“The fintech sector holds immense importance for Latvia. It has emerged as a strategic pillar for economic growth and innovation. By leveraging technology to transform traditional financial services, the fintech sector has positioned Latvia as a vibrant hub for innovation, attracting international recognition and investment. It plays a vital role in diversifying the economy, creating high-skilled jobs, and fostering entrepreneurial spirit, ultimately contributing to Latvia’s competitiveness on a global scale,” emphasises Deputy Director of the Investment and Development Agency of Latvia Iveta Strupkāja.
He informs that fintech is one of the most widely represented sectors in the Latvian startup ecosystem. Of 600 startups active in Latvia, 25% are from the fintech sector. “The number of fintech companies in Latvia is growing yearly, and even faster, since the government introduced several support mechanisms – from startup visas for foreign founders to tax incentives, startup-friendly stock option policies, and more.
The main advantages of attracting investment in this sector are the opportunity to operate in the EU market thanks to a common regulatory framework and supervisory practices,” says I. Strupkāja.
Latvia recognises the significance of providing support instruments for the fintech sector. The government and relevant institutions have implemented various initiatives to nurture and accelerate the growth of fintech startups. These include financial support programs, incubators, accelerators, and regulatory sandboxes that foster innovation and provide a supportive environment for experimentation. “However, continuous improvement is necessary to address evolving challenges and capitalise on emerging opportunities. Close collaboration between public and private sectors, streamlined regulations, and enhanced access to funding and mentorship are key areas that require attention to further strengthen support for the fintech sector,” adds I. Strupkāja.
Deputy state secretary at the Ministry of Economics Raimonds Lapiņš informs: “The financial services sector in Latvia accounts for 3% of the value added of the economy and 3% of all service exports.” It is one of the seven industries of the economy where job growth can be observed. The industry consistently has the highest level of wages, with an average gross monthly salary of 2,437 euro in 2022.
“In the current economic and geopolitical situation, innovation and ability to adapt to the market conditions is one of the main challenges. Therefore, innovation in the financial sector is a prerequisite to move towards sustainable economic development and to promote even faster growth in the industry,” says R. Lapiņš.
Latvia recognises the significance of providing support instruments for the fintech sector. The government and relevant institutions have implemented various initiatives to nurture and accelerate the growth of fintech startups. These include financial support programs, incubators, accelerators, and regulatory sandboxes that foster innovation and provide a supportive environment for experimentation. “However, continuous improvement is necessary to address evolving challenges and capitalise on emerging opportunities. Close collaboration between public and private sectors, streamlined regulations, and enhanced access to funding and mentorship are key areas that require attention to further strengthen support for the fintech sector,” adds I. Strupkāja.
An industry with growth potential that cannot be ignored
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In terms of amount of assets, and comparing fintech and banking industries, the fintech industry is not yet large. But there is great potential to increase the amount of assets of the fintech industry. One signal that the industry is being taken seriously at a national level is the adoption of the Fintech Sector Strategy in 2023.
“The development of the fintech industry is very important for Latvia. It has great growth potential – we cannot neglect and ignore it. We need to take the opportunities that this industry offers us,” says Dina Buse, head of the Credit Institutions and Payment Services Policy Division of the Financial Market Policy Department of the Ministry of Finance.
Many countries are ready to compete to attract the fintech companies. It is therefore important for Latvia to be able to present itself internationally as the friendliest jurisdiction for this sector in order to compete successfully with the offer of other countries. “The large players in fintech are France and the Netherlands, but our offer can also be quite good and competitive,” she is confident.
To do this, it is important to create the right regulatory environment for fintech companies so that the industry can grow and companies can offer their services not only domestically, but also across borders. For example, the MiCA regulation on crypto assets states that licences issued in all EU countries will be valid in other Member States. “Therefore it is important, which country is able to implement the regulation into national law the fastest and to prove itself as the friendliest to the fintech industry,” adds D. Buse.
The fintech industry now has its own strategy
In 2023, the Latvian Fintech Strategy was adopted. It has four directions related to improvement of the regulatory environment, talent development, public support for the industry, and marketing. “The aim of the strategy is to make a big development leap forward to catch up with our neighbours Lithuania and Estonia,” says D. Buse.
The regulatory environment will be improved
For Latvia’s fintech industry to be competitive, the Latvian fintech industry regulator must be one of the fastest and best. She stresses that fintech companies need good communication with the regulator, both during the pre-licensing and licensing phases. “In attracting new players, it is important to get the message out that Latvia is an open and welcoming jurisdiction for new market entrants. The regulator has done a lot to make the licensing process as business friendly as possible. But of course, work in this direction must continue,” says D. Buse.
Plans to develop a support programme
Today, fintech start-ups can benefit from the same support instruments as any other start-up, such as the possibilities of the Law on Aid for the Activities of Start-up Companies and support from incubators and accelerators. The Latvian fintech industry association Fintech Latvia and the Ministry of Finance are working together to gather information on the needs of the industry and develop the most appropriate support instruments. “We are working with the industry on it,” says D. Buse.
Latvia has ambitions
to become the fintech hub
WELCOME TO LATVIA
Latvia has ambitions to become the fintech hub. In order to achieve this, professionals at all levels of government need to understand the specifics of the industry and be open-minded.
“Currently, conditions are maximally positive and the stars are aligned better than before – Latvijas Banka is actively signalling that Latvia wants to become more open to fintech companies. Latvijas Banka is doing a great job – attending various events in other countries, trying to show the positive attitude of the financial market supervisor,” says Rūdolfs Eņģelis, partner at law firm Sorainen.
Agneta Rumpa, senior associate at Sorainen, also highlights the Financial Intelligence Unit of Latvia as a good example of a good understanding of the industry, especially the crypto asset field. She believes that other institutions need to be equally understanding. “As soon as we talk about innovative technologies and services that are different from the classical ones, there is unfortunately not the same understanding everywhere. Once the knowledge of financial technology will also flow to other institutions, we will have everything we need to achieve good results in this area,” says A. Rumpa. She believes that Latvia could benefit from a high-level official with a strong voice or interest in the industry. For example, when the new prime minister of the UK started work, the crypto industry was very enthusiastic because he had previously spoken positively about the potential of the sector.
“Conceptually, a milestone may have been reached – now we need to see whether what is declared will happen in practice. Once we have practical results, we will be able to draw conclusions,” says Andis Ozoliņš, associate partner at law firm Walless.
There are valuable benefits from the overhaul
“Latvia went through an overhaul of its financial industry – more ambitious than anywhere else in Europe. Market participants, supervisors, and advisors at all levels are now much more knowledgeable about this area than the European average. Now that fintech is evolving so rapidly and there are so many business models, each with its own specific compliance risks, we have the opportunity to demonstrate best practice in managing these risks, allowing new business models to develop. But it also requires more courage from the side of infrastructure holders to partner with fintech start-ups,” says R. Eņģelis.
A. Ozoliņš also agrees that the overhaul, which many believe caused damage to the business, also has had positive side effects. He sees similarities with the situation in consumer lending, which started to develop rapidly earlier in Latvia than in other countries. Practice was developed, the Consumer Rights Protection Centre issued guidelines, the law was amended. As a result, consumer credit rules in Latvia became more developed than in many other countries. A. Ozoliņš foresees that the strict regulation of anti-money laundering risks could also potentially be used to the industry’s advantage. While the changes come slowly around the world, Latvia already has experience implementing them. “Being able to use this situation can be to our advantage. This requires cooperation between market participants and the regulator, as well as the search for new solutions,” says A. Ozoliņš.
Foreign companies show interest in Latvia
Recently, a number of foreign fintech companies have shown interest in Latvia. From time to time, Sorainen receives requests for assistance in obtaining permits to provide payment services, collective financing or other financial services and to start a business in Latvia. “This trend is becoming more obvious. I would like to hope that Latvia’s name is no longer so much associated with anti-money laundering problems, but rather with the fact that fintech companies have a significant advantage in the Latvian market. For example, our regulator is easily accessible, industry associations provide support, there are tax benefits, staff options and a special framework for start-ups,” says A. Rumpa.
A. Ozoliņš suggests that the issue regarding anti-money laundering has reached its top point and that attitudes may now become more flexible. “Latvijas Banka wants to make Latvia one of the centres of fintech development. Work in this direction has started – now we have to see whether it will result in new fintech companies in Latvia,” says A. Ozoliņš.
Let’s play in the Regulatory Sandbox!
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There are two initiatives by Latvijas Banka that are dedicated to support fintechs – the Innovation Hub and the Regulatory Sandbox. The Innovation Hub offers consultations on the compliance, business model, and regulation, while the Regulatory Sandbox supports innovative product testing.
The Innovation Hub has been operational for over 4 years and has been experiencing consistent growth both in terms of quantity and quality. Consultations provided through the Innovation Hub have been steadily increasing each year.
“The fintech sector’s interest aligns with current events and regulatory shifts, with a notable surge in demand for consultations for anti-money laundering and combating the financing of terrorism solutions by regtechs in 2021, a peak in crowdfunding in 2023, with a particular focus on the MiCA Regulation this year,” says Marine Krasovska, head of the Financial Technology Supervision Department at Latvijas Banka.
Nevertheless, business ideas related to payment solutions remain the consistent front-runner in the annual statistics of the Innovation Hub.
Additionally, the Innovation Hub serves as a platform for connecting Latvian and international fintech sector players and their partners. Through public events, the Innovation Hub addresses pertinent issues within the sector, fosters learning, and educates ecosystem members on current topics.
The Regulatory Sandbox supports innovations
The primary goal of the Regulatory Sandbox is to support innovative product testing from a regulatory and compliance perspective during the development or piloting phase. Each applicant is assigned a dedicated team of experts in areas such as anti-money laundering and combating the financing of terrorism, prudential supervision, and licensing, who acts as stakeholders providing feedback and assessments to ensure compliance right from the inception of the innovation.
“This structured approach enables the creation of appropriate internal control systems for these innovations,” says M. Krasovska.
The Regulatory Sandbox is accessible to businesses at various lifecycle stages, catering to both established companies launching new products and those in need of a licence. To promote the rapid dissemination of innovation throughout the European Union markets, Latvijas Banka actively participates as a member of the EU Digital Finance Platform, thereby supporting cross-border testing and engagement in the EU Blockchain Regulatory Sandbox.
There will also be a Synthetic Data Sandbox
“To further enhance the services offered in the Regulatory Sandbox and foster new business ideas, Latvijas Banka is actively working on the Synthetic Data Sandbox project,” says M. Krasovska.
The vision of the Synthetic Data Sandbox is to create a platform that interconnects public and non-public databases, mimicking actual society behaviour while preserving privacy and confidentiality. This solution aims to facilitate early-stage regtech hypothesis testing, reducing costs and time for business idea owners and making it equally accessible to students, data enthusiasts, start-ups, and experienced players in the fintech sector. To expedite the development of this synthetic data platform, Latvijas Banka is participating in the EU Data Hub.
Latvia as a sandbox for fintech solutions
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One of the IPF Group subsidiaries, IPF Digital in Latvia, serves the group not only as an important market but also a place to build and test new products that are later introduced in other markets as well. One of the most successful examples is Creditea Mobile Wallet.
Some time ago, IFP Digital noticed that customers are using the services more and more on mobile phones and they were asking for a more convenient and transparent tool to manage their daily finances. So, the company developed a new product: Creditea Mobile Wallet. It is a digital wallet, payment card, mobile banking app, cash options, and credit – all in one product.
“After launching Creditea Mobile Wallet for the first time back in 2020 we were able to quickly increase the user number above 10 thousand and that gave us a lot of good insights to how to make the solution more relevant for our customers. Based on the learnings we did a significant makeover before it went to new markets including Mexico this year,” says Edgars Kalniņš, head of customer experience at IPF Digital. Now there are already more than 10,000 Mobile Wallet customers in Mexico, even more – it was achieved in less than three months.
The company was happy with the results in Latvia and the other Baltic markets, but Mexico surprised the company even more. According to E. Kalniņš, compared to the Baltics, the growth is much faster in Mexico. This is mainly driven by two aspects. First, based on the learnings IPF Digital got in the Baltic states, the company simplified several processes. Second, the adoption of mobile phones is much stronger in Mexico.
“We know the market and customers very well and have grown a solid customer base. This means that when launching new products and services, learnings come fast and that’s very important for us,” adds E. Kalniņš.
A global company with a footprint in Latvia
IPF Group is a global financial service company playing a vital role in the lives of millions of people by providing unsecured, affordable credit and great-value insurance products in a responsible way. “We help people who are often financially excluded by other lenders access affordable credit and other financial services when and where they need it. Our purpose is to build a better world through financial inclusion,” emphasises E. Kalniņš.
The history of IPF Group is interesting – IPF was originally the international operation of the Provident Financial Group which was founded in the UK by Joshua Waddilove in 1880 as a way of helping working-class families provide for themselves through the use of vouchers which could be repaid at a later date. IPF Group is currently active in 9 markets – Poland, Hungary, Romania, Czech Republic, Mexico, Australia, Estonia, Lithuania, and Latvia. The group has served more than 14 million customers since 1997 and there are 22 thousand people working globally for IPF Group. IPF Group is represented in Latvia through its fintech subsidiary – IPF Digital. “In the Latvian market we were among the first digital lenders,” says E. Kalniņš.
Innovative business models
ask for specialised education
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Responding to the development trends in the financial sector and the rapid development of fintech, in 2016, BA School of Business and Finance, together with Riga Technical University, started work on the design of a new study programme: Finance Management Information Systems. Now the programme is developed and accredited in English; the next year is intended for advertising and attracting students for studies in English.
Dr Līga Peiseniece, rector of BA School of Business and Finance, remembers: a few years ago, the representatives of the financial industry pointed to the lack of specialists with interdisciplinary knowledge who would be able to work effectively in the industry, taking into account the challenges posed by digitisation processes and changes in business models. That was the reason why the idea of a specialised programme was born. In 2018, the first students were admitted to the professional bachelor’s study programme Finance Management Information Systems. “The aim was to prepare specialists who will gain deep knowledge in both IT and finance, and who would be able to work effectively under rapid changes and digitalisation in the financial sector,” says L. Peiseniece.
The professional bachelor’s study programme Finance Management Information Systems prepares specialists for the financial industry – programming engineers with in-depth knowledge and skills in the field of finance.
The first in the region
Dr. Līga Peiseniece
Rector of BA School of Business and Finance
“Taking into account the fact that the professional study programme Finance Management Information Systems was the first fintech programme in the region, initially the students’ interest was moderately high, but in recent years it has been observed that Latvian society is developing a greater understanding of the fintech industry, digitisation trends in the financial sector, and the industry’s demand for specialists has grown. Therefore, the interest in the study programme is steadily increasing,” says L. Peiseniece.
The growth of graduates from the study programme Finance Management Information Systems is currently limited because of a limited number of state-financed places in the programme, compared to traditional IT field study programmes. Currently, seven students have graduated from the study programme, but BA School of Business and Finance expects an increase in the number of graduates in the future, taking into account the increasing recognition and interest in the programme, as well as the increasing dynamics of the number of students in the study programme.
The programme will be in English
During the implementation of the study programme, BA School of Business and Finance and Riga Technical University estimated the potential of the implementation of the study programme in English.
“The preparatory work for its implementation in English has been carried out,” informs L. Peiseniece.
Necessary preparations will take place during the next academic year, so the first students will start studies in English in the fall of 2024. L. Peiseniece forecasts that the implementation of the study programme in English could ensure a significant growth of interest in the study programme, offering study opportunities to foreign students, which in the future will promote its recognition on an international scale. “Thus, potential workforce for fintech companies will also be attracted from abroad,” she adds.
A new initiative to bridge the gap
Riga Business School at Riga Technical University is launching a new and ambitious initiative to bridge the gap in financial services education and research by establishing a new Baltic Centre of Excellence in Financial Services. The centre will serve as a key regional independent think-tank and capacity builder, aiming to shape the future of financial services in the Baltic region and beyond.
The primary mission of the Baltic Centre of Excellence in Financial Services is to become a trusted member of the Baltic financial services ecosystem, contributing to the development of an innovative, sustainable, and well-functioning financial services market that drives economic growth. To fulfil this mission, the centre will provide academic and professional training, as well as conduct research and data analysis, with a particular emphasis on building capacity in fintech and financial regulation.
Over the next three years, the centre will receive €1.5 million from the European Commission’s Recovery and Resilience Facility to strengthen knowledge and research capacity in fintech, anti-money laundering, financial regulation, and sectoral analysis. As part of the project, the centre will deliver an ambitious program of work, including:
Developing six academic study modules on fintech and financial regulation and training faculty from universities across Latvia to integrate these modules into existing undergraduate and graduate programs.
Publishing policy-focused applied research, including an annual flagship report on the state of the financial sector, as well as academic research.
A SECTORAL REVIEW
A business with
A SECTORAL REVIEW
Head of Fintech Latvia Association
It is no secret that there are many fintech companies in Latvia – both those that have already proven themselves and have been operating for many years, and those that are creating new products and have only recently entered the market. But how did this industry start? What were the first companies and industries in which they started? Tīna Lūse, head of the Fintech Latvia Association, talks about this in an interview with Fintech Pulse 2023.
Let’s start with a definition – what is fintech anyway? How would you describe the boundaries of this industry?
Within the association, we ourselves from time to time return to the definition of this industry. I would put it simply: fintech is any solution that makes everything related to money more accessible, easier and more convenient to use with the help of technology – how we receive it, send it, use it.
Fintech can be divided into two directions. One direction is the invisible solutions and infrastructure used by both banks and classic non-bank fintech companies. All these solutions and technologies are designed to make it easier and faster to exchange data, make payments and settlements, meet various regulatory requirements such as verifying that a customer is able to borrow and can be granted credit. This includes embedded financial solutions that make payments more convenient.
The other direction is all those fintech services that the end consumer sees – non-bank lending, investment platforms, crowdfunding platforms, etc.
If we look back to the not-so-distant past, in order to do anything with money you had to go to a bank branch. Today we can do everything on a computer and even that approach is outdated – now everything has to be done on a mobile phone in the middle of the forest. Fintech companies have also influenced the way traditional financial sector companies work.
How technological is the industry?
This is a very technology-intensive sector. In the beginning it was only loans via SMS, now the way we use financial services has completely changed. Now everything is on the phone and more accessible.
We cannot forget financial inclusion. It is no secret that the non-banking sector serves higher-risk customers – it is important that people have access to money, especially in underdeveloped economies. For example, as I read in an interview with a Latvian lender, in Asia people use loans from non-bank lenders to start their own small business, such as buying a coffee vending stand or similar small business in order to feed their family. The traditional financial sector does not serve such clients.
Moreover, as consumers get used to convenience and technologies, they expect other services to be just as convenient. For example, we already think it is very easy to invest and borrow. But one day it could be ordinary for a person to pay their bill with a voice message on their phone, for example saying: “Siri, pay my phone bill!” This will be important not only because it will be convenient for everyone, but also for people with disabilities, thus promoting technological inclusion. I could just as easily see a mobile app using AI to advise a person on whether they can afford a particular purchase and whether it is better to pay for it in two or six instalments.
How did the fintech industry start in Latvia?
I would say that the starting point was right after the financial crisis of 2008, which was felt particularly hard by Latvia at the European level. Literally around that time, the first market players emerged and around 2009 and 2010 they became more visible to the consumers.
The first fintech companies were consumer lending companies, as the crisis literally stopped the lending by banks. This was the reason why non-bank lenders entered the market and started offering both consumer and mortgage lending services. Probably the very first company was smscredit.lv from the current 4finance group. It is also the origin of the slang term SMS credit. This was followed by a variety of service providers, which at one point numbered more than 40, but now their number has shrunk.
Subsequently, between 2012 and 2014, various payment and electronic money institutions started to emerge, which are currently not active in Latvia due to various regulatory barriers. There are such companies, but most of them are based abroad. However, as the Latvian regulator becomes more active and open, we see that there is a trend in this area too, where foreign companies are becoming interested in licensing in Latvia. This is due to the fact that Lithuania has always been a leader in the payment and electronic money institution industry, but there have been changes in the national requirements for these market players, which have resulted in companies looking at other jurisdictions where they could obtain the licence. Latvia is in a very good position in this segment at the moment – we have the ideal set of conditions that could bring growth and a breakthrough in this area. We have overhauled the financial sector following the 2018 Moneyval report and our financial sector is ready for new and high compliance standards. We now see that the regulator and policy makers are open and ready to welcome new entrants. The last positive initiative relates to access to the SEPA system. Both the Ministry of Finance and Latvijas Banka are committed to finding a solution to give fintech companies access to the SEPA system through the central bank. This could be an important condition for the development of the industry. Let’s hope for the best.
Around 2017, a new industry of fintech companies emerged – peer-to-peer lending. These are platforms where money is borrowed by consumer lending companies, but the lenders can be both professional and private investors. Such investment platforms are a Latvian phenomenon, for which Latvian companies are known throughout Europe. Latvia is also the only country in Europe that, in the absence of European regulation, has actually devised its own solution to licensing such investment platforms.
And then in 2021, a regulation was adopted in Europe that governs how crowdfunding platforms operate and allowed different models for how platforms can raise finance for different crowdfunding business projects. Now there is activity in this segment too – we see both brand new players entering the field and established companies adapting their operations.
The above industries show the most prominent fintech companies. But there are many other companies that are less obvious, providing services that are invisible to consumers, such as open banking data, regulatory technologies and various infrastructure issues.
The most recent area in which Latvia is committed to participate is the blockchain and crypto industry. With the adoption of MiCA regulation at a national level, this could be a new and potential development area with high added value.
So the industry started with fast loans and now offers many other services?
The industry has suffered and continues to suffer greatly from the fact that it is always associated with fast loans. This prejudice prevents us from seeing how broad the industry is. And it is important to understand that fast loans are not fast in the bad sense of the word that was given to them in the early days of the industry. They are only fast because technology can help you quickly understand who you can lend to. Today, non-bank lending in Latvia is the most mature and tightly regulated industry in Europe.
And it was non-bank lending that was the first stage of development, from which other companies in the fintech sector have emerged and developed. Fintech companies have a great opportunity to become one of Latvia’s next unicorns – companies worth more than a billion dollars.
How many fintech companies are there in Latvia?
We have some problems with the data because there is no separate NACE category for financial technology company. We can look for licensed service providers who have received a licence from Latvijas Banka or are registered with the Consumer Rights Protection Centre. But these figures do not show how many companies we have that develop different technological solutions, work on software, etc. Although the exact figures are not known, what has been counted in the various reports so far indicates that the number of workers in the industry varies between 150 and 160.
How big is the industry in terms of turnover?
This is the second problem – without knowing exactly how many companies are working in the industry, we cannot tell the exact turnover of the industry. The second reason is that almost all companies also work abroad and we have no publicly available data on how they are doing outside Latvia. Companies are not always willing to share this information.
We also faced this problem in the spring of this year, when we did a review of consumer credit providers. We know and we are proud that our companies export their services and operate in large markets, but no one was ready to disclose specific figures. That is why the association only notices how well a company is doing when it has been listed in Forbes, Deloitte, or the Financial Times. Unfortunately, neither our association nor any other body has precise data on the number of companies in the industry and their turnover, partly because companies are reluctant to share this information, knowing the prejudice of the public.
How global are Latvian fintech companies?
Latvian fintech companies are everywhere! They work in every continent – Africa, Europe, America, Asia, Australia. Antarctica is probably the only exception.
There is no doubt that fintech is an exportable and scalable industry. Many services are invented here but offered elsewhere. In the case of banks, it is mostly the holding companies that are based abroad and make their profits in Latvia, but in the case of fintech it is the other way around – the holding companies are based in Latvia and work all over the world.
What surprises you about this industry?
I am constantly amazed by the creativity and courage of entrepreneurs in this industry. I am really impressed by their ability to keep up with new trends and to be the ones who bring them to life. In this industry, we are not a small country that follows and copies what is happening abroad. No – we participate in creating trends and others learn from us.
Since independence, we have watched various investors enter Latvia and develop businesses in different industries. Now it is Latvian fintech companies that are entering other markets, offering different services, creating jobs, and paying taxes.
What are the strengths of Latvia in the fintech industry?
Latvia is a relatively small country, which ensures that we can easily communicate with other market players and the regulator. The regulator is open and ready to welcome new technological solutions. So this is a good sandbox to try out new solutions, get market feedback and then scale up these concepts. In a small market, everything happens quickly and neatly. For example, recently a payment institution from another European country approached the association and asked for our support to meet with Latvijas Banka. The regulator reacted very quickly and offered a meeting the very next day – the company itself was not even prepared to react so quickly. The pre-licensing consultation process of Latvijas Banka before obtaining a licence is also praiseworthy. It is a really good tool that we should not be shy to use. In this format, it is possible to smooth out any uncertainties, verify the business model, and then the licensing process is smooth and fast.
At the same time, the small size of the market automatically suggests export and scalability – all fintech companies export.
What are the biggest challenges of the industry?
For some time now, various fintech companies have been pointing out that access to the SEPA system should be arranged through Latvijas Banka. The association, in cooperation with other organisations in the industry, has formally asked for this issue to be sorted out and has also received indications that a solution may indeed be found.
Another challenge is to find ways to foster cooperation between banks and fintech companies. It is no secret that the survey of Latvijas Banka this spring was not encouraging and suggests that banks see fintech companies more as competitors than partners. This is partly due to the fact that the fintech sector is not always sufficiently mature in terms of compliance, but it is not an insoluble and insurmountable problem. There are also banks in the Latvian market, which show that they are willing and able to work with fintech companies.
How do you see the future of the Latvian fintech industry?
It would be great if we continue on the successful course and support the fintech startup ecosystem at the national level. It will certainly contribute to the national economy. I would like to see young companies staying in Latvia and basing their business here – Latvia is a wonderful place to create and develop a business. We have excellent air connectivity – thanks to airBaltic, business partners are easy to reach. We have a great opportunity to work in the city centre, 10 minutes from Latvijas Banka and the Ministry of Finance, and relax by the sea or take a walk in the forest in the evening. Such luxury is not a given in many other European cities.
Latvia has ambitions
to become the fintech hub
A SECTORAL REVIEW
Executive director of the Latvian Blockchain Association
Currently, in Latvia about 35 companies are working in the crypto industry and in the field of blockchain technologies, but Reinis Znotiņš, executive director of the Latvian Blockchain Association, expects that this industry will develop rapidly in the next few years – similar to what has happened in Lithuania.
An important milestone will be the implementation of the Markets in Crypto-Assets Regulation (MiCA) in the national legislation. R. Znotiņš believes that Latvia should be the first country in the EU to implement this regulation and should think innovatively about the payment of company share capital and taxes with cryptocurrency assets. By following these three steps, Latvia has an excellent chance of becoming an attractive destination for crypto companies, which will help the state budget to collect more taxes, create new well-paid jobs, and offer citizens a wider selection of financial services.
Znotiņš believes that the introduction of the regulation in Latvia will ensure higher tax revenues and put Latvia on the world map as a potential place for companies in this industry to obtain a licence. R. Znotiņš tells more about the crypto industry in Latvia, the most significant startups and the importance of this niche of financial technologies for the economy in an interview with Fintech Pulse 2023.
How big is the cryptocurrency and blockchain startup industry in Latvia?
In the last seven years, a decent number of serious and interesting companies have grown up in the blockchain and Web3 direction in different verticals. Part of the companies are related to crypto assets – cryptocurrency payments and cryptocurrency institutions. There are at least 10 companies with developed sustainable business models working in this direction and servicing the whole world. For example, the Gravity Team algorithms process 0.8% of the global cryptocurrency market turnover – several hundred million dollars per day. In five years, a cumulative 100 billion dollars have passed through the company’s systems. That is impressive. Nexpay, Hodl Hodl, and other companies are also working in this field.
Web3 game companies such as Colizeum and Beetroot Lab, blockchain software development companies such as Blockvis, and NFT-related companies are also working in this industry. For example, one of our members is the Latvian national airline company airBaltic, which has its own NFT Plainies. The company uses NFT very cleverly as a customer engagement tool – just like Nike and other big companies.
Other blockchain companies include smart contract companies such as Salto X, a joint venture of Latvian Krists Avots and Estonian entrepreneurs.
There are many other companies operating in very specific niches. For example, eSIM company Yesim has an integration with the Binance platform.
How many companies are active in this industry in Latvia? How big is it?
Around 35 companies. In the association, we try to reach out to all companies that are connected to Latvia and have Latvian founders, and to all companies that are physically located in Latvia. The association also includes Latvian-founded companies that are legally based elsewhere, for example in Sweden. Of course, there is the question of what we do or do not count in this industry and whether we consider them Latvian companies. For example, Bitfury’s co-founder is Latvian and the company employed 70 people in Latvia as recently as 2020.
35 companies – is that a lot or a few?
If one of these companies has handled 100 billion euro, it shows that this is an economically important industry. Also it is a fast-growing area. Even if it has a few hundred employees today, I see great potential to reach a few thousand in a few years. Lithuanians have shown that fantastic growth is possible in a few years. In 2020, Lithuania managed to attract a large crypto exchange, Binance, which is now the fourth largest taxpayer in the country, excluding VAT payers. This, I think, also shows the enormous economic impact of the industry. There are myths that the industry is decentralised and does not pay taxes – this example dispels them.
What are Latvia’s strengths in the crypto industry? What do our companies do best?
We have very strong programmers, as can be seen both from Blockvis and the Gravity Team. Intellectual potential can be harnessed to create internationally competitive products. It is also a good argument to use in negotiations with foreign companies that would like to work in Latvia – there is no shortage of technical talent to worry about.
How did this industry start? Who were the first companies in this field in Latvia?
The first major crypto company related to Latvia probably was Bitfury, founded by Vals Vavilovs, which initially developed various devices, but now focuses on providing security solutions and infrastructure for blockchain companies. The company has raised 170 million dollars in investments and is worth more than one billion dollars.
What about foreign blockchain start-ups? Are there any in Latvia?
There are a number of companies that have applied to join the association, based in the UK or Italy, for example. There are not many examples of this because our financial system has not been very supportive and has not licensed crypto companies as actively as Lithuania or Estonia, which have specific regulations for this industry.
Earlier this year, the European Parliament adopted the MiCA Regulation on crypto asset markets, which will apply from 2024. How will the crypto world change as a result of this regulation?
The regulation changes everything, because now the European Parliament has said at the highest level that this is a legitimate industry that will have the legal framework for development. So far, several countries such as Lithuania, Estonia, Portugal, and France have introduced national cryptocurrency regulation, but most countries have not yet done so.
Crypto exchanges, crypto brokers and other service providers will now be able to be registered and licensed in any European country. If you get a licence in one country, you will be able to work all over Europe. The industry itself also welcomes the regulation. It strikes a good balance between protecting consumers and not killing business opportunities, leaving room for development and growth.
If Latvia will be able to adapt this regulation first and introduce some other small initiatives, this is an excellent opportunity for Latvia to stand out at the European level and become a crypto centre.
What could these initiatives be?
We are already working to encourage the possibility of paying taxes and paying for the share capital of a company with cryptocurrencies – the euro would go to the state account, and on the other side there would be the possibility to pay with cryptocurrencies. It would also be important to remove the restriction that you have to travel to Latvia to register a company. Small things like this, which do not cost the state anything to implement, will lead to higher tax revenues in Latvia and put Latvia on the world map as a potential destination for companies of this industry.
Once these issues are sorted out, the association is ready to go and approach crypto companies to consider registering and obtaining a licence in Latvia. I have already spoken to the major stock exchanges and told them that Latvia is working in this direction – crypto companies established outside the European Union will need a licence anyway. Why not get it in Latvia?
And what do they answer?
They understand that a licence will be needed and are now trying to understand the process of how this could happen. The question is whether Latvijas Banka will actually start issuing licences and do it fast enough. If everything works as planned, Latvia has an excellent chance of attracting one of these big companies.
What does it take for it not to be a fantasy, but to actually work?
We need a change of mindset, and it is already happening. In recent years, we have lived in a regime where the entire financial system is being re-regulated. This has been felt by everyone, not just entrepreneurs. But the situation is slowly changing. Latvia has invested a huge amount of money to reduce the potential risks of money laundering: the annual budget of the Financial Intelligence Unit is almost five million euro, and the capacity of the Bank of Latvia and the Financial and Capital Market Commission is being strengthened. Finally, there is an understanding that the country needs to be more open and innovative in the financial sphere. Now it is simply a matter of putting it into practice and issuing licences. It cannot take a year or more – the licence must be obtained within three months. That would be an excellent due date.
We have agreed with Latvijas Banka that there will be a sandbox for blockchain companies in the regulator and they will be able to consult on the process of obtaining a licence.
Awareness in other institutions also needs to be improved. It cannot happen that someone sees a company working with cryptocurrencies and immediately freezes its account. There must be adequate dialogue. Everything will work if the system is sound at every step and we do not try to be twice as strict with what the law requires of our own companies.
Does each country implement the regulation separately, or does it work in the same way across Europe?
The text of the regulation must be approved by national law in each country. The regulation is directly applicable and there should be no major derogations.
It doesn’t matter in which country a company registers in. What can be done to make it more attractive to obtain this licence in Latvia?
First of all, we need to apply the Regulation first in Europe! We need to understand that Latvia is not Germany and we cannot wait for 10 other countries to adopt national regulations and test what works the best. The only way for us to be competitive is to adopt this regulation first and sweeten it with national legislation that allows the payment of taxes and company share capital with cryptocurrencies, as well as the remote filing of company registration documents and easy communication with the public authorities. By putting these things in place, Latvia will have a very good offer. The most important thing is not to put additional obstacles in the way.
How much awareness is there at the national level about what blockchain companies are doing?
The joke about the crypto industry is that it combines what people don’t know about computers and finance. In all seriousness, it looks like understanding is improving. For example, the Financial Intelligence Unit has a good understanding and its specialists are able to distinguish between risks and real business. At Latvijas Banka there also is a pretty good understanding. We have agreed to run additional courses to help understand this industry. We are also talking to the Ministry of Finance, the State Revenue Service and the Treasury, which are increasingly willing to move in the direction of innovation.
Awareness is slowly building, and the MiCA Regulation is a good stimulus for this: soon it will be applied and everyone needs to understand how to do it.
I see that the situation is changing, and there is an understanding in the regulator and the Ministry of Finance that innovation is needed in the industry. For example, Lithuania determined seven years ago at every level from the political leadership to the central bank that the fintech industry is important for the country. As a result, there are now more than 500 fintech companies in Lithuania and 3,000 people working in the industry. This example shows what can be done with great will and courage.
Bitcoin is based on the blockchain, but that is not all that is possible with this technology. How else is it applicable?
Yes, there are many uses for this technology, and cryptocurrencies are just one of them. There are other examples of use, both in the commercial sector and at a national level, which should be seen as an opportunity. For example, Estonia’s electronic voting system, Finland’s national logistics system and the US Department of Homeland Security’s surveillance camera data storage system are based on blockchain, while in Georgia it is used by the National Land Registry. Europe is working towards a single digital identity, where every European citizen will have a single digital identity file – which could also be built on a blockchain.
In Latvia, I see at least two excellent options in which blockchain could be used. One example would be an eHealth system, where a blockchain would ensure that all data is decentralised, and another would be to put a cash register system on the blockchain.
After working in the start-up environment and four years as a member of the Latvian Parliament, you have been leading the Latvian Blockchain Association for a year. What does the association do?
The association has three goals: to build community, to educate the public, and to promote Latvia. We evaluate the members very seriously, when we admit them to the association. We make sure they are in business for the long term, and that they do not engage in fraud. We also educate public institutions and politicians about the field, trying to show its potential and hope for positive change. We also promote Latvia internationally as an attractive location for companies of this type and make it our mission to attract companies from this industry. One could say that this is a task of the government, but we are ready to invest our resources in promoting Latvia internationally, because we know that everyone will benefit from it.
This year, the association carried out a study on the blockchain industry. What are the main findings?
We carried out this study because we want to educate the wider public about the potential of blockchain technology and to draw the attention of politicians and public officials. This is a turning point – a new technology is coming into the world and we all have the opportunity to let it pass or surf on this wave and make a significant difference for the country of Latvia.
We wanted to test this hypothesis academically. The 2023 study “Assessment of the Potential Economic Impact on the Latvian Market of Implementation of the European Union’s Unified Crypto Asset Regulation MiCA” by Prof. Gundars Bērziņš and Prof. Jānis Priede shows that Latvia has the potential to develop this industry and significantly benefit its economic development. However, this requires decisive action through legislation already this year. In practice, entrepreneurs also want to see that the regulator is receptive to active licensing in Latvia.
How do you see the future of blockchain technology companies in Latvia?
During the interview we are sitting in one of the most modern offices in Riga – Zunda Towers. I hope that in a few years, with a few things in order, these offices will be home to many high value-added companies that will create thousands of well-paid jobs, pay taxes, and make Latvia much more visible in this industry.
It is important to be among the first to implement
the MiCA Regulation
A SECTORAL REVIEW
The crypto asset market regulation (MiCA) will be applied from mid-2024 and each EU Member State is required to develop its own national regulation. If Latvia is the first to adopt it, we have a great chance to stand out at the European level with our offer.
On 20 April 2023, the European Parliament adopted the MiCA Regulation, which is designed to promote and support the potential of digital finance for innovation and competition, while mitigating risks. This regulation is being developed in line with the European Commission’s priorities to make Europe fit for the digital age and to create a future-ready economy and financial system that works for the benefit of citizens.
Among other things, MiCA will set out the requirements for licensing and supervision of crypto asset service providers. The licence will be required to provide various crypto asset services in the EU, such as holding crypto assets, exchanging crypto assets for official national currency or other crypto assets. A crypto asset service provider licensed in one EU country will be entitled to provide crypto asset services throughout the EU.
A perfect legal and licensing regime
Marine Krasovska head of the Financial Technology Supervision Department at Latvijas Banka
The regulation aims to provide a harmonised framework for crypto-asset service providers across the European market. It will bring clarity and legal status of cryptocurrencies and related services in Latvia, reducing uncertainties and encouraging legitimate businesses to operate in the sector.
“Currently, there is no specific crypto-asset service regulation in Latvia; however, the MiCA Regulation provides a perfect legal and licensing regime for crypto service providers, including exchanges, wallet providers, issuers, and custodians. Businesses operating in Latvia will need to comply with the licensing requirements in order to offer their services to the market, ensuring customer protection and compliance with anti-money laundering regulations. The MiCA regulation will also enhance investor protection by imposing certain disclosure of requirements and product governance standards. In this way, we will provide customers in Latvia with more transparent information about crypto services and associated risks promoting responsible investing and transactions,” emphasises Marine Krasovska, head of the Financial Technology Supervision Department at Latvijas Banka.
A major step for the industry
Ramona Miglāne Partner at drill., attorney at law
“MiCA sets a completely new definition of cryptocurrency – previously there was a different definition of what a cryptocurrency was. In order to be compliant with the regulation and to be able to register under the regulation, the type of cryptocurrency the company is dealing with will need to be reviewed,” says Ramona Miglāne, partner at drill., attorney at law. In her opinion, the requirements are not drastic: “Compared to requirements for credit institutions, the MiCA framework is liberal and easy to comply with. This is an important step to get the industry in order.”
Finally there will be more clarity
Agnete Rumpa Senior associate at Sorainen
“Agneta Rumpa, senior associate at Sorainen, is also positive about this regulation. “This will be a great change for Latvia, as we have not had a comprehensive regulation for virtual assets. Now, whether we want it or not, we will have to create it,” she says. Until now, the industry has not been regulated or there was no clarity about how it is regulated. Now the uncertainty will disappear. In reality, the system will be similar to the current one for financial instruments – just a little simpler,” says A. Rumpa.
But that doesn’t mean everything will be very simple. There will be crypto industry companies that will be subject to classical financial regulation, for example if they work with crypto assets. “If they count as financial instruments, they are not subject to the new MiCA rules and are subject to the existing rules on financial instruments. Similarly, tokens that are considered e-money will not be covered by the new regulation – they will also be covered by the existing e-money framework. In practice, there will therefore be plenty of challenges, such as understanding which regulation applies to particular crypto assets or crypto asset service providers. But anyway, the adoption of MiCA is a step in the right direction,” says A. Rumpa.
On the same starting line
Partner at law firm Sorainen and attorney at law
“We are now in a situation where all of Europe is roughly on the same starting line. Every country has the chance to be the first. The one that can show the market the fastest that it is ready to issue the first licences under the MiCA framework and convince companies that it is faster, easier, friendlier to get them in the country will become the leader. This gives us the opportunity to make all the preparations in time to be as ready as possible when the licences can be issued. The race is now on to see which country will be the first to implement the MiCA Regulation nationally” says R. Eņģelis. In his view, both Latvijas Banka and the Ministry of Finance understand this and are working on it.
R. Eņģelis adds that not all European countries are so ambitious. As far as he knows, Estonia and France are already working on the regulation, but others are hesitant to be the first with the national regulation.
A possibility to stay ahead of other countries
R. Eņģelis believes it is important to adopt the MiCA Regulation quickly. “If we can send a strong message to the market that we will work constructively with companies and that we really want to work together, this is one way we can be ahead of other countries,” he says.
R. Eņģelis says that favourable tax instruments for the industry are an added bonus to a timely national framework. “But it’s a difficult subject – it’s usually a long and painful process to touch the tax system,” he admits.
In the past, Sorainen was occasionally approached by clients interested in provision of virtual currency services. “Unfortunately, until now there was no specific licence in Latvia – if a company offered virtual assets, it had to register with the State Revenue Service as a virtual currency service provider, develop internal control systems and comply with anti-money laundering regulations, but there was no virtual services licence. Estonia had such a framework, which is why companies were more likely to choose our neighbouring country. If Latvia introduces national regulation in time, I look forward to the future,” says A. Rumpa.
R. Eņģelis believes that a niche pilot project should be implemented in Latvia to show how blockchain technology is being used at a national level. “It would be a good signal for Latvia and a great marketing tool,” he says.
Implementation of the MiCA Regulation is expected already this year
Ministry of Finance of Latvia
“The MiCA Regulation has set good pre-conditions for the European Union as it is the only jurisdiction that has started the regulatory process in the crypto assets industry. This is our chance.
We have quite high expectations for MiCA, because being among the first to introduce national regulation gives us the opportunity to make a major breakthrough in the fintech industry,” says Dina Buse, head of the Credit Institutions and Payment Services Policy Division of the Financial Market Policy Department of the Ministry of Finance. That is why the national framework for the MiCA Regulation is currently being developed at the Ministry of Finance. Discussions are ongoing between the regulator and the Ministry of Finance. “We plan to move it quickly so that it can be adopted in the Parliament later this year,” says D. Buse.
Discussing what is needed for a successful national framework, she points out that the Ministry of Finance needs to develop the regulatory framework and the regulator needs to be ready to supervise the industry. “Issuing a licence in Latvia grants authorisation to operate throughout the European Union. So it is important to do everything correctly so that we have a good enough reputation to be able to take advantage of this opportunity,” says D. Buse.
Some may struggle to meet the new regulatory standards
M. Krasovska knows there are more than 30 companies operating in Latvia in crypto services. The majority of them are focused on blockchain technology and the development of other technological solutions. Others are more actively participating in crypto-asset services, such as exchanges, trading. Those companies may need to invest resources and technology to meet the regulatory requirements proposed by the MiCA and adapt business models or exit the market. Some smaller or less compliant players in the industry may struggle to meet the new regulatory standards which may lead to potential industry consolidation or merging with larger, more established entities that can handle the compliance burden.
M. Krasovska thinks it will be easier for the already licensed market participants in Latvia – credit institutions, investment firms, payment and e-money institutions – to obtain authorisation for the provision of crypto-asset services, as most of the MiCA regulatory requirements have already been met and compliance is assured.
The confidence of investors will improve
“We see that regulation can create new opportunities for Latvia bringing the products and services to the European market. The MiCA Regulation will definitely improve the confidence of investors, allowing them to feel more secure about their investments; as the result, it may lead to increased participation and inflows of capital. The new regulation can affect customer behaviour, particularly issues related to safety, security, or the right of consumption. Consumers will become more selective in their choices by preferring entities that offer a higher level of protection,” says M. Krasovska.
Only at the European level
R. Miglāne points out that the MiCA Regulation only applies to the European region, but one of the biggest markets for many companies in this industry is Asia, where there is still no such regulation. “I don’t think this regulation will have a significant impact globally. But I am happy that at least in the European market there will be regulation and people will have legal expectations,” she says.
R. Miglāne adds that the MiCA Regulation should have been in place already years ago. There is currently a big gap between what is happening in the market and regulation. She thinks this will have to change over time. “The law-making process in the European Union needs to modernise – it is not normal for a technology that has been on the market for 10 years to have no regulation,” says the expert.
Phenomenon of the Latvian market:
WHAT’S HAPPENING? A SECTORAL REVIEW
Peer-to-peer lending platforms in Latvia offer outstanding products in all the industries – consumer loans, business loans, real estate, and agriculture. That confirms success is like a magnet.
Numerous peer-to-peer and crowdfunding platforms that are presently active in the market have originated from the Baltics, particularly Latvia. “Latvia stands out as a country of investment platforms. Twino and Mintos were the first – everyone knows Latvia because of these platforms,” says Ramona Miglāne, partner at drill., attorney at law.
According to co-founder of Mintos Mārtiņš Valters, this phenomenon can be attributed, in part, to a parallel between the development of such platforms and the evolution of technology hubs like Silicon Valley. The factors contributing to this trend include robust networking, knowledge sharing, or knowledge availability, the presence of capable individuals with specialised expertise, among others.
“Latvia, being among the pioneering entities in this sector within the Baltics, laid the foundation for subsequent growth. Early successes for the company as Mintos served as a magnet for individuals interested in the field.
The legal setup on how to establish such operations was clear and over time a body of knowledge around the industry emerged. One can also not diminish the impact that many non-bank lending companies operating internationally have originated here. Moreover, the relatively compact size of Latvia and the Baltics engendered an environment conducive to forging relevant connections,” says M. Valters
Sergejs Viškovskis, co-founder and CEO of InDemo, says that each platform focuses on its own product – it’s not like everyone works in the same niche. “This is good because there is a variety of products, the investor can choose the one that suits the best and we are not competing with each other,” he says. S. Viškovskis knows that in 2022, some platforms based in Latvia and elsewhere in the EU briefly had some business difficulties. This was due to the fact that the platforms were previously operating in Russia, Belarus and Ukraine. All have now changed their business model, entering new markets and offering new products. “No one has left the market – that’s good, because it shows that investments in loans is a viable investment class,” says S. Viškovskis.
Latvia has six licenced peer-to-peer lending platforms
During the last 10 years, the peer-to-peer lending market has been booming across Europe, while fragmented regulation has been applicable in the member states. Some countries do not facilitate the development of peer-to-peer platforms, while others are looking for a solution that would help to find the balance between financial innovations and customer protection. Over the last three years, the Latvian regulator has been actively working on regulating and straightening the peer-to-peer lending market. As a result, it has transformed investment services from investments made in loans as claim rights into the form of the regulated financial instrument – notes. Within the last three years, six peer-to-peer lending platforms have been licensed.
“We are facilitating innovations by applying a regulatory framework that enables peer-to-peer lending market participants to operate in financial markets with allowed cross-border activity. This represents a new way to regulate investment activities,” says Marine Krasovska, head of the Financial Technology Supervision Department at Latvijas Banka.
“We are facilitating innovations by applying a regulatory framework that enables peer-to-peer lending market participants to operate in financial markets with allowed cross-border activity. This represents a new way to regulate investment activities,”
As a result, customers are protected by the Markets in Financial Instruments Directive II investor protection framework, Prospectus Regulation, packaged retail investment and insurance-based products, Investor Protection Law, and other existing acts which aim to protect the interests of the investors. The Regulation distinguishes professional and non-professional investors making sure they receive the appropriate protection.
Licence leads to a new developmental trajectory
Co-founder of Mintos
“Transitioning into a regulated platform represented a logical progression in our developmental trajectory, as well as for peer to peer investments in loans. On the one hand, the disparity between how the product operates on an unregulated versus a regulated platform may appear relatively minor from a user’s standpoint. Such a perception holds some validity, as our aim was to ensure minimal disruption to user experience. However, it’s important to acknowledge that certain aspects were not only aligned with legal mandates but also geared towards refining the user journey,” shares M. Valters.
For instance, the introduction of suitability and appropriateness inquiries to ascertain investment compatibility is a requisite step, serving the dual purpose of legal compliance and prudent investor guidance in the long run. While these inquiries are obligatory in regulated platforms, they are not mandated in unregulated counterparts. Similarly, the heightened due diligence procedures for anti-money laundering purposes, although increasing operational demands on the company and potentially tempering investor convenience, augments the security posture. “Compliance with these standards allows sustained collaboration with financial institutions, assuring seamless payment services that are pivotal for investors to transfer money and receive back payments from the platforms – a stability that non-compliant entities cannot assure,” adds M. Valters.
According to Sigita Kotlere, chief executive officer of Nectaro, upon entering a regulated environment, the necessity for standardising the investment process becomes evident. Regulatory measures will inevitably induce a form of natural selection, leading to a reduction in the count of investment platforms.
“We anticipate that, in the foreseeable future, investors won’t even contemplate unregulated platforms as viable investment alternatives. Furthermore, there’s a pressing requirement to educate investors using accessible language, empowering them to make informed decisions with a long-term outlook,” says S. Kotlere.
Chief executive officer of Nectaro
The regulatory changes constitute a net positive
“Looking inward, the transformation entails more substantial adjustments than initially envisioned, primarily influencing internal operational processes. This shift pertains predominantly to behind-the-scenes works. However, as with any organisational evolution, the learning curve is steep, enhancements to the process are made, and operational efficiency improves. This result is that the new regulated approach is now seamlessly integrated into our regular way of business. Ultimately, the regulatory changes constitute a net positive. This will not only propel the company to a new level but also unlock avenues for novel services not available before,” says M. Valters.
Also chief executive officer of Debitum, Henrijs Jansons, thinks that in general we can see a positive growth trend for these platforms after getting an investment brokerage licence. “Since 2021 Latvia has been a pioneer in offering legislation for the platforms thus we can enjoy increased competitiveness in the industry,” he says.
S. Kotlere emphasises that Latvia’s licensing process is recognised as among the most intricate and stringent. This aspect offers an advantage to investors, who are compelled to conduct comprehensive analyses while selecting a specific platform. “In sum, while Latvia’s investment platforms share resemblances with their European counterparts, the subtleties lie within the regulatory framework, investor safeguarding mechanisms, and the development of distinctive attributes. It’s noteworthy that the Baltic countries have managed to address concerns following the collapse of unscrupulous platforms,” she adds.
There is room for growth
Tatiana Kulapina Viainvest Board Member
According to Viainvest Board Member Tatjana Kulapina, at the moment we are in an era of platform proliferation, where digital investment platforms have democratised investment services, granting retail customers seamless access. Viainvest is observing a remarkable surge in interest towards asset-backed securities, an indication of the evolving investment landscape. This heightened attention is mirrored in the consistent growth of investment volumes, painting a vivid picture of the expanding appetite for these securities. This trend not only underscores the growing sophistication of investors but also hints at the increasing diversification and complexity of investment strategies.
“Latvia could be characterised by robust competition and certain challenges associated with market entry.
While the number of investment platforms is steadily increasing, there remains ample room for growth, as the market is yet to reach its full potential. This dynamic environment showcases the latent opportunities within Latvia’s investment platform development,” says T. Kulapina.
She is sure that the industry’s response to issues like talent acquisition, regulatory compliance, and access to financial infrastructure will shape its trajectory. “By adopting a collaborative and forward-thinking approach, Latvia’s fintech ecosystem can surmount these challenges and continue its journey toward becoming a global fintech hub,” adds T. Kulapina.
Crowdfunding financing services
are gaining momentum
WHAT’S HAPPENING? A SECTORAL REVIEW
Despite the European Crowdfunding Service Providers Regulation being adopted by the European Parliament and the Council in November 2020, at the moment, there are only 44 licences issued across Europe. One of them – in Latvia. Experts predict that the collective finance platform industry will grow in the future.
The goal of the European Crowdfunding Service Providers Regulation was to harmonise crowdfunding services across the European Union Member States, to promote the growth of crowdfunding platforms, and enhance investor protection. One of the ideas of the regulation also involved supporting small and medium-sized enterprises by providing better lending and fundraising opportunities. There were different forecasts for the market development following the implementation of the regulation, such as increased cross-border activity, market expansions, the growth of crowdfunding platforms, and the impact on the traditional financial system.
“Currently, we can observe a very different situation: the regulation was adopted by the European Parliament and the Council in November 2020 but, at the end of summer 2023, there are only 44 licences issued across Europe. We observe a huge consolidation of the industry, when service providers are working on the adaptation of business processes and business models to new requirements,” says Marine Krasovska, head of the Financial Technology Supervision Department at Latvijas Banka.
Latvijas Banka has received two official applications for the authorisation of a crowdfunding service provider. In the beginning of August 2023, only one authorisation was granted. “Consultations are ongoing with existing market participants currently operating within the transitional period set out in the regulation, thus 2–3 applications for authorisation are expected in the near future,” predicts M. Krasovska.
The first one – CrowdedHero
Jānis Blaževičs Founder of CrowdedHero
“CrowdedHero is the sole equity crowdfunding platform in Latvia. This unique positioning has garnered significant attention from investors not only in the Baltic region but also throughout the European Union. While there are other crowdfunding platforms in Latvia, they primarily focus on collective lending. This sector is growing rapidly, but it does not pose direct competition to our equity crowdfunding model,” says Jānis Blaževičs, the founder of CrowdedHero.
CrowdedHero has attracted 10 potential investment projects with a total value of 2 million euro. These projects will soon be made accessible to a broad spectrum of investors.
“The future for CrowdedHero looks promising. We have ambitious growth plans, both in terms of the number of projects and the investor base. We are also gearing up to launch several new investment products this year, including a secondary market for investors to buy and sell shares in CrowdedHero projects, as well as fixed income products that offer investors a fixed return on their investment,” he shares.
Latvia’s name has been heard widely
“In Latvia, it has not been possible to set up crowdfunding platforms, and the companies that did it are balanced on the edge of illegality. There were negative experiences where unprofessional investors fell for promises of high returns. I therefore have a positive overall view of this regulation. The requirements of the regulation are neither drastic nor easy – there is a lot of paperwork, monitoring is needed. Compared to the requirements that Latvia was planning to introduce at a national level, the requirements of the European Regulation are softer,” says Ramona Miglāne, partner at the law firm drill., attorney at law.
R. Miglāne has observed that since the Regulation was introduced, Latvian companies are interested in setting up such platforms.“I think crowdfunding platforms are a wonderful way for the sharing economy to be used in lending,” she says. Agneta Rumpa, senior associate at Sorainen, points out that from time to time companies seek advice, including from abroad.
“Latvia’s name has been heard. We are being approached by companies from abroad, such as Austria and Lithuania. Interest in registering such platforms in Latvia is growing – all we need to do is to keep active, because financial supervisors in neighbouring countries like Lithuania and Estonia are not far behind, also by actively issuing licences,” she says.
Challenge – the offer of investment projects
Rūdols Enģelis Partner at Sorainen, attorney at law
Rūdolfs Eņģelis, partner at Sorainen, attorney at law, points out that one of the challenges in this area is the limited availability of investment properties on the market. Companies have many options for receiving financing – bank loans, venture capital, crowdfunding, and stock market listings. To choose crowdfunding, a company needs to clearly see the benefits of such choice.
“On the one hand, people have money and would be willing to invest it. But on the other hand, there has to be a sufficiently attractive supply of companies to invest in. Similarly, crowdfunding platforms are not willing to offer doubtful projects because they do not want to risk their reputation. As a result, the sector is developing slowly. It’s not an easy start,” says R. Eņģelis.
Andis Ozoliņš, associate partner at Walless, attorney at law, also says that finding good investment properties is not an easy task. “This is likely to be the ‘bottle neck’ holding back the industry. This is where the scale effect is important – only a sufficiently large number of suitable investment objects can ensure that the investment can pay for itself overall,” he says.
Andis Ozoliņš Associate partner at Walless
Līga Aizupiete Fintelum founder
The lack of supply is also confirmed by the experience of the crypto-friendly crowdfunding platform Fintelum. “Fintelum’s challenge is to have both good projects to offer to the market and motivated investors to back them with their funds. There are very few projects. And the hard working ones – even less. Instead, we see half-baked ideas and simply consumers who are in it for the quick profit, or who like to borrow and overpay in interest,” says Fintelum founder Liza Aizupiete. She does not see the investment culture developing, especially in terms of participation in the capital of companies by becoming their shareholders. What is the explanation for this? She believes this is because the country has no tax policy to support investing.
“People do not have the opportunity to invest their spare cash in order to develop new ideas and products and not worry about income or capital gains taxes. Instead of receiving free market-led support from the society, the potential entrepreneur expects and waits for help from the state institutions, which distort the free market and favour their own,” says L. Aizupiete.
Moreover, she foresees that the world will continue to feel the effects of inflation for a long time to come, which further reduces people’s access to free resources and eliminates the appetite of projects to develop. “Despite the fact that Latvia has great minds and willingness to work, there is every reason to believe that young entrepreneurs will choose to start elsewhere in the world. But if Fintelum will be able to achieve its goals, there will be many people in the future who will own shares in small but profitable or promising companies that will provide their investors with an alternative retirement savings or inheritance for their children. In today’s age of longevity, we can only safely rely on the constantly falling value of fiat money and the inability of state pension funds to provide quality old age for their citizens,” says L. Aizupiete.
Over time people will get used to this way of investing
Although there have not been many crowdfunding campaigns so far, R. Eņģelis believes that the opportunity to invest in this way will become more popular over time. “People have enough money and they are looking for ways to invest it.
A few years ago, there were people who invested in crypto-assets – some profited greatly, some got burnt. Now they are looking for something new,” says R. Eņģelis. R. Miglāne also thinks that over time it will be easier for people to invest on such platforms, as it is easier than buying shares or bonds.
R. Miglāne believes that crowdfunding platforms are a great opportunity for non-professional investors to invest in another financial instrument. “I hope that these investment platforms will become more active in lending to start-ups and SMEs that are not interesting to credit institutions. We are currently thinking about how to bring European funds into SMEs through platforms. Currently, this is done through alternative investment funds. But Latvian venture capital funds, which have won the opportunity to manage European funds as a result of the tender, are not particularly interested in investing in start-ups. There is a high potential for failure in this sector, but they need good rates of return to attract future funding – including through new tenders that assess the past performance of these fund managers. That is why I hope that crowdfunding will be the solution, because small and medium-sized enterprises are the backbone of the economy,” says R. Miglāne.
A good solution for local entrepreneurs
With the harmonised regulatory framework, crowdfunding platforms could have experienced greater ease in operating across the European countries. “We expected faster market expansion after the adoption of the regulation. The regulation has reduced entry barriers for crowdfunding service providers; however, the consolidation of major European markets is still in progress. Smaller crowdfunding platforms that were previously oriented towards local regions or specific industry financing are now consolidating their business models and investor base as they could not fulfil the requirements regarding risk management and credit scoring. In some countries, small platforms have been outsourcing credit services and the relations of the borrowers from third party providers as they are not ready to ensure a sufficient level of competence by themselves,” says M. Krasovska.
In contrast, standardised rules have enhanced investor protection, setting requirements for crowdfunding platforms to ensure mandatory disclosures, due diligence, and risk warnings. As a result, investors may have gained more confidence in participating in crowdfunding campaigns.
“We want to encourage crowdfunding platforms and financial market participants to analyse the value of crowdfunding services in the economy. In a situation where banks are not showing signs of lending activity on the market, the crowdfunding services might be a good solution for local small and medium-sized enterprises, as the demand for debt services still remains,” says M. Krasovska.
One of the oldest fintech niches in Latvia: non-bank consumer lending
A SECTORAL REVIEW
One of the oldest niches of fintech in Latvia is non-bank consumer lending services. Non-bank consumer lending, together with the field of fintech, is developing in Latvia, occupying an important role in national financial systems, according to research on the development of the Latvian non-bank consumer lending industry made by Prof. Arnis Sauka in 2023.
The non-bank consumer lending sector in Latvia has developed significantly in recent years. Currently, the non-banking industry in Latvia is dominated by mature market players with good corporate governance and strict operational standards, which is the prerequisite to be able to participate in the regulated financial markets, where most of them are a part of. Legal regulation in the field of granting loans is the same for banks and non-banks. Also, banks and the non-banking sector are very similar if we compare the amount of issued loans. For example, the total volume of consumer loans issued by the non-banking sector in Latvia in 2022 reached 350.4 million euro. In comparison, the total volume of loans for private individuals issued by the Latvian banking sector (new consumer loans for households that do not include credit card amounts) in 2022 was 365.5 million euro.
The non-banking consumer lending sector in Latvia is one of the most strictly regulated in Europe. Market conditions and legal requirements dictated the development of an extremely strong anti-money laundering system and high-quality customer solvency assessment processes.
Quick is only a process of scoring
Some years ago there was an assumption that non-bank credits are issued without properly assessing the creditworthiness of the consumers, loans have very high rates, short terms and credit extensions. Yes, that was a reality a few years ago when loans with a repayment term of up to thirty days accounted for 99% of offered products. But currently, the respective product type makes up only a few percent of the total portfolio. Products offered by the industry at the moment are quite close to the ones that banks are offering. Higher product prices can be explained by a bigger risk that these lenders undertake by issuing loans to those consumers that do not always have access to bank loans, thus contributing to the financial inclusion level in society, according to the research.
The majority of members surveyed by the Fintech Latvia Association have implemented the company’s internal code of ethics. Nowadays the phrase quick loans describes only how quickly the industry can make a decision to grant or not to grant a loan. However, the industry’s reputation in society still tends to be associated with the time when, due to the lack of regulation, the term quick loans was born.
Only 10 to 20% of applications get approved
Currently, the non-banking lending industry is based on effective customer creditworthiness assessment models. The customer’s creditworthiness is analysed using the automated mathematical model – scoring. According to its calculation, the client’s risk level is determined, which is further used in the calculation of the credit limit and in the issuing of the loan. The scoring technology takes into account income, expenses, and other data available about the person through open-banking solutions, as well as the public databases accessed through credit information bureaus. Fixed-term non-bank loans for new customers are rejected in an average of 74.6% of cases. For the majority of the interviewed Fintech Latvija Association members, this indicator is in the range of 80 to 90%.
The number of complaints for non-bank consumer credit operations received directly by the seven surveyed Fintech Latvija Association member companies was 344 in 2022. The average percentage of total complaints about non-banking services is less than 0.2% of the average number of customers.
Those with higher financial literacy borrow less often
Artūrs Kostins, the co-founder of a financial comparison platform Altero, has observed that Altero clients with high or moderately high incomes apply for credit less often, because their financial literacy is higher. These customers weigh all the pros and cons and often decide not to take a loan at all, because it is no longer as profitable as it was years ago.
“They don’t want to overpay, as we’ve observed in the lending industry the pursuit of annual interest rates on credit, which have risen against the background of an increase in the cost of capital,” he says. On the other hand, there are people with medium and medium-low income who have previously taken loans, and after inflation, their monthly payment has not decreased, but their spending has increased. “First of all, credit is no longer available for an ever-increasing part of the population of Latvia, or they need to consolidate existing loans or refinance them at lower interest rates,” adds A. Kostins.
Co-founder of Altero
Head of customer experience at IPF Digital
Edgars Kalniņš, head of customer experience at IPF Digital, says that IPF Group’s purpose is to build a better world through financial inclusion. That’s why the company supports initiatives which help people out of social exclusion and create a better financial future. One of them is Neredzamie, which means Invisible in English.
“Project Neredzamie appeals to us because we are dealing with social groups that are marginalised by larger financial institutions but still need a solution. We hope that this initiative will help make “invisible” people and their problems visible to the public, institutions, and regulators, and together we will try to gradually understand these problems. This project is becoming global as besides Baltic countries, it has been launched in Central Europe and soon also in Mexico and Australia,” he adds.
A sector with high potential: regtech
Overall the regulatory technology – regtech – sector in Latvia is very narrow. Some of the most notable representative companies currently in Latvia are Huntli, Confero, and Finchecker.
“The regtech sector in Latvia is still in its early stages of development, although it is showing promising growth potential that is connected with current tightening of anti-money laundering and combating the financing of terrorism regulatory requirements in different areas,” says Huntli co-founder Lev Bass.
Regtech is noticed by the state institutions as well: this sector’s development was included in the Latvian Fintech strategy, prepared by Latvijas Banka, the Fintech Latvia Association, market participants, and other institutions.
Lev Bass Huntli co-founder
Help with compliance requirements
L. Bass shares that regtech refers to the regulatory technology companies, where the technology is used to facilitate compliance with regulatory requirements in various industries, including financial services. It may involve the application of innovative cutting-edge technologies like cloud computing, application programming interfaces, data analytics, artificial intelligence, robotic process automation, chatbots, and machine learning, to streamline and enhance the compliance process. “Overall, any technology that enables firms to meet the compliance requirements imposed by regulatory institutions is referred to as regtech,” says L. Bass.
The primary goal of regtech is to help businesses and organisations navigate the complexities of regulatory requirements more efficiently and effectively, reducing the cost and time involved in meeting compliance obligations and effectively preventing financial scam, money laundering, terrorism financing, and other types of fraud. Regtech solutions can automate manual tasks, monitor regulatory changes in real-time, analyse large volumes of data for compliance risks, and provide insights and reports to support decision-making.
According to Deloitte, there are five essential services that regtech is focusing on. These include compliance, identity management, reporting, risk management, and transaction monitoring.
In the spotlight
L. Bass says that the regtech sector currently is in the spotlight: “With a growing number of fraud cases globally, the regtech sector becomes vital to preserve the integrity of the financial system and safety.” The global regtech market had a revenue share of USD 8,727 million in 2021, presumed to reach USD 44,544 million by 2030, expanding at a compound annual growth rate of 22.6% during the forecast period. The regtech sector development is also powered by its ability to be the most rapid adopter of new technologies.
Latvia, being a member of the European Union, must comply with various European Union regulations, and this has created opportunities for the development of regtech solutions to help businesses and financial institutions meet these requirements more efficiently and effectively, reducing costs and time, as well as effectively fighting financial fraud in an ever digitalised society.
“The Latvian regtech sector is very narrow at the moment which can be seen as both a limitation and an opportunity. The regtech sector development can be linked to the general fintech and startup sector growth. Also, the necessity for locally based innovative and highly flexible regtech solutions is driven by Latvia strengthening its position as a Baltic startup capital, becoming more attractive for financial industry players,” says L. Bass.
Live transaction monitoring tool
Talking about Huntli, L. Bass explains it is an all-in-one WIX-like live transaction monitoring and fraud prevention solution suitable for traditional and crypto payment systems, online betting and gambling, and ecommerce merchants. “Huntli is a disruptive solution in the industry, which directly targets the main pain points: the ever-great threat of outside fraudulent activity, tight anti-money laundering, and combating the financing of terrorism regulations and lack of systems that are fast and adaptive enough to proactively address dynamic industry challenges. These factors push companies to rely heavily on a multitude of complex tools that require expensive and rare specialists, as a lot of work is still being done manually,” he says.
Addressing these issues in the market, Huntli offers a highly adjustable and flexible solution, suitable to the specific needs of a given company and its profile. Besides, all the information is available in a user-friendly intuitive dashboard without the need to jump between systems.
The Huntli platform allows highlighting any user activity that is deemed too risky or might lead to money laundering, tax evasion, fraud, and other financial crime for proactive fraud prevention strategy implementation. “Our compliance solution helps clients to be on par with current anti-money laundering and combating the financing of terrorism regulations as well as makes them up to 60% more cost-effective, which allows them to allocate funds for better financial product development, a customer-oriented approach, and more effective fraud prevention activities. Currently Huntli is the only company in Latvia of this scale and technical capacity in the know-your-transaction market,” says L. Bass.
One of the biggest exits in the Latvian fintech scene: Nordigen’s acquisition by GoCardless
A SECTORAL REVIEW
One of the biggest exits in the Latvian fintech scene is the Nordigen acquisition by the UK’s bank payment company GoCardless. Not only is it a big milestone for Latvia, but also for GoCardless because Nordigen was the company’s first acquisition ever.
GoCardless has incorporated Nordigen’s open banking connectivity into its account-to-account network, offering the widest coverage in Europe, connecting to more than 2,300 banks in 31 countries. According to GoCardless President Paul Stoddart, the deal is a success. Many deals don’t reach an agreement on the terms to merge, so the fact that both parties got to the point where the contract was signed is great. This was the first acquisition for GoCardless – that’s why the weight of this decision was even bigger. “If you want to build your inorganic growth lever successfully, the first transaction is very important,” says P. Stoddart.
The first year of the new union has been good. The GoCardless team in Latvia already has around 100 people, and in two to three years’ time there will be around 300 employees.
“We’ve worked hard since the acquisition to bring the two companies together and we recently reached an important milestone: we are ceasing to use the Nordigen brand name and our operations are now fully integrated with GoCardless. Consequently, our core service – Account Information – is now called GoCardless Bank Account Data,” says Nordigen’s co-founder Rolands Mesters, now vice president of Bank Account Data at GoCardless.
Nordigen founders still work at GoCardless. “We still strongly believe that open banking is something that must exist and we’re pushing it into existence day by day. And now we have a chance to plug into GoCardless and its resources, and do it on a bigger scale. It’s awesome to work with people at GoCardless. I want to learn from the team and learn from the GoCardless CEO, who is a Y Combinator graduate from the period when the original Y Combinator gang was still around. There’s knowledge inside of GoCardless and it’s fascinating being able to soak that up” says R. Mesters.
Nordigen’s co-founder, now vice president of Bank Account Data at GoCardless
It’s an interesting angle about Nordigen’s acquisition: Nordigen was looking for an investment, not for an exit. Through the introduction of Andris K. Bērziņš, a partner at Change Ventures, R. Mesters had a chance to speak with Tom Hulme from Google Ventures. He said he knew another company that was trying to do something very similar – Nordigen has built half of the equation and GoCardless is building the other half of it. R. Mesters was introduced to Duncan Barrigan who was, at the time, the chief product officer at GoCardless. At the end of the conversation they were discussing the possibility of joining forces.
When asked about preparation works, R. Mesters emphasises that the startup should be ready for acquisition and there should be a company who wants to buy this startup. “Most founders in the world are first-time founders and they have no idea what it’s like to sell a company. It is actually very similar to an investment process. The same stages are there: you express your interest to do business together, there is a term sheet which you evaluate just like any other term sheet, and then there’s a process of due diligence and further negotiation and agreement. I want to highlight that this is not as scary as it sounds,” he says.
Sign of a healthy startup ecosystem
“Exits are a sign of a healthy, working startup ecosystem. These are always long-term processes – now you need between 5 and 15 years for the benefits to flow through with the right infrastructure in place,” says P. Stoddart. If all the circumstances are right in the ecosystem, more founders will be exiting and then making new startups.
To startups who are thinking about an exit, P. Stoddart advises to prepare. “Organise your thoughts and be able to talk credibly and logically about what you’ve done and why you’ve done it. Being prepared for those conversations is important,” he suggests. GoCardless President Paul Stoddart also emphasises the importance of cultural fit. “We were very lucky because literally just a week after the acquisition, GoCardless held its annual company offsite in London and we had a chance to bring most of our team over to join it. That event solidified the fact that we’re now part of a larger company,” says R. Mesters.
When asked how the local fintech ecosystem has changed during the last years, he remembers that 7 years ago, when Nordigen was founded, the capital available to fintechs in Europe was scarce and building a fintech startup meant creating layers and layers of proprietary solutions. “Today, although fintech startups in Europe are facing some challenges due to the economic downturn, they are able to attract 4x more capital than in 2016. Furthermore, it’s now possible to launch a fintech startup from third-party building blocks, so what used to take months of development can now be achieved in weeks, which has substantially reduced the cost of starting and scaling startups,” R. Mesters shares his thoughts.
BANKS & FINTECHS
The relationship between banks and fintechs – it’s complicated
BANKS & FINTECHS
The majority of banks see cooperation with fintech companies as an opportunity to develop existing products and create new products and services using fintech solutions, shows a survey conducted by Latvijas Banka. At the same time, banks do not value the importance of cooperation with fintech companies for their development as highly as fintech companies.
In 2023, Latvijas Banka conducted a survey of banks and fintechs with an aim to facilitate the dialogue between the sectors, provide expert opinions, and enhance cooperation to ensure better banking service availability and partnership in creating improved solutions for customers. The survey covered several areas: the competition aspects between banks and fintechs, the impact of big-tech on the financial industry, the cooperation between banks and fintechs, and the availability of banking services for fintech companies.
Fintechs value cooperation more than banks
84%, or 26 surveyed fintechs, have defined the development with banks as cooperation partners and 10 of them already have ready-made solutions for banks, for example, customer attraction using Banking as a Service technology, anti-money laundering solutions, software products, etc.
One of the forms of mutual cooperation between the two sectors is white label – when a bank cooperates with an external service provider, a specific product or service is developed for the needs of customers and sold under the brand name of the bank selling this product or service. Currently, five banks cooperate with fintech companies in the form of white label cooperation.
Fintech companies see opportunities for future cooperation with banks, both jointly and in the form of white label cooperation, creating new services for banks and their customers.
“In general, there are various forms of cooperation between banks and fintech companies. Fintechs can support banks by offering them solutions that improve the existing products and services or help create new services. As a result, both banks and fintech companies benefit and so do customers, who receive products and services of higher quality and a better user experience,” says Marine Krasovska, head of the Financial Technology Supervision Department at Latvijas Banka.
Plans to expand cooperation in the future
Six banks define the development of fintech as a cooperation partner or as a customer in the development of new products, distributing banking services by third-party digital solutions, attracting payment and electronic money institutions as bank customers, and credit risk scoring model based on artificial intelligence solutions and online onboarding.
The survey shows that banks are generally open to cooperation with fintech companies and plan to expand cooperation in the future in the following areas: expanding and digitising the product basket, improving customer experience, expanding distribution channels, and using ready-made solutions in standardised parts of credit processes.
“Banks work with a wider range of products and services than fintech companies, thus in general, banks do not value the importance of cooperation with fintech companies for their development as highly as fintech companies. The majority of banks see cooperation with fintech companies as an opportunity to develop existing products and create new products and services using fintech solutions,” observes M. Krasovska.
Competition or cooperation?
Banks and fintech companies can be both partners and competitors, so in the survey, Latvijas Banka asked whether and in which areas these segments feel mutual competition. Most fintech companies do not feel any competition with banks, only 35.5%, or 11 fintech companies that responded to the survey felt competition with banks in the last three years – in lending to consumers and legal entities and in the field of payments.
On the other hand, out of 11 banks that responded to the survey, five, or 45%, have experienced competition from fintech companies in the last three years, mostly in the following areas: servicing private individuals, servicing merchants, issuing small loans, payments. Large banks estimate the risk of fintech companies affecting the aforementioned services in the range of 1% to 20%, while small banks estimate this risk at 41% to 60%.
“Both banks and fintechs recognise that fintechs are mostly able to provide a better user experience, adapt to changes faster, and use automated solutions more, thus changing customer perceptions of services and service quality. On the other hand, it is difficult and expensive for banks to adapt to rapidly changing trends. Fintech companies mostly focus on providing a single service or product, while banks have the advantage of being able to create greater customer trust and provide a wide range of financial products together. By combining the best practices and solutions of the parties, the interaction of fintech and banks can create additional added value for common customers. There is great potential for mutual cooperation, creating new or improved products and services,”M. Krasovska is sure.
The risk appetite differs
Every business needs a current account for day-to-day payments. The account can be with a credit institution or with another payment service provider. “Opinions are often expressed that companies in Latvia have difficulties opening current accounts and are denied certain banking services,” says M. Krasovska.
After the Fifth Round Mutual Evaluation Report of the Council of Europe’s Committee of Experts on the Evaluation of Anti-Money Laundering Measures and the Financing of Terrorism (MONEYVAL) on the effectiveness of the Latvian system of anti-money laundering and combating of terrorism financing in 2018, a capital overhaul was carried out in the Latvian financial system.
As a result, several Latvian banks had to suspend non-resident money services and create new business models, which were approved by the regulator. Banks reviewed their business strategy, maintaining profitability and a proportionate risk appetite. The risk appetite of banks differs, and there are banks that specialise in the niches of various riskier industries, have defined their risk limits, and know how to manage these risks.
Some are open to cooperate, some are not
head of the Financial Technology Supervision Department at Latvijas Banka
Banks have identified the areas of fintech companies which they service and which they do not. Several banks are open to servicing fintech companies operating in payments, IT services, and lending. On the other hand, seven banks currently do not service crypto-asset service providers, and only three of them are considering the possibility of servicing only licensed crypto-asset service providers in the future.
“One of the reasons why banks do not service fintech companies working in the field of crypto-assets is the lack of regulation, increased risk and difficult determination of the origin of funds,” says M. Krasovska.
Those banks that service fintech companies offer them the following services: current account, account for keeping customer funds separate, open cooperation platform or open banking, card payments on the internet. These services were also noted by fintech companies as the most important in cooperation with the bank.
If the local banks do not want to cooperate, fintechs go abroad
Four banks have raised the fees for fintech companies over the past three years. As reasons for the price increase, banks indicate the necessary resources to conduct in-depth research in the field of anti-money laundering. Eleven fintech companies indicated that the increase in bank commissions significantly affected the service provided to customers or made it more expensive. The increase in commission fees has a significant impact on fintech companies in the field of payment services.
“”It is no secret that the number of companies choosing to open a current account abroad has increased,”says M. Krasovska. The survey shows that 45.16%, or 14 fintech companies have accounts opened with foreign banks or with foreign payment service providers. Also, 48.39%, or 15 fintech companies stated that there were difficulties in opening current accounts with banks in Latvia. Fintech companies cited the lack of banking competence in fintech business models and the reluctance to go deeper and take additional risks as reasons. Also, fintech companies pointed out that Latvian banks had high commissions for document review if the owner was a foreign resident and the document review process was long.
Sergejs Viškovskis, co-founder and CEO of InDemo, also points out that cooperation with banks is difficult. InDemo has accounts with local banks, but is also exploring the possibility of working with another bank in the Baltic states. “In Latvia, fintech companies have high account opening costs. For example, processing an application can cost as much as three to seven thousand euro, while banks abroad don’t even charge money to open an account. This is how Latvian banks lose out in the competition with foreign banks,” says S. Viškovskis.
S. Viškovskis argues that Latvian fintech companies, despite the overhaul, still face major challenges in expanding beyond European borders. “Latvia remains in the grey area in business circles and our opportunities to cooperate with foreign partners are limited. I would recommend working on this issue at a national level and convincing our Western partners that the Latvian financial sector is not what it was a decade ago,” he says.
Co-founder and CEO of InDemo
Opening an account is still difficult
“Of course, there are still different challenges,” says Agneta Rumpa, senior associate at Sorainen. Rūdolfs Eņģelis, partner at law firm Sorainen and attorney at law points out that recently he has heard a lot of complaints from clients in the fintech industry about their cooperation with credit institutions – but not all of them. “Of course, there is a wide range of financial technologies and those providers that are relatively close to traditional financial services have fewer problems, for example, it is relatively easy for them to open an account. But once a company moves away from traditional financial services, the policies of credit institutions become very conservative,” he says.
Ramona Miglāne, partner at drill. law firm and attorney at law, also knows from practice that fintech companies have difficulties with opening a bank account. “But banks do not say they don’t work with fintech companies. Banks ask for various documents, take a long time to review them, but in the end do not open the account. There are also cases where an account is opened, but later cooperation is refused. And the commission fees are much higher than for any other company. In order for the industry to grow, there is plenty of room for improvement. Of course, banks see fintech companies as competitors, but instead they should see them as cooperation partners. A good example of how banks can cooperate with fintech companies is Mobilly, one of the shareholders of which is Citadele bank,” says R. Miglāne.
A. Rumpa also agrees that this is a topical issue. She believes that the solution can be found in dialogue. For example, the discussions that have already taken place this year between representatives of the banking and fintech sectors and Latvijas Banka give hope that improvements in this and other areas of cooperation between banks and fintech companies can be expected.
Access to the SEPA system soon will be easier
A specific concern that reverberates within Latvia’s fintech sphere revolves around access to accounts and SEPA payments. “The conservative risk appetite of credit institutions and the unavailability of central bank services for account opening compound the difficulties,” adds Viainvest Board Member Tatjana Kulapina.
“Already now, in the context of the instant payments initiative, there are discussions in the European Parliament about giving fintech companies, non-bank payment service providers, direct access to SEPA payment systems to the same extent as it is currently available to the banking industry. This initiative is expected to be endorsed by the European Parliament during the examination of the instant payment initiative package and there is a possibility that the process could be quicker than originally thought.
If the initiative is adopted, no amendments to the Latvian legislation will be needed, as the issue will be dealt with by a regulation at the European level,”says Dina Buse, head of the Credit Institutions and Payment Services Policy Division of the Financial Market Policy Department of the Ministry of Finance.
Tietoevry Banking Latvia’s team works worldwide
The financial software development team of Tietoevry Latvia’s branch, Tietoevry Banking Latvia, assists national central banks, commercial banks, and other nationwide payment system operators in developing payment systems and driving innovation within the financial sector. Tietoevry Banking Latvia already employs approximately 500 people.
Previously, financial software development was just one of the activities within Tietoevry Latvia’s branch, but it has become a separate entity known as Tietoevry Banking Latvia. “Tietoevry Banking Latvia has been a player in the fintech arena for over 30 years, which is a critical advantage in banking, finance, and payments. We have gained international recognition for implementing nationwide payment systems that facilitate real-time payments and card-based payments. As a result, in major procurements for payment systems, Tietoevry Banking Latvia often emerges as a contender for payment system development and implementation,” says Deniss Fiļipovs, strategic business developer at Tietoevry Banking.
Projects at this magnitude demand active collaboration for several years before the tender and procurement phases commence. The potential customer’s requirements are usually shaped by their perception of the opportunities, albeit these tend to be somewhat limited. At this early stage, Tietoevry Banking Latvia’s task involves understanding the problem, proposing optimal solutions, and leveraging global experience to formulate a future-proof development strategy.
“Effective engagement with potential clients, proactive awareness of the specific market, and the ability to anticipate its future course through both technological and financial sector expertise are crucial.” adds D. Fiļipovs.
Strategic business developer at Tietoevry Bankin
Different regions vary a lot
Tietoevry Banking Latvia’s clientele spans across various regions, including the Nordic countries, continental Europe, Central Asia, South Asia, the Middle East, and even Africa. For example, Maldives Monetary Authority has implemented an instant payments system in the Maldives developed by Tietoevry Banking Latvia, while in Kenya, Latvia’s company delivered a real-time payment system.
“Notably, differences exist not only between regions but are also pronounced among countries within the same region.
Each financial market possesses its unique historic development and nuances, influenced by financial sector participants and societal behaviours,” emphasises D. Fiļipovs.
For example, in the Maldives, the distinct characteristics are deliberate decision-making processes, a particular mindset, and meticulousness. The unhurried pace of life is reflected in business dealings as well – changes and innovations are not rushed. “Even the simplest decisions take weeks! What might take a year in Europe could extend to three years in the Maldives,” shares D. Fiļipovs. Market players in the region often assume that suppliers are responsible for every aspect from development strategy to technology solutions, not stating it clearly with the contract. This can lead to unclear communication, necessitating meticulous attention to every contract detail.
On the other hand, the Kenyan payments market is characterised by rapid development, a multitude of coexisting solutions, and a strong business focus. Many people still utilise feature phones, prompting a diverse array of payment solutions to cater to their digital advancement level. Consequently, any new financial innovation must predominantly encourage the adoption of modern digital services directly among the population. “As a financial hub in Africa, Kenya’s market players are poised for rapid action when promising business opportunities arise. In Kenya, seizing opportunities and swift project implementation are paramount,” adds D. Fiļipovs.
He thinks the African region currently offers immense potential. It is actively attracting investments and evolving rapidly. “It presents a prime opportunity for fintech companies with innovative solutions to promote financial inclusion in the realm of digital finance,” says D. Fiļipovs.
Market research is a must
To other companies thinking about far markets, D. Fiļipovs suggests to conduct comprehensive market research and define clear objectives. Market expansion often requires substantial investments; hence, assessing market potential and devising ways to address it are critical. “For instance, while the Maldives is a small, exotic market, Kenya’s population exceeds 50 million. Maintaining focus and formulating a detailed go-to-market strategy are pivotal,” he is sure.
D. Fiļipovs recommends that companies undertake initial market research themselves to gain a solid understanding of the product, competitors, and the industry as a whole. This enables comprehensive aligning of market needs with product strengths and opportunities. “In the context of expansion or new market entry, industry events provide accessible avenues to gather valuable market information, connect with industry players, and establish new contacts. They also serve as a unique platform to convey your distinct story. Effective public speaking and compelling presentations (which require preparation and market research) can enhance visibility and attract media attention,” he adds.
D. Fiļipovs emphasises that local support is indispensable, though sometimes challenging to secure. “Start by engaging with the Investment and Development Agency of Latvia and its overseas branches and partners. This support is immensely valuable. The African region follows the strong hierarchical structure. Participating in Ministerial business delegations and Ministry of Foreign Affairs missions would effectively promote you and facilitate high-level networking. If such support is unavailable, forging relationships with industry associations is recommended,” he suggests.
Progressive solutions often face scepticism
According to D. Fiļipovs, each local financial market possesses unique traits influenced by financial sector players and societal norms. Progressive solutions often face scepticism and hesitance. Understanding the root of the problem, articulating it clearly, and presenting a solution are pivotal to progressing discussions on innovation, streamlining, and modernisation.
“It’s important to recognise that in certain markets, partners may overestimate their actual capacity and competence. During projects, considerable resources may be allocated for training customer teams. Such scenarios can considerably extend project durations. Predicting such occurrences in advance is challenging, underscoring the need for a flexible team of experts and a creative approach for each project,” he shares.
The significance of maintaining client relationships, seemingly taken for granted, cannot be overstated. Remote communication poses a significant challenge. “While remote work is part of our daily routine, clients often desire in-person presence. This entails regular and extensive business travel or establishing local representation,” adds D. Fiļipovs.
There is almost endless potential in Kenya
Africa as a continent is now almost endless in its potential, and the countries that are the region’s economic hubs, such as Kenya, look particularly interesting for the Eleving Group.
Today, Kenya amounts to around 18% of the Eleving Group’s portfolio. In terms of net portfolio share, this is still the largest market for the company. “In the future, the African region will play an even more significant role in the Group’s portfolio,” discloses Modestas Sudnius, the CEO of Eleving Group.
A big and underserved market
On the one hand, Kenya is a huge economy, with a population of more than 53 million. It is a country with a well-developed mobile payment culture and a relatively high level of digitalisation.
“I believe Kenya could experience rapid growth in the next 10–15 years and that the standard of living in the major cities could approach European standards. It is an excellent environment in which to develop one’s business, says M. Sudnius.
On the other hand, there is a large number of people in this country who are underserved by traditional banks. This means that a large proportion of the population has practically no access to banking products, which hinders the emergence of an inclusive economy and contributes to social exclusion. These factors determined Eleving Group’s desire to enter the Kenyan market and, through its mobility products, empower people to engage in private business, profit from it, and raise the overall level of well-being of society.
“As we know, in African countries, a vehicle is not just a means of commuting; it is also a means of making a living, which is why our motorcycle and car finance products fit well with the Group’s ultimate goal – to enable upward social mobility in diverse communities around the world by creating access to innovative and sustainable financial solutions,” adds M. Sudnius.
CEO of Eleving Group
Record-breaking years are still ahead
Eleving Group has expanded its business portfolio in Kenya rapidly in recent years. However, due to geopolitical reasons, economic turmoil, and changing moods in the global economy, last year, the company had to re-evaluate its business in some markets, re-adjust growth plans, and focus more on portfolio quality. Therefore, Eleving Group has become more conservative in introducing new products and is focused on organic and controlled growth. And this, on some level, translates to its business in Kenya.
M. Sudnius predicts the company may not expect its mobility portfolio in Kenya to grow by more than 20% this year, but the company is putting much effort into various sustainable mobility products that will bring excellent results in the future. “Record-breaking years for our business in Kenya are still ahead of us. You could say that we are now doing both – our business and reshaping Kenya’s mobility market for long-term social benefit.”
Green mobility will be increasingly important
How could this market develop in the future? When talking specifically about the vehicle finance segment, M. Sudnius predicts that as the wealth of the population increases, as the infrastructure develops, so will the affordability to buy and utilise a private vehicle – both for personal commuting needs and for the purposes of developing small business. He is sure the market has immense potential and is bound to grow.
“Personally, I expect green mobility to become an increasingly important part of the vehicle market in Kenya,”says M. Sudnius.
Eleving Group has contributed to this progress and is introducing e-motorcycle products for self-employed and small and medium enterprises. Today, small entrepreneurs, by using Mogo Kenya’s product, enjoy cheaper operating and lower maintenance costs, which increase their level of income from doing business.
“In addition, financing electric motorcycles contributes to reducing CO2 emissions and noise levels in urban areas where internal combustion engine-powered vehicles still dominate. The market for e-bodas is still small, but we expect to see a significant shift this year, with around 1000–3000 e-bodas on the road by the end of the year. We know that the future of mobility will be electric, and together with such partners as one of the world’s leading transport services platforms, Bolt, we are taking the first steps to facilitate this transition in Kenya,” tells M. Sudnius.
It’s not a monolithic market
Asked about the challenges in this market, M. Sudnius points out the difference in education and business awareness levels compared to Europe. The business environment in Kenya today can be seen similarly to Latvia in the 1990s when the first big Western companies came in, new services were introduced, and an understanding of capitalism and business emerged. “Latvians or Lithuanians, too, may have looked a little naive and inexperienced against the backdrop of the Americans at the time, but that is no longer the case. And this is the same path that Kenya is following very rapidly today,” tells M. Sudnius.
Compared to Northern Europeans, who are quite distant and reserved, in Kenya, direct contact is important to locals. This requires Europeans to gain more trust and mutual understanding with the locals.
“It is also interesting that Kenya has more than a hundred indigenous tribes and cultures. In terms of self-determination, they closely associate themselves with their tribes. For example, we have had a case where we sent an employee to meet a potential business partner who, when he found out that they were both from the same tribe, agreed almost immediately to the deal and was very happy that an international organisation was integrating a member of his tribe into the economy,” tells M. Sudnius.
In other professional settings, when two different tribes come together, it can be a burden. As a result, Eleving Group looks at Kenya as something other than a monolithic market but as a much more fragmented one. Each region has its characteristics, and each interest group needs to be approached in its own way.
Also, when working in the African region, one has to accept that these are countries where political developments closely reflect public sentiment and economic activity. Companies, therefore, need to be excellent when setting their business strategy and assessing potential risks. “I believe that we have been highly successful in doing this so far,” says M. Sudnius.
There is an opportunity for fintechs in large economy
Thanks to a large, young population increasingly using digital financial services, the Indonesian fintech market is growing rapidly. Fintech companies that overcome the hurdles in the market will be well-positioned to succeed.
Indonesia has a much lower credit penetration rate than Europe, creating opportunities for embedded lending to serve previously unserved or underserved markets. With risk controls and additional data points, embedded lending can extend credit to those typically considered too risky.
“Moreover, with 270 million people, Indonesia has more than one-third of Europe’s population. While the average income level is still lower, it’s growing rapidly, and a massive middle class is emerging. This unique situation presents opportunities unlike any in Europe, as it shapes the future for a country predicted to become the world’s 4th largest economy by 2050,” says Reinis Simanovskis, the co-founder of Finfra.
Co-founder of Finfra
There is lack of law enforcement
According to R. Simanovskis, the biggest challenges for fintech companies like Finfra in the Indonesian market are the lack of law enforcement, the rapidly developing regulatory environment, and fraud. The lack of law enforcement in Indonesia makes it challenging to prosecute fraudsters and others who target fintech companies. “This is a major obstacle to growth, as it hampers efforts to protect customers and data,” he says.
Also, the rapidly evolving regulatory environment poses challenges. For example, the regulator frequently issues new regulations, complicating compliance and potentially damaging a company’s reputation.
“Fraud is particularly problematic in embedded lending, where platform data is used for credit scoring. Ensuring that there are no fraudulent elements in the data is an essential first step,” shares R. Simanovskis. But fintech companies that overcome these hurdles will be well-positioned to succeed. “Despite these challenges, the Indonesian fintech market is growing rapidly, thanks to a large, young population increasingly using digital financial services,” he says.
One-stop shop for white-label financial products
R. Simanovskis refers to Finfra as a one-stop shop for Indonesian businesses seeking to integrate white-labelled financial products. “We directly support non-financial digital platforms in their efforts to launch their own financial products and services, particularly in credit lending. These platforms are often digital business-to-business commerce, agritech, or logistics companies, and the products we help them launch increase their users’ purchasing power while improving the individual platforms’ own margins,” he explains.
Finfra works exclusively with Indonesian businesses. “With the rise of digital platforms making existing industries more efficient and data-rich, we recognised an opportunity. Considering the low coverage of lending in Indonesia and the promise many platforms made to investors and customers to add lending services, we identified a massive need for our service. We’ve seen Embedded Lending and Lending as a Service become huge successes in other markets, and it’s clear that there’s an even bigger need for it in Indonesia,” says R. Simanovskis.
Finfra has six live partners, and the company has disbursed more than half a million loans. “We’re still at the beginning of our journey, but we’re looking to accelerate quickly,” he says. With later funding rounds, Finfra will be expanding into other regions of Southeast Asia.
Vietnam: a country with huge potential
With a population nearing 100 million, the Vietnamese market offers immense potential for serving the underfinanced sector through fintech solutions. And Latvian fintechs are offering these solutions.
Jeff App is developing a data-driven financial comparison platform to help unbanked segments of the population in South Asia and eventually in the rest of the world. From the first day, the company has worked in Asia. The first market was Vietnam.
“The Vietnamese market is very tricky. There are many similarities with China, and at the same time many differences between the north and the south of the country. There are a lot of local nuances: the country has its own communication tool, its own Spotify analogue and many other tools that are very popular in Vietnam but don’t exist outside it,” says Toms Niparts, co-founder of Jeff App.
The prevailing order is unpredictable – instead of clear laws regulating certain sectors, very broad interpretation is left under control of local authorities. Although Vietnam remains the largest market of Jeff App, the company is actively working to diversify its markets. “From the very beginning, this has been a clear goal for us, both in principle and in objective terms – a table is more stable if it has several stable legs. Similarly, a company is in a better position if it has a good diversification of income from different markets and products,” says T. Niparts.
Co-founder of Jeff App
CEO of Twino Group
According to Džiugas Šykšta, CEO of Twino Group lending operations, the Vietnamese consumer lending landscape differs significantly from Europe, with smaller average loan amounts and shorter durations being key product differences. In terms of client behaviour, contextual content plays a significantly larger importance when introducing the brand and its products.
“The fintech market in Vietnam presents both opportunities and challenges,” says D. Šykšta. Among the hurdles we encounter are collaboration with local partners (data and payment providers, etc.) to build more flexible and interesting products for the clients as the country’s technology infrastructure continues to evolve to meet high-tech demands. Nevertheless, the consumer lending market in Vietnam is showing remarkable growth, ranking third in terms of year on year growth across all sectors based on search volume analytics. “There’s great potential market holds, not just for our existing products, but also for future innovative solutions,” D. Šykšta is sure.
Since Twino’s launch in 2019, the company has experienced consistent growth, with a 50% year on year surge in 2023, after maintaining steady performance throughout 2021 and 2022.
Every country in Asia is different
Jeff App is also working on business development in Indonesia, India, and Mexico, as well as further growth in the Philippines. T. Niparts says that the markets in South and Southeast Asia were chosen based on the team’s previous experience and due diligence of the market. “These are emerging countries and economies where the fundamental market base for financial services is very different from many other parts of the world: people largely have no credit history, people are more likely to use cash or alternative payment tools such as e-wallets rather than bank accounts, many services are still not provided online or are poorly developed online, and consumers lack the knowledge that using digital services is not only more convenient and cost effective, but also a credible alternative. Taking into account these and other factors, and recognising the almost unlimited scalability, we chose these markets,” he says.
T. Niparts points out that every country in Asia is different. And at the same time, they are all quite unpredictable. “There are countries where the legal side and the regulation is clear, and there are countries where things are more chaotic, unpredictable, and ambiguous,” he says. But all these countries have two things in common. First, public awareness and the shift to digital financial services are at an early stage. Second, by learning about and respecting local cultures, which vary considerably from country to country, cooperation and success are better achieved. “It is important to be aware that the best model in theory is not always the best in a particular country or market. You are an outsider, you have to adapt to the local culture, and then over time, step by step, you can hope to change some of the nuances based on the trust you have built up,” says T. Niparts.
For other fintechs thinking about the Vietnam market, D. Šykšta advises having a mobile-first mindset. “Keep that in mind as the local users are accustomed to instant access at any time, anywhere,” he says.
AVAILABILITY OF FINANCING
Issuing bonds is not only money in the bank account
AVAILABILITY OF FINANCING
There are a lot of advantages to issuing bonds – fintech companies appreciate the transparency that comes hand in hand with this decision and the benefits for reputation.
“In the fintech segment, there are several companies that have been successfully issuing bonds for several years – industry leaders Eleving Group, Sun Finance and DelfinGroup. I would like to single out DelfinGroup because 2 years ago they also carried out an initial public offering, raising capital and new investors,” says Liene Dubava, Chair of the Management Board of Nasdaq Riga. The fintech companies regularly re-issue bonds, which in her mind is good because investors are interested in dealing with companies that have experience in the capital markets and have proven their ability to not only raise capital, but also to deliver on their commitments, and are interested in issuing new bonds.
Chair of the Management Board of Nasdaq Riga
According to L. Dubava, there has been an increase of interest in issuing bonds in the recent years. There are several reasons for this. One is high inflation, which is driving investment opportunities and thus the investment community to grow faster. “On the one hand, there is a growing interest and willingness of investors to invest their money, and on the other hand, there is an increasing number of companies that can offer different yields on their bonds. This is undoubtedly contributing to investor mobilisation and the development of the bond market as a whole,” she says.
Another aspect is the growing number of private investors in Latvia and the Baltic region as a whole. Given that Nasdaq Baltic is a regional securities market, companies can raise capital also from Lithuanian and Estonian investors. L. Dubava has noticed that Latvian corporate bonds are highly valued by our neighbours. “This is very important especially for larger issues, as a regional investor base gives the company more assurance that the issue will be successful and the money will be raised,” she adds.
L. Dubava emphasises investor relations – in this field the fintech companies have been particularly successful. For example, this year, ElevingGroup and SunFinance made it into the top3 of the Nasdaq Baltic Awards, which is the stock exchange’s award for companies with the best investor relations. “Maintaining good investor relations, regular dialogue with investors, both existing and potential, is a solid foundation for successful future issues,” she is sure.
A natural step in a company’s progress journey
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Issuing bonds marked the natural progression for Sun Finance as it transitioned from its startup phase, during which it operated with initial capital from founders and private investors, to becoming a stable company seeking financing in the capital markets. “As Sun Finance continues to grow, we see bonds as an excellent means to diversify the company’s financing structure while providing our investors with stable returns,” says Toms Jurjevs, co-founder of Sun Finance. To date, Sun Finance has successfully executed five unsecured and one subordinated bond issue, with each issuance increasing the ticket size. The company began with a 10-million euro issuance in 2019 and recently reached a milestone of a 50-million euro issuance.
Co-founder of Sun Finance
Chief financial officer of Eleving Group
Māris Kreics, chief financial officer of Eleving Group, highlights that capital markets accelerate the business, companies can have stable and permanent capital in place, and it helps the owners to diversify their portfolio and related risks. Eleving Group’s total assets at the end of 2022 were approaching the 400-million euro mark, with revenues of almost 184 million euro, net profit before FX of 27.8 million euro, and EBITDA of 71.6 million euro. “Such scale and needs cannot be met by private capital alone. Therefore, we are pursuing opportunities in the capital markets. We have been active in the Baltic capital market since 2014, and the investments we have raised here through bond issuances have laid the foundations for our business growth. Now the Baltic capital market has become part of a broader investment strategy for us,” emphasises M. Kreics.
The backbone of Eleving Group’s financing structure is three bond issuances in 2021 with a total amount of 205 million euro. M. Kreics explains that from a term perspective, this is mid to long-term capital, with 30 million euro raised locally in the Baltics maturing in 2024, 150 million euro maturing in 2026, and 25 million euro maturing in 2031.
“Also, lately, we have been active in local private bond issuances in Kenya, through which we have already attracted close to 13 million euro in just one year. The issuance of the bonds is directly linked to the company’s global ambitions and the desire to become the largest player in a particular segment – vehicle financing services. In business, the fuel for growth is access to capital, and we have been quite successful in securing that,” says M. Kreics.
Bonds come hand in hand with high business standards
“The experience we have gained in almost a decade in issuing local bonds and the trust earned over time from investors in the Baltics is now helping us in the global markets. By becoming part of this environment, companies commit to high standards in business transparency, outreach, cooperation with regulators and stock exchanges, and also high standards in business disclosure and ethics,” says M. Kreics.
T. Jurjevs also says that opting for bonds as a financing source has brought increased transparency to Sun Finance’s structure and prompted the development of internal procedures to ensure consistent and timely reporting to investors.
“Additionally, this decision has enhanced Sun Finance’s reputation, as we have become one of the largest issuers in the local capital market. This achievement stands as a testament to Sun Finance’s robust financial performance and promising future prospects,” he emphasises.
M. Kreics adds: “Reputation is one of the most important assets for a financial company. We are becoming a more accessible and understandable business for people by following capital market standards.”
A lot of information becomes public domain
When a company publishes its bond prospectus or other deal documents, it will put a huge amount of information, often quite technically detailed, into the public domain. “It’s worth remembering that few people understand the mechanics of, for example, consumer debt repayment and that you will need to explain what your figures actually mean. Be ready to do so, especially if your company uses different metrics or performance indicators to its peers, or if there aren’t many peers,” says James Etherington, the Group CFO of 4finance. 4finance has 325 million euro in issue across two EUR bonds but has issued and refinanced several bonds over the last ten years in different markets and currencies.
“Issuing a bond requires a great deal of disclosure and transparency about your business – in many ways it feels like becoming a publicly-listed company. You make important commitments to the bond market and share a lot of detail about your business, including regular financial reporting. So the business needs to be in good shape and have proper governance and processes in place. So from a reputation perspective for all different stakeholders it can deliver a boost because people know you are accountable to the market and have to comply with those obligations. Companies also have the opportunity to build (or harm!) that reputation over time based on how they interact with capital markets,” says J. Etherington.
The Group CFO of 4finance
A first trial – bonds
Liene Budava Management Board of Nasdaq Riga
For the companies that are starting to think about issuing bonds, L. Dubava recommends having a clear business model, a strategy for the future and a stable cash flow, as all listed companies are required to regularly inform the public about their activities. “Bonds and shares are fundamentally different ways of funding, each with its own pros and cons. If bonds are comparable to loan – fixed amount and interest rate to be paid on set maturity date, then share IPOs mean sharing the ownership – investor becomes a shareholder, participating in decision making and expecting dividends. Equity financing and listing is also a long-term commitment with rather strict rules to follow. Each company has different argumentation and reasoning when and why to do one or another,” she notices.
“Sometimes, it can also be a combination of both. Entering the market with bonds might be a good start as it is a bit simpler and easier to do, it gives time to test the market, see how it works, and learn the investors’ expectations. This is what Delfin Group did and there are also other examples,” says L. Dubava.
It’s worth it
How to prepare for a bond issue? “The company should have a commitment towards transparency and start with getting internal reporting processes sorted. From a company, it requires commitment in terms of resources and the ability to articulate its strategy and results,” points out M. Kreics.
T. Jurjevs admits that issuing bonds may seem daunting, especially the first time, but the rewards make it worthwhile. To get started, a company needs reliable consultants and legal advisors to assist it in this journey. “Keep in mind that the initial bond issue will require significant internal resources to prepare the terms of the issue. However, subsequent issuances become less resource-intensive,” adds T. Jurjevs.
J. Etherington also says that choosing the right advisors and banking partners to support the company through the bond issuance process is key as many parts of it are not familiar to most management teams, and market practices are changing constantly. “Remember that issuing bonds is just the start of the process. You need to continue to communicate with your bondholders and, obviously, have a clear idea of what the options are when a bond’s tenor comes to an end. The nature of the bond market is that you will not always have a complete picture of who holds your bonds, so be curious, invite bondholder contact, and develop an investor relations function,” suggests J. Etherington. “Finally, in terms of decision making, you will need to understand that you will go from being answerable solely to your shareholders, to having to consider the interests of bondholders, too. So careful balance and communication is critical here,” he adds.
In T. Jurjevs’ mind, the most significant challenge lies in establishing orderly internal procedures to fulfil bond covenants and ensure regular and timely reporting to investors. “If you plan to list bonds on a public market, additional requirements, like information disclosures and an appropriate governance structure, must be met,” he adds.
To attract investors, the company will also have to invest time in preparing informative marketing materials to create a solid public image for your company. Once the company has covered all these aspects, it will not only be ready for the bond issuance but will also have a streamlined internal structure that boosts your business, says T. Jurjevs.
Serious decisions ask for a clear strategy
According to M. Kreics, today the biggest challenge is to have a clear strategy for long-term involvement in capital markets and act upon it. However, the most important thing to do before the business starts to master the capital markets is to be aware of one’s capabilities and ambitions.
“Capital markets come with stringent rules and standards that companies must comply with to participate successfully. It is also always worth weighing up exactly what kind and how much of an investment a company can and wants to attract. Bonds are a financial instrument that will not be universal or the best choice for any business. Similarly, there are companies for which an IPO may not be the optimal way of raising capital,” says M. Kreics.
He adds one more piece of advice: “It is important not to borrow too much but exactly as much as you intend to invest in the development of the business. Every extra euro is a fixed commitment in the medium term, so companies should do their math and set adequate investment goals.”
When Eleving Group started to issue bonds almost 10 years ago (with the previous business name Mogo), there was no dedicated support for companies doing it. In M. Kreics’ mind, the situation now is different, and there is plenty of support – there are stock exchange sandboxes for new companies, consultants are more educated and experienced, banks have dedicated departments to capital markets, the regulator is more advanced and responsive, etc.
Top3 benefits of listed companies
L. Dubava sees several benefits from bond issue and IPO. First, both bonds and shares are a source of capital. “It allows a company to grow faster, invest and reach the targets. In addition, larger equity gives to the company an opportunity to borrow more and thus – develop and grow faster,” she has observed.
Second, bond issuance and IPO gives visibility and investor confidence, as all listed companies receive increased media and public attention. L. Dubava is sure it is a great opportunity for companies to talk about themselves, their products, expand their customer base and pave the way for success. On the top of that it is an opportunity to turn customers and employees into investors thus gaining loyalty and engagement.
A third advantage is market value and liquidity. “Only by being on the stock exchange company can learn its market value – the price investors are ready to pay for its business,” emphasises L. Dubava.
IPO – the next logical step
Through the initial public offering (IPO), DelfinGroup raised 8.1 million euro and attracted nearly 6,000 shareholders. Now the company is the largest Latvian company by market capitalisation represented on the Baltic Main List of Nasdaq Baltic.
“DelfinGroup has always strived for excellent corporate governance and company operation transparency. Hence, an initial public offering or IPO at the end of 2021 was the next logical step in our growth. Undoubtedly, the IPO required extensive preparation and mobilisation of internal resources from the company’s team. The preparations for the IPO took approximately a year,” says Aldis Umblejs, chief financial officer of DelfinGroup.
Chief financial officer of DelfinGroup
Combining bonds and equity issuance
Although DelfinGroup listed its shares at the end of 2021, the company was familiar with the stock exchange – DelfinGroup has been represented there with bonds since 2014. “DelfinGroup recognised the advantages of using capital markets to its benefit by also making its shares available to the public. Being present on the bond markets for several years helped the company better prepare for an IPO,” says A. Umblejs.
Now DelfinGroup uses financing from bond and equity issuances to diversify its capital structure and finance its growing business. This combination offers a broader capital market presence, allowing the company to attract both equity and bond financing. “By being known to equity and bond investors, the company can benefit from a broader spectrum of investors, thus increasing its funding opportunities,” he says.
Also, the process of attracting bonds is more cost-efficient to acquire capital than equity, which is the most expensive process of capital attraction.
Boost for reputation
“Stocks and bonds offer essential funding for the company and play a significant role in boosting its reputation, not just within the capital markets. Allowing potential employees to invest in the company even before joining helps them build a connection with the organisation from the start. This public status is highly valued by business partners, potential employees, and current staff as it is a hallmark of quality. Moreover, being a publicly traded company necessitates transparency and the disclosure of information. This requirement compels the company to implement specific processes and reach a certain level of maturity in its operations,” says A. Umblejs.
At the end of 2022, DelfinGroup launched a programme to grant company stock options to employees. 450,000 company shares will be issued as part of the programme. “A staff option programme for employees further enhances motivation and adds to the company’s positive reputation. After working for a certain period at DelfinGroup, employees can become shareholders and ambassadors of the company,” says A. Umblejs.
External assistance is very helpful
“Preparing for bond issuance can be intricate and demanding, requiring careful planning and collaboration. For DelfinGroup, the process has become progressively smoother with each subsequent bond issue, given our experience conducting 10 successful bond issuances since 2013,” says A. Umblejs.
However, companies seeking to issue bonds often require external assistance. Engaging legal consultants, bond emission arrangers, or investment banks is crucial for successful bond issuance. “Legal consultants are vital in helping the company prepare the emission prospectus, an essential document for investors in the bond issue. This prospectus must be comprehensive and transparent, instilling confidence in potential investors,” he adds.
On the other hand, investment banks are instrumental in structuring the deal to align with the company’s and investors’ interests. They also assist in preparing the necessary documentation for the depositary and stock exchange, where the bonds will be registered and listed.
One of the significant challenges in this process is the company’s obligation to provide regular and high-quality financial information. This process requires a competent accounting, finance, and business intelligence team capable of consistently delivering accurate data.
Choosing the local market
“The decision to issue bonds in Latvia and on Nasdaq Riga was initially a logical step, as it allowed us to tap into the local market where our presence was established. Over the years, with a successful track record of conducting 10 bond emissions, we have built a solid and diverse investor base, primarily from the Baltics and other parts of Europe. This market provides us with ample opportunities to meet our capital needs effectively,” says A. Umblejs.
He thinks that choosing the home market offers several advantages, including familiarity with the market’s requirements, ease of access to capital, and cost-efficiency in conducting bond issuances. These factors combined made it a strategically sound choice for the company to issue bonds in Latvia.
End of the unicorn era
Upcomings months will be a formative moment for many European fintechs and the entire sector. Scarcer financing will squeeze out less innovative or, simply, less luckier fintech startups, and they will not receive generous investment rounds, expects President at European Digital Finance Association Maria Staszkiewicz.
She assumes that well established fintechs are already rethinking their business model, focusing on revenues. The fintech sector will have to find a way to provide modern services while getting paid for them. “This is what Sanjib Kalita, the wizard of Money 20/20, one of the biggest global fintech events, calls the Age of the Centaurus: the shift from obsession with valuation to focus on money-making models. An unusual trigger may help fintech companies in this process – the European regulation,” adds M. Staszkiewicz.
President at European Digital Finance Association
Financial data economy
The current European Commission’s efforts to support the use of data in the financial sector by policy means were crowned on June 28. On that day, referred to as D-Day of European payment services, DG FISMA presented a package of long-awaited and debated proposals: the revision of the Payment Services Directive (PSR), a new regulation on access to financial data (FIDA) and a regulation establishing the digital euro.
“This legislative package was the last piece in the EU digital finance strategy, which was being implemented during the current five-year plan,” says M. Staszkiewicz.
The new regulations are not only intended to help more than a thousand of European payment institutions and electronic money institutions build new services based on the so far unused data. The proposals are part of an ambitious project of European data spaces in the field of finance, alongside healthcare, mobility or energy. M. Staszkiewicz explains that the strategy is supplemented by ESAP, i.e. the European Single Access Point serving as a centralised point for publicly available information on the finance and sustainability of European companies and investment products to be launched in 2027, and a Strategy on supervisory data.
Hold your horses
“Champagne bottles were probably not popping in the headquarters of financial technology companies at the end of June, but those who follow and try to co-shape the European regulation welcomed the proposals,” says M. Staszkiewicz.
She highlights one positive factor is the chosen legal form: a regulation, which does not leave the member states much room for gold plating and introducing unnecessary domestic hurdles. “Other ones are several bold proposals, such as the access to clearing systems or enhanced right to bank accounts for fintech,” adds M. Staszkiewicz.
But there is at least one but: the timeframe. Because of the upcoming European elections, the legislative process of adopting PSR, FIDA and digital euro most likely will be prolonged, meaning the new regulations will become applicable towards the end of the decade. “Besides the timetable, the chosen philosophy for data access is also of interest – while in the case of payment services, access by third parties remains free of charge, other financial data made available based on FIDA will be available upon fee,” emphasises M. Staszkiewicz.
However lengthy and intricate the political process may be, she calls it imperative for even smaller companies to get involved in the lobbying activities. Otherwise, the rules by which they have to play in the financial sector will always be only written by the incumbents.
A chance for Latvia to voice the ideas and worries
Latvian Fintech Association has recently become part of the European Digital Finance Association. This network of national fintech organisations engages in the policy discussions with European regulators to shape the outcome.
“It is a chance for the Latvian ecosystem to voice their ideas and worries, discuss them with their European peers and then jointly present the fintech market positions to those who write and and adopt laws affecting fintech for the years to come. Getting involved in policy work is an inseparable part of investing into your company’s future,” says M. Staszkiewicz.