2022: A year at the crossroads for Lithuanian fintech

FinTech
FinTech, from Shutterstock

As industry and government come together to determine a new regulatory framework for Lithuanian fintech, Airidas Puodziunas, General Manager, Contis Lithuania, looks at the issues at stake and makes the case for maintaining an open, enabling and collaborative approach to building business, according to a press release provided by Contis.  

Lithuania’s position as a globally recognised fintech hub is no accident. On the contrary: it is the result of deliberate policy, both from the government and the central bank. 

Just last week, the Bank of Lithuania hosted an event with relevant stakeholders – including the Ministry of Finance – and fintech communities to discuss the vision, maturity and sustainable development of Lithuania’s fintech sector, issuing new guidance to the country’s institutions and market participants.

Glance at Lithuanian fintech 

A quick glance through the Invest Lithuania prospectus, for example, shows exactly how important having a ‘Regulator at the frontier of innovation’ has been. More than 230 fintechs have set up shop in Lithuania, earning the country a Top 10 position on the Global Fintech Index and Number one within the European Union in terms of licensed fintech players.  

Lithuania’s business-enabling regulation, smart infrastructure and an innovation-friendly microenvironment – exemplified by the Bank of Lithuania’s regulatory sandbox and CentroLINK among others – have all been instrumental to the fintech sector’s impressive growth in the past few years. 

But we will soon see whether the government-directed approach will continue to deliver value or start to flatten Lithuanian fintech’s impressive growth trajectory. 

The Guidelines for the Development of the Lithuanian Fintech Sector in 2022-2027 are being drawn up by a group of market participants and public sector representatives. In the words of Minister of Finance Gintarė Skaistė, the aim is to “discuss and find common solutions to the challenges that arise” as a consequence of growth at the national and individual level.

In many ways, this is the latest iteration of a familiar conversation within the finance sector. Regulation is both a blessing and a curse – depending on where you sit in the overall ecosystem. We’ve all heard the arguments from traditional finance houses, pointing out that they are hampered by onerous regulatory obligations that don’t touch their smaller, digital-first challengers. 

We’ve also all seen fast-growing fintechs suddenly run into regulatory brick-walls once they become big enough to attract attention but lack the capacity to manage compliance effectively. Many of the most vocal arguments for a collaborative approach within the sector come back to exactly this: it is not enough to have a great business idea, fantastic customer service and a funding pipeline. Certain competencies are essential and are often best acquired through partnership. 

But there’s an extra dimension to the discussion in Lithuania. The government, not unreasonably, wants the value created by the fintech sector to benefit not just individual business customers, but the broader economy and the country’s citizens. 

However, Lithuania’s community of innovators and entrepreneurs aren’t necessarily thinking in terms of national borders. The cooperative approach to licensing, which combines local infrastructure with European reach, has certainly contributed to growth – as evidenced by the number of Europe-wide firms that call Vilnius their home. 

Internationalism remains critical. Yes, Lithuania is certainly excelling as a fintech hub – but that should not blind us to the fact that the local market, even when extended to its Baltic neighbours, is not that large. Putting new barriers in place could well be a self-defeating move. 

One thing that is clear from government announcements of late, is that Lithuania is positioning itself as a hub for AML and CFT as a way to maintain robust and sustainable growth. 

This is a sound move with obviously beneficial outcomes. It acknowledges that compliance structures and environment can attract those larger fintechs that receive more regulatory scrutiny. It builds on the public and private investments already made in Lithuania’s world-class Centre of Excellence in AML. And it helps position Lithuania as the potential host for an EU-Level centre of AML competence, following the Commission’s proposal for new, unifying rules on anti-money laundering and cybersecurity risk management.

The result should be further FDI into the country. It should also offer greater support both for new market participants and existing players, regardless of the size of their ambitions and whether they want to focus exclusively on the Lithuanian market or realise a pan-European vision.

Lithuania’s regulators, therefore, face both abundant opportunities and potential pitfalls. They have to get the balance right between heavy-handed regulation that protects customers and the country at large, and a lighter touch that will allow a competitive fintech environment to thrive.

Tighter regulation need not be a bad thing, as long as it is done in a way that reflects the specifics of the sector. That the Ministry of Finance and the Bank of Lithuania are engaging with business leaders on the future direction of Lithuanian fintech is certainly encouraging. 

In effect, Lithuania is creating a new type of sandbox. Not one where products are safely tested against regulation, but one where regulation itself is tested against the needs of a thriving market. The prize for sticking to internationalist principles are substantial. But either way, there’s little doubt that 2022 will be an interesting year for industry watchers and participants alike.

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