With normal life suspended and economies suffering under lockdown, any activities that can take place online have shifted there as people and firms adapt to the coronavirus (COVID-19) pandemic. The same goes for financial services, with fintech firms experiencing a boom in demand as many bricks and mortar banks close their doors temporarily and shopping moves online.

The Lithuanian capital Vilnius has been establishing itself as a regional fintech hub for the last few years, and according to Titas Budrys, chairman of the board of the Fintech Hub LT association, several segments of the emerging sector are seeing unprecedented demand for their services. 

Budrys is also CEO of Seven Seas Europe, a Lithuania-based electronic money institution (EMI) that works with e-commerce companies from China and Hong Kong selling their products in the EU and UK via platforms such as Amazon, eBay and Wish. 

“The company has even noticed an increase in clients’ sales and payments volumes in the recent weeks, mainly due to Europeans continuing to buy various goods online,” Budrys tells bne IntelliNews. However, he warns the crisis could cause its clients’ business to stall: “if the situation continues, increasing logistical challenges may eventually lead to the significant lack of supply from the sellers and, in turn, a drop in sales and payment volumes.”

P2P lenders, crowdfunding sites and other lenders are also doing well amid a spike in loan requests from local businesses. One Vilnius-based site, SME Finance, said the number of loan requests had increased to four or five times the usual level during one week of the crisis. 

Another factor helping fintechs through the crisis is that like other tech firms, they start from a point of being better equipped to take their operations online and have the equipment and processes in place for their staff to work remotely.

“Fintechs all around the world (including Lithuania) have been rather well prepared for such an unprecedented crisis. Firstly, most of the players already had remote work opportunities for all the employees and procedures in place … Secondly, their clients have exclusively been onboarded and served completely remotely, i.e. online,” explains Titus. 

In addition to that, some fintechs have a diversified portfolios of clients from around the world which, he says, allows them to maintain more or less stable cash flows.

A Baltic hub

The pandemic erupted around three years after the idea of turning Vilnius into a fintech hub was broached by the Lithuanian central bank, the Bank of Lithuania, in early 2017. The central bank sought to increase competition in the financial services sector, and quickly bought the finance ministry and other government institutions on board. 

The Fintech Hub LT association was set up to bring together the fintech industry, create favourable conditions for the sector to thrive and help turn Lithuania into a hub for the Baltic region and the EU as a whole. 

Budrys lists various advantages Lithuania has over rival European destinations, starting with the Bank of Lithuania’s openness to both local fintechs and new arrivals. The central bank operates CENTROlink, a SEPA (Single European Payments Area) payment system that provides access to payments in euros, and issues IBAN accounts to small financial services firms such as EMIs and credit unions as well as commercial banks. On top of that, Lithuania offers a highly educated workforce with good language skills, and relatively low costs to set up and run a company.

One arrival to the Lithuania market, in 2019, was London-based mobile payments company SumUp. The company’s Vilnius hub is now the fastest growing of its 15 offices worldwide, and there are plans to grow it further, Sigute Kunceviciute, who heads the Vilnius office, tells bne IntelliNews. Like Budrys, she cites the innovative and fintech-friendly business environment, efficient licensing process, the highly skilled talent pool, and active and continued support from the government as being behind the decision to set up in Vilnius. 

SumUp is now working with a “vast number” of Lithuanian small businesses already, “from the artisans to small cafes and restaurants, from the taxi drivers to the farmers in the Lithuanian countryside. We plan to support Lithuanian businesses no matter how small, unique or mobile they are,” says Kunceviciute. 

The expansion of the fintech sector comes in the context of a local tech sector that is growing fast. While Lithuania doesn’t yet have an international reputation for tech on a par with nearby Estonia’s, the emergence of the first Lithuanian unicorn, used clothing marketplace Vinted, is accompanied by a growing number of venture capital investments. 

2018 was a record year for venture capital investments in the Baltic states, with Lithuania in second place after Estonia, and fourth place in the CEE region in terms of venture capital that has been invested since 2013, according to a report from Startup Lithuania, Contrarian Ventures, Koinvesticinis fondas, TGS Baltic and dealroom.co. The report also points to a large number of “rising stars”, companies that show the growth of a potential future unicorn in Lithuania. 

“Currently, there are strong local and international companies in Lithuania, yet the local fintech market is in the initial stages of development – licensing, product development and testing, clients’ acquisition, etc,” says Budrys. 

“However, I am sure that out of so many companies here trying and working on different innovative products and business models, there will be a number of great success stories in the coming years. According to our calculations, the whole fintech sector can contribute more than 1% increase in the yearly Lithuania’s GDP in the next five to 10 years.”

At the same time, the financial services industry as a whole is evolving and banks and other established financial institutions are turning to new technologies. Budrys says: “I see traditional banks being replaced by more innovative, customer-friendly, efficient or specialised banks, which will grow out of the most successful fintechs. At the same time, traditional banks have to either follow – try to innovate, become more efficient, specialise – or stick to their core – low-risk deposits and lending business.”

A rival to London

Those behind the project to turn Vilnius into a regional fintech hub hope that with the UK’s exit from the European Union, Vilnius could replace or at least complement London as a European centre for the industry. 

“Because of Brexit, licensed fintechs in the UK will have to acquire a licence in one of the EU countries if they wish to continue providing financial services to clients there and Lithuania has become one of the top destinations for them to do this,” explains Budrys. 

Around 100 fintech companies from the UK have already expressed interest in establishing an office or acquiring a licence in Lithuania in the last few years.

Among those to have taken the step are London-based fintech company Revolut, which obtained a licence from the Bank of Lithuania in 2018. At the time, a Revolut spokesperson told Bloomberg that the company had chosen Lithuania both because of the “incredibly fintech friendly” regulatory environment and because around 7% of its customers were in the small Baltic country. The move was also assumed to be so that Revolut could continue to operate both in its home market and in EU countries post-Brexit.

Shortly afterwards, Google Payment obtained an electronic money institution licence in Lithuania to allow it to issue electronic money and provide payment services to ensure smooth operation of its marketplaces across Europe, the Bank of Lithuania said. 

Asked about whether the launch of SumUp’s Vilnius hub was linked to Brexit, Kunceviciute said the company has prepared for the UK’s exit from the EU — a must given its pan-European user base — by securing an EMI licence to allow it to serve merchants outside the UK. However, she says, “other factors like the talent pool and support received played their role when selecting Lithuania as well”, and the company plans to keep and grow its London operations while also expanding in Vilnius. 

And, she warns, the authorities will have to ensure Lithuania remains competitive. “Vilnius is definitely becoming a fintech industry centre in our region … But we also need to realise that competition is growing. I believe as a country we are on the right track and fintech strategy is high in the agenda/priorities of governmental institutions, but in this fast changing environment we need to continue keeping a close eye on aspects like talent pool, or regulatory requirements,” Kunceviciute commented. 

Bubble warning

The Baltic states have seen a series of money laundering scandals in the last few years. While recently they have been concentrated in Latvia and Estonia rather than Lithuania, the scandals have still affected, for example, the ability of local banks to find corresponding payment partners. In response, the Bank of Lithuania and Financial Crime Investigation Service together with a few other government institutions are already in the process of establishing a competence centre for risk mitigation and anti-money laundering, which, Budrys notes, “is a growing concern given the growing fintech sector in Lithuania.” 

Part of the reason why fintechs are doing so well is that regulation on the traditional banking sector was tightened after the last international economic and financial crisis a decade ago. The coronavirus pandemic, lockdowns and consequent economic crisis are now creating fresh opportunities for fintechs, but at the same time additional risks are emerging.  

“In the years since the 2008 financial crisis, there has been an exponential increase in the number and strictness of the regulations of the financial sector, especially in the European Union, with no visible plans to relax any parts of it,” explains Budrys. 

“This certainly is the main reason that led to traditional commercial banks de-risking heavily and caused [the] fintech boom-turning-into-bubble. And now, the effects of COVID-19 on the worldwide economy may or may not become that needle to burst that finTech bubble.”

In response, Budrys warns that regulators may need to target the sector more carefully and take new measures to ensure there are no collapses of fintech firms in the aftermath of the pandemic.