can also apply externally. Without a licence, companies cannot directly offer services such as mortgages, loans and overdrafts.

We chose Lithuania because the central bank promised speed, which is what we wanted most

Just over half of the country’s fintechs, 147, have now been licensed as electronic money institutions, payment institutions or specialized banks – a number that Lithuania can boast is the highest in the EU, with France in second place with 90.

This factor played a major role in British neobank Revolut’s decision to seek its European banking license from Lithuania. A specialist banking license was granted in December 2018, which was upgraded three years later to a full European banking licence.

“We chose Lithuania because the central bank promised speed, which is what we wanted most,” says Nik Storonsky, Revolut’s CEO, who has been waiting almost two years for a banking license in the company’s home country of Britain.

“The strictness of the regulation is the same everywhere, but in Lithuania it doesn’t feel like a series of vague judgments,” he explains. “It’s just quick, clear and efficient.”

Understanding regulatory processes can be a huge drain on resources for fintech startups, but early-stage companies cite their positive experience with the Lithuanian regulator’s openness.

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

In other ways too, Lithuania’s regulators seem to be doing a good job. The country is the eighth lowest money laundering risk jurisdiction in the world, according to the AML Basel Index, which ranks the UK 12th and the US 30th.

However, last year the FT revealed that UAB Finolita Unio – at the time, a licensed Lithuanian payments company – had been used to steal more than €100 million from Wirecard, the scandal-plagued German payment processor, before it collapsed in June 2020.

The Central Bank of Lithuania revoked Finolita’s license in June 2021 for violating anti-money laundering (AML) and counter-terrorist financing (CTF) rules. It said it had been investigating the business since autumn 2020.

While other companies and investors operating in Lithuania acknowledge the seriousness of Finolita’s breach, they insist it is not a sign that local regulators have put ease of use over rigor, as EU policymakers suggested at the time.

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

“And yes, the Finolita breach involved a large amount of money, but if you look at the number of transactions Revolut does every month, it pales in comparison.”

So far this year, BoL has imposed 24 fines – five more than the UK’s Financial Conduct Authority. Six of these were for AML failings, including €200,000 in penalties for Revolut in March.

BoL board member Simonas Krėpšta admits that the Finolita incident was an “unpleasant wake-up call”.

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

Krėpšta says this includes developing new software that will collect data from the companies it supervises in “real time”, so the regulator does not have to rely on on-site visits or quarterly reporting and can react more quickly to future breaches.

In May 2021, Lithuania launched a new “centre of excellence” dedicated to refining AML legislation, and in June 2022 the government amended its AML rules to tackle the risk of cryptocurrency fraud. Fresh fintech guidelines for the next five-year period are to be published by the end of this year.

But however “pro-fintech” its regulators may be, investors say it will take Lithuania a long time to match the breadth of London’s fintech scene.

The figure of 265 fintechs is exceeded by the UK’s 2,500, although only around 7 percent of these – 178 – are licensed by the UK financial regulator, which is a far lower proportion than in Lithuania.

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