The Baltic States – Estonia, Latvia and Lithuania – are world leaders in fintech. According to a World Economic Forum report – ‘Europe’s Hidden Entrepreneurs’ – Estonia is Europe’s number one entrepreneurial ‘hotspot’, with Latvia third and Lithuania seventh. Technological development, including fintech, sits at the heart of the countries’ progress.
“On a recent ranking of the world’s 100 most innovative fintechs, as many as 33 were from the EU,” explained European Commission vice president Valdis Dombrovskis – himself Lithuanian – in a speech. “And within the EU, the Baltics are at the forefront. This is linked to many factors, including the early adoption of digital technology, a culture for start-ups and innovation, and growing cross-border co-operation.”
This is both impressive and remarkable, as the countries only joined the EU in 2004 after emerging from the shadow of the Soviet bloc in 1991. The three states have a combined population of just six million people. But their small size has focused emerging companies on export markets, driving them towards fast growth. And that has been backed by effective government policies promoting innovation.
Estonia’s reputation as a centre for high tech expertise was enhanced by the emergence of Skype, but the country is also home to hundreds of fintech start-ups. Yet the country’s technological development also owes much to entrepreneurs from other countries, whose presence has been assisted by the government’s e-residency programme. This allows non-Estonians to form companies and fully engage in Estonian banking, payment processing and taxation systems. The scheme was launched at the end of 2014 and has an objective of attracting ten million e-residents into the country by 2025.
Lithuania promoted its payment infrastructure and supportive regulatory environment to lure global entrepreneurs, not only from within Europe, but also from Israel and Singapore. Thirty five fintech companies were formed in Lithuania in 2017, tripling the size of the sector, which employs nearly 2,000 people.
Vilius Šapoka, Lithuania’s minister of finance, told a recent conference: “In such a short period of time Lithuania became the fastest growing fintech hub and it is not going to stop… We are offering tax holidays for start-ups, a fast licensing process, a regulatory sandbox at the central bank, and [a] friendly ‘Newcomers Program’ at the central bank. Furthermore, if you do R&D activities in Lithuania you can deduct your expenses triple of the amount.”
The ‘regulatory sandbox’ allows companies to test financial innovations in a live environment for up to six months under the guidance and supervision of the Bank of Lithuania. During this period, participants are subject to simplified regulations and supervisory requirements. If the services work well in the test environment, companies are permitted to start operating in normal conditions.
Talent is also vital for the region’s fintech businesses, explained Roberts Lasovskis, investment platform lead at TWINO, one of Latvia’s successful start-ups (see box). “It’s become quite common for the world’s leading fintechs to base themselves, and specifically their service centres, in the Baltic region,” he said. “Riga, Vilnius and Tallinn are all now thriving fintech hubs – it’s not unreasonable to suggest that they are now beginning to rival London and Berlin as ‘silicon cities’ in the CEE region. As a result the region has an exceptionally strong talent pool, and top fintechs are able to recruit top professionals.
“This quality is tied to the education infrastructure of the country. We have a substantial base of financial experts because we – in part – have significantly more universities focusing on relevant sectors than other Baltic countries. In our region, this industry has something of a symbiotic relationship with our education system, which has a real focus on financial services. Riga’s Stockholm School of Economics, which was recently ranked as one of the top 30 European business universities by the Financial Times, has specific strengths in the development of, and research into, advanced financial technology.”
A skills advantage leads to strong businesses, added Lasovskis. “Industry employs top tech talent and the technology talent pool in Latvia is getting better and better.”
The Baltics’ fintech companies
TWINO P2P of Latvia claims to be one of the three largest investment platforms in Europe, having arranged €380m in loans since in launched in 2009. It also has operating bases in Poland, Russia, Georgia and Kazakhstan.
Transferwise is a low cost electronic money transfer system that originated in Estonia in 2010. It now has four million customers, 11 offices in four continents and 1,300 employees.
TransferGo is another low cost electronic money transfer system, formed in Lithuania in 2012 and now headquartered in London.
EstateGuru describes itself as the leading European marketplace for short-term, property-backed loans, having facilitated over 500 loans to a value in excess of €80m. It has offices in Estonia, Latvia, Lithuania and the UK and 15,500 investors.
Funderbeam is the world’s first primary and secondary marketplace for early-stage investments secured by blockchain technology. It was established in Estonia, is now headquartered in London and also has offices in Singapore and Croatia.
Mintos is a peer-to-peer lending marketplace which enables retail and institutional investors to invest in fractions of mortgage and personal and business loans that originate across Europe. It was established in Latvia in 2015 and now has offices in Brazil, Russia and South East Asia.
Debitum Network of Lithuania is “an innovative hybrid ecosystem for small business financing”, which provides fast funding approvals via blockchain and accepts cryptocurrencies.