Fintech Lithuania Market Insights: Fewer Investments, but We Will Strengthen Competitiveness

Fintech Lithuania Market Insights: Fewer Investments, but We Will Strengthen Competitiveness

by February 7, 2023

The financial technology sector in Lithuania continues to develop. There is a steady increase in the number of people employed, the turnover of companies, and more taxes are being paid. However, it is predicted that in the background of global stagnation, fintech companies will show such a rapid growth, and development resources will have to be sought by optimising operations.

Liudas Kanapienis

Liudas Kanapienis

How to overcome perhaps the toughest challenges of the past decade will be discussed in Vilnius, at the international conference Fintech Day, organised by Rockit and the association Fintech Hub LT. One of its organisers, Liudas Kanapienis, the head of the know-your-customer (KYC) and anti-money laundering (AML) solutions company Ondato, shares his thoughts on the most important issues faced by the fintech sector.

Around the world and in Lithuania, there is a growing opinion that the financial technology sector needs optimisation. Why?

International conflicts and the tightening of monetary policy are undoubtedly affecting both the EU and the rest of the world. There is growing talk about signs of a recession in 2023. For example, a survey of economists, conducted by the Davos World Economic Forum, shows that two-thirds of authoritative public and private sector economists believe a global recession is to be expected this year.

Business activity is also expected to be dampened by a few negative factors in 2023. 9 out of 10 respondents expect companies to face both low demand and high borrowing costs, while more than 60% said that production costs will increase. These challenges are expected to encourage international companies to reduce costs. For example, businesses will reduce operating costs, lay off employees, and optimise supply chains.

Naturally, the fintech sector also needs to prepare for a possible recession, review and optimise processes. We already see how big tech companies are laying off employees, while others are just on the way to optimising processes.

We can recall the wave of layoffs that started last year when Klarna, Meta, Snapchat, Salesforce, and other tech giants reported on their layoffs. A recent announcement that Microsoft plans to lay off about 5% of its employees proves that large tech businesses are not only slowing but also optimising human resources.

Is it just about employee optimisation? What exactly should companies in the fintech sector do?

In terms of optimisation, businesses often resort to layoffs, since in the field of technology human resources account for a large part of the costs. However, from my point of view, we need to look at it a little differently. Historical data teaches us that during a crisis companies that optimised but did not cut off advertising budgets, lay off employees, or otherwise slow down, gained the most and continued to grow.

It is important to optimise processes strategically so that optimisation will give a boost to growth, not vice versa. Let’s take a concrete example from the financial market. Every financial institution needs to ensure KYC and AML practices. In this area, business costs represent a large part of the costs and do not generate revenue. Therefore, it is natural that processes need to be automated because in this area there is a lot of manual work, and the lack of efficiency is glaring. There is no doubt that the same or an even better level of compliance needs to be maintained.

Many of these areas can be found in business, so the main thing is not to cut down functions, not to lay off people, but to automate and digitise processes.

Last year, the Bank of Lithuania imposed even more fines on financial technology companies than in 2021. What are the reasons for this? Does the Bank of Lithuania impose excessive requirements in the eyes of the fintech sector?

The requirements are the same throughout the European Union and all financial institutions comply with the same directives. Therefore, the main reasons for fines are human errors, limited resources devoted to ensuring various claims, and archaic processes in companies. Meanwhile, there are solutions on the market that can reduce the human error factor, increase efficiency, and strengthen processes.

Does the tightening of compliance lead to the fact that Lithuanian fintech loses its competitive advantages over other EU countries?

I do not think that the tightening of regulations leads to Lithuania losing its competitive advantages on its own. We need to understand that there is stricter regulation all over the world, it is designed to find a balance between technological development and market protection. It is important for the regulator to be able to respond just as quickly to the changing environment. Due to the tightening of regulations, processes such as licensing should not take too long.

The market has no expectation that it will not be penalised, that there will be no inspections, or in any other way market participants will not be supervised. The market expects, for example, that the licensing process will be quick, clear, and smooth and that the rules on market operation will also be transparent and not subject to frequent and substantial changes.

Another example is the requirements regarding customer composition. I would like them to be logical, reasonable, and in line with the overall expectations of the market.

There are solutions to all these issues. Therefore, I think that, on the contrary, stricter regulation around the world creates even greater opportunities for our competitive advantage as a state. You just need to use them and react quickly.

Over the past few years, several Belarusian startups have moved to Lithuania or opened a branch. Do we have opportunities to attract start-ups from Western Europe or other parts of the world?

I am very doubtful that we can attract large Western European start-ups to Lithuania. Due to the location of our country, the relocation of Belarusian startups was simply a unique opportunity. We are neighbours, so it was the simplest and quickest way for them to move here when the unrest began there. Of course, another contributing factor was that we were able to quickly provide them with easy conditions to do so. However, Poland was on a roll as well, attracting its own share of startups and talents.

As far as Western European startups are concerned, I think we shouldn’t be too optimistic. The only potential that can be seen − the financial licences of the European Union, which would allow these companies to set up their own representative offices. However, we shouldn’t think that this would be a transfer of all activities or large teams, because the Lithuanian market is simply too small.

In your opinion, which fintech companies in Lithuania can make investments this year?

This year, the issue of all investments will be problematic. Investment is going to be much lower. The total number of investments in Lithuanian start-ups may continue to grow, but the amounts will be lower compared to previous years. Money is just more expensive, and the ratings of start-ups have also decreased.

At the beginning of the year, the fintech company Click2Sell was sold. Are there any other such “dark horses” on the market?

We have many bright minds and good businesses that just do their job and do it well. I wouldn’t call them “dark horses”, just under the right circumstances, I think the right decisions are made, so I won’t be surprised if we see more sales than usual this year. It is also worth noting that our fintech market is becoming more mature − the technological solutions used and developed are becoming more and more advanced in both traditional finance and cryptocurrencies, making it increasingly interesting for larger brands.

 

Fintech Day on 9.February

The Fintech Day will be held in a hybrid format on February 9 — live at the Rockit Financial Technology and Sustainable Innovation Centre (Gynėjų g. 14) and it will be broadcasted live on the @Rockit channel on Youtube.

Representatives of the Ministry of Finance, the Bank of Lithuania, the Embassy of the United Kingdom, Invest Lithuania, Fintech Hub LT, Ondato, Accenture, Revolut, BankingLab, Hawk AI, Amlyze, Sorainen, other start-ups, finance and legal advisers, venture capital funds, international fintech associations, and communities will participate in discussions on various areas of the sector.

 

Featured image credit: Liudas Kanapienis

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