Lithuanian Fintech Landscape: Trends and Developments

09/03/2020

Fintech in Lithuania is a rapidly developing field on the intersection of traditional finance and cutting-edge IT. Compared to other fintech institutions, Lithuania possesses one highly distinctive feature: a shared strategic approach at every level of the ecosystem. Authorities at both national and municipal levels have shown strong levels of commitment to this sector, creating a fintech-friendly regulatory environment, combined with Lithuania’s cost competitiveness and dynamic young talent, is why more than 170 fintech companies have already chosen Lithuania for their jurisdiction. The ecosystem boasts a dynamic blend of globally-known brands like Revolut, Instarem, TransferGo, Contis together with innovative young companies in their development stage.

More than 170 fintech companies have already chosen Lithuania for their jurisdiction

The Bank of Lithuania has been recognised as one of the most progressive regulators in the EU. By streamlining licensing and automating a number of supervision procedures, it has transformed Lithuania into a jurisdiction that prioritises progress and helps fintech newcomers to enter the market transparently and smoothly. The Bank of Lithuania is recognised as one of the most advanced regulators not only in the EU, but also globally. According to the Ease of Doing Business Index, Lithuania ranked 11th out of 190 countries in 2019.

Lithuania is now a leader in the European Union for the number of licensed EMI entities. The Bank’s primary goal remains to increase competition, and to this end it has made significant changes to provide a level-playing field for payments service providers. Payment and electronic money institutions can access SEPA via the Bank’s own CENTROlink payments system. The regulator is also planning to push forward open banking to foster competition and innovation in the financial market.

Lithuania is now a leader in the European Union for the number of licensed EMI entities.

The dynamism of Lithuania’s fintech sector is matched by its diversity. Fintechs based in Lithuania provide a broad scope of services and products, and a wide range of business models – payment and electronic money institutions, specialised banks, banks, P2P lending platforms, crowdfunding platforms, investment management companies, securities brokers, insurance companies and etc. The most common type of service offered by fintechs in Lithuania is payments, with banking and lending growing rapidly. Because a Lithuanian base provides direct access to the EU, Europe is naturally the number one target market, but North America and Asia are also important regions for many fintechs based here.

Growing Role and Importance of Blockchain Solutions

The fintech sector is heavily influenced by the development of blockchain technology over the last few years and growth is expected to continue. While some experts were predicting the end of the blockchain era – some are seeing the innovation merely as cryptocurrencies – others understand the key impact of decentralised technologies. There is no doubt that there will be more partnerships formed with traditional financial institutions and growing token adoption of both early and emerging currencies.

According to a G2 survey of financial services professionals, as companies recognise the value of distributed ledger technology on the back-end and 60% of financial services companies will either implement or have plans to implement blockchain within the next years. The use of blockchain goes much further than cryptocurrencies – it’s a flexible innovative solution that solves the majority of modern fintech problems. There is no doubt that in the next few years, there will be a concentrated focus on creating of the right environment for innovation, where new fintech products can be developed and then scaled globally.

Lithuania has already emerged as one of the front runners in the field of blockchain technology application. This was achieved by offering regulatory sandboxes for testing financial innovations, accelerating the development of regtech solutions and building a platform (LBChain) for blockchain-based solutions to be created under the watchful eye of the Bank of Lithuania.

Lithuania has already emerged as one of the front runners in the field of blockchain technology application.

The launch of the blockchain-based platform is being spearheaded by The Bank of Lithuania. LBChain is a blockchain-based sandbox combining technological and regulatory infrastructures. The platform will enable Lithuanian and international start-ups, as well as financial and fintech companies, to gain new knowledge, carry out blockchain-oriented research, test and adapt blockchain-based services and offer state-of-the-art innovations to their customers. LBChain is the world’s first platform of this kind to be developed by a financial market regulator. The platform is expected to be launched in March 2020.

The Lithuanian regulatory approach towards the traditional cryptocurrency transactions is clear and well defined. As with most of European financial regulators, the Bank of Lithuania coherently follows the position that cryptocurrency transactions are not licensed financial activities. The key regulatory requirement is clear separation of cryptocurrency activity and licensed financial activity.

Increased Attention to AML, KYC and Risk Management

Fintech companies have a wide area to expand and great risks to face at the same time. As criminals carry out more sophisticated money laundering activities, regulators are increasing their commitment to anti-money-laundering (AML) compliance. The growing number of data breaches, cyberattacks and financial fraud schemes have made governments and regulators intensify fintech regulations in order to protect customers and organisations. For fintech companies, this means they must work diligently to maintain AML compliance. It is now more important than ever (and it will become even more so) to remain on top of AML compliance measures.

It is now more important than ever (and it will become even more so) to remain on top of AML compliance measures.

The European Banking Authority (EBA) has published its Work Programme for 2020, outlining plans to prioritise anti-money laundering (AML). The Bank of Lithuania has already issued Instructions for financial market participants to prevent money laundering and/or terrorist financing, which comes into force from 1 March 2020. The Financial Crime Investigation Service has issued Instructions for Virtual Currency Depository Deposits and Virtual Currency Exchange Operators to Prevent Money Laundering and/or Terrorist Financing, which came into force early 2020. These documents will ensure a clear implementation of AML procedures.

Cases of non-compliance bring not only penalties to fintech companies, but most importantly affect negatively the most valuable asset of every fintech company – reputation. Ultimately, customers need to trust financial firms. Bad behaviour from one player affects the trust in placed in the entire industry. Fintech founders must pay more attention to AML and KYC issues than ever before, setting the right controls and procedures in place for regulatory compliance. Focusing on a superior customer experience is surely a good thing, but more resources should be devoted to AML/financial crime prevention. The very first thing fintechs need is to have an effective risk management policy in place. The next step is to establish a rigorous risk assessment system. It is crucial to implement an adaptive risk-based system, the risk assessment process and also the identification of the specific products, services, customers base, entities and geographic locations. While such focus is difficult, companies that effectively adapt their internal systems will be the ones who enjoy long term success.

Attention to Intelligent Technologies (AI)

From the traditional establishments testing robo-advisors to algorithms assessing credit profiles, we’ll see the expansion of intelligent technologies. AI is already a hit with customer service software using chatbots and other smart systems. AI, machine learning (ML), and robotic process automation (RPA) provides multiple benefits to the financial industry. They help to decrease risks from loan defaults through the use of alternative credit decisioning models, provide smarter risk management that uses predictive and proactive models instead of reactive processes and facilitate a better customer experience through the adoption of virtual customer assistants.

We can expect to see more fraud and risk management specialists in many fintech companies. Moreover, fintech institutions will increase their adoption of AI and ML for AML monitoring, capitalising on AI’s ability to detect patterns in large volumes of data as well as adapt to changes in criminal activity over time. Big data backed up with AI allows financial organisations to collect, report and analyse large amounts of data to extract useful insights about customers and their needs.

Growth of Mobile Payments

Mobile payments, contactless payments and mobile wallets will further replace physical wallets. Consumers want payments to be instant, invisible and free. Mobile payment innovations might even do away with the traditional (physical) wallet as global consumers are less reliant on cash. Google, Apple and Alibaba already have their own payment platforms and continue to roll out new features such as biometric access control, and fingerprint and face recognition.

Mobile banking trends show ambitious advances. The app becomes more educated, it learns to synchronise with other user devices and quickly responds to fraudulent transactions.

Alibaba’s Alipay, a third-party online and mobile payment platform, is now the world’s largest mobile payment platform. Many mobile payment platforms are building programs and offers based on the user’s purchase history.

Partnership Through Open Banking

Open banking is a system under which banks open up their application programming interfaces (APIs), allowing third parties to access the financial information needed to develop new apps and services and providing account holders with greater financial transparency options. Open banking services cultivate competition in the banking industry, forcing incumbents to either enhance their financial services or partner with fintechs.

We are still very much at the start of the open banking revolution with PSD2. The pace of change in all areas of banking will allow fintech companies to continue to revolutionise customer experience and products.

Customer demand today is bigger than ever before. All the innovations we see come as a result of customer demand, and it was customer demand that made businesses come out of their silos and collaborate with others to create products and services that are open-source, non-proprietary and do not lock users into an ecosystem.

The same thing applies to the banking sector. Traditional banks and credit unions continue to have a difficult time meeting the level of experience and service that today’s consumers expect. Many products are simply outdated, and the level of friction and poor design of applications are hindering growth. Open banking provides the opportunity to leverage the experience that fintech firms provide with the scale of most legacy financial institutions; this is why open banking is expected to be one of the top banking software trends in the coming years.

Cryptoassets Come Within the Scope of AML Regulation

The fifth EU Anti-Money Laundering Directive extended AML requirements to virtual currency exchange platforms and custodian wallet providers. Alongside this, HM Treasury confirmed, at the end of 2019, that it would extend AML requirements to firms offering cryptoasset exchange services, firms involved in the issuance of new cryptoassets and cryptoasset ATMs. However, it will not extend these requirements to non-custodian wallet providers.

Full Chambers Fintech 2020 Guide (Lithuania).

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