Lithuania eyes European regtech glory

Lithuania is establishing itself as a European regtech powerhouse — a position the Baltic country hopes to cement by housing a new EU institution cracking down on financial crime.

Already a noteworthy fintech hub, Lithuania’s capital Vilnius wants to give a bloody nose to the likes of Frankfurt and Paris by winning the race to be home to the EU’s AMLA (Anti-Money-Laundering Authority).

The EU's AMLA will be in charge of setting a coherent framework for AML authorities of EU states and harmonising the fight against money laundering and terrorism financing in the EU.

Criteria when choosing the winning city include recruitment capacity, accessibility, training opportunities, and whether money laundering and terrorist financing risks are “adequately addressed in the member state”.

Victory would likely taste sweet: not only would it burnish Lithuania's status within the EU, but would bring a slew of economic benefits.

AMLA has a minimum €400 million annual budget, is expected to grow to a 750-strong unit and could lead to 10,000 support jobs in areas like compliance while it would also likely draw in millions in investment to a country with a population of just 2.8 million.

Vilnius “confident” of success

While the bookies' odds are against Vilnius, Gintarė Skaistė, Lithuania’s minister of finance, is “confident” that Vilnius (known for its eye-catching architecture, messy history and being relatively cheap to base a business) is the “best home” for the newly-created EU agency.

In its plus column, she points to its best-in-class public sector risk management services, the swelling number of compliance experts in Lithuania’s private sector and the country's strong reputation in managing risks.

Vilnius’s storied fintech history

Should Vilnius win, it would mark the latest achievement for the plucky Baltic upstart, whose fintech ecosystem can already boast a storied history despite its relative infancy.

Much of the thanks can go to the Lithuanian government, which saw an opportunity, amid post-Brexit uncertainty, to woo startups looking for new European hubs, instilling competition in a country whose banking sector is dominated by Swedish banking giants.

Marius Jurgilas, a former Bank of Lithuania board member, describes the provenance of the fintech ecosystem in Lithuania.

He says:

“Lithuania embraced fintech to solve the national problem of a highly uncompetitive, foreign bank dominated domestic market, wanting to bring in competition.”

Scandinavian banks dominate

At the government’s behest, a Lithuanian fintech ecosystem developed, with startups enticed by the Bank of Lithuania’s zippy licence regime, a payment system allowing customers to set up payments across SEPA (Single Euro Payments Area), a reputable Sandbox regime, and low-cost infrastructure costs.

Revolut, Yapily, Curve, SumUp, and Square all chose Lithuania as a European hub, with many startups seeing Lithuania as a gateway to the rest of Europe.

Revolut currently uses its Lithuanian licence — a licence granted by Jurgilas — as a passport into the European Union.

“At that point in time, it was just two young guys with lots of ambition,” he says of the Revolut co-founders, at the start of their journey.

Vilnius today

Today’s Vilnius teems with payment providers and other fintechs while the country can now boast three unicorns — London-listed online marketplace Vinted, Nord Security, a cyber solutions firm, and Baltic Classifieds Group (BGC), the classifieds group.

Another key fintech employment driver in the capital is the shared service centres of financial giants like Western Union and Danske Bank.

In total, 263 fintechs are operating in Lithuania today, compared to 55 in 2014 — many of whom have EMI licences.

Fintechs flock to Vilnius

Like many Vilnius-based fintechs, neobank myTU was enticed to locate in Vilnius because of its favourable licence regime, which led to a “quite quick” approval of an EMI licence, and the “people potential”, says co-founder and CEO Raman Korneu.

He adds:

“It is not so expensive here if you compare it to Germany or the UK. And we can find people here with talent and experience.”

Originally hailing from Belarus, Korneu says myTU, founded in 2019, now has nearly 30,000 customers with a focus on serving migrants, mostly Eastern Europeans who are frequently sending cross-border payments.

Like other Vilnius-based fintechs, myTU is funded from outside the country, due to the lackluster Lithuania VC market.

Star player kevin.

Arguably Lithuania’s most famous fintech is Kevin., the payment infrastructure firm.

Its founder Pavel Sokolovas says competition has been pivotal in propelling the fintech ecosystem in Lithuania.

He says:

“You know what competition does? It pushes the whole industry to step up its game and progress forward. That's exactly what we're seeing in Lithuania.”

Like others, he supports moves to make Lithuania more attractive to overseas workers, through measures such as pushing for more favourable employee stock option regulations.

And like his peers, he thinks Lithuania can grow its RegTech status, with its regulatory “know-how”.

The VC market

Lithuania’s VC ecosystem is relatively new and small, though it’s showing impressive signs of growth, experts say.

Lithuanian startups raised €295 million in 2022, the second-best year on record, according to Dealroom with Lithuania ranking 6th among Central and Eastern European countries for 2022 VC investment.

One of its prominent VCs is Practica Capital, which invests in 75 firms across the Baltics, including TransferGo, the money transfer startup.

Practica Capital accounts for around half of the VC funds invested in Lithuania.

Donatas Keras, founding partner, Practica Capital, says:

“The last decade was just fantastic. We grew tremendously across the region. Estonia being number one but of course Lithuania is catching up quite nicely.”

One recent boon for Lithuania has been attracting major US-based startup accelerator Plug and Play to the country, which will work with innovative startups in Lithuania.

“The involvement of a US company will aid entrepreneurs in forming precise connections with foreign investors and prominent global corporations,” says Aušrinė Armonaitė, Minister of Economy and Innovation.

Challenges persist

With so many achievements, Lithuania has rightly earned its fintech spurs and the respect of the fintech ecosystem across Europe and globally.

However, challenges persist: the Lithuanian economy might be the largest among the three Baltic states, but the country is not as affluent as the big Western European economies.

The country also took a knock in 2021 when a local fintech — UAB Finolita Unio — had its licence removed by Lithuania’s central banks after it was implicated in the Wirecard scandal.

Along with beefing up its VC ecosystem, a further challenge is encouraging major overseas financial institutions to move to and invest in Lithuania.

Jurgilas, who is currently building a tokenized securities trading platform called Axiology, says:

“The biggest political challenge right now for the president’s office is to show that competition can be bought in.

“But it’s a very hard sell to lure in a retail bank, be it Standard Chartered, Barclays into a country of sub-three million citizens, where it is already a captive market of the Swedish giants and some of the local players.”

Will Vilnius win?

A recent poll among anti-financial crime professionals did not spell good news for Vilnius, which came bottom out of the eight candidate cities to host the AMLA.

But that is just one poll, and flag-wavers for Lithuania can point to data burnishing Lithuania’s AML credentials — including being home to some of the brightest and best AML specialists working in the country.

Eighteen percent of the country's fintech employees are made up of regulatory compliance specialists, data shows.

Furthermore, it is already home to a Centre of Excellence in AML, set up in 2021, with the Ministry of Finance and the Bank of Lithuania, alongside key players in the banking system, to improve AML rules.

Whether it wins or not, Vilnius has already earned its credentials as both a regtech and fintech hub of distinction.