The Baltic Finance Center has published a study “What Should Latvia’s Next National FinTech Strategy Look Like?”, which examines the situation in fintech industry in Latvia, various foreign approaches to planning the development of this field, and their success stories and failures are analyzed, as well as recommendations for the development direction of Latvia’s fintech sector are provided.

At the end of 2024, the Ministry of Finance, in cooperation with the Bank of Latvia, the Ministry of Economics, representatives of the financial sector, and other interested parties, will begin work on the development of the new Latvian fintech strategy. The study was designed to support this process with independent, evidence-based analysis.

The authors of the study have collected and analyzed information about the Latvian fintech sector, studied the approaches of 28 other countries (European Union and Great Britain) in creating and implementing fintech sector strategies, as well as interviewed more than 30 representatives of the industry ecosystem in Latvia to gather opinions and recommendations that should be taken into account when creating the new strategy. The Baltic Finance Center also held a discussion with representatives of the industry associations, the ministries, and the Bank of Latvia on the conclusions of the study in the context of the emerging strategy.

What is fintech?

Financial technologies (fintech) is a dynamic, forward-looking, innovative, and rapidly growing field worldwide, which includes a wide range of digital solutions and services: payments, savings, loans, including digital and crowdfunding platforms, crypto-assets and blockchain services, insurance technologies, monitoring technology, alternative lending and a range of other technologies and new business models.

Currently, many countries are competing to become global fintech development centers and to make a contribution to their economy.

 

Fintech sector in Latvia

The beginnings of fintech in Latvia can be traced back to the year 2000, but the sector experienced rapid growth – similarly to other countries – after the financial crisis of 2008, when, as banks reduced their risk appetite, various alternative lenders entered the lending market. Although there is a large proportion of digital lenders in Latvia, over the last ten years the sector has expanded and become significantly more diverse, with the development of crowd and collective financing platforms, crypto asset service providers, regulatory and data analytics technology solutions, and other fintech solutions.

The lack of unified taxonomy and comprehensive data makes it difficult to monitor the development of the sector not only in Latvia, but also elsewhere in the world, because fintech often is not identified as a separate form of economic activity. In order to support to support the ecosystem, a new database on Latvia’s fintech was collected and validated, which is planned to be further developed and supplemented in the future. More than 180 fintech companies have been identified, most of which are small. In 2023, companies for which financial data were available employed around 2,500 employees and contributed around 42 million euros to the Latvian state budget.

The largest fintech segments, in terms of historical development, are credit services (41% of companies), payments (19%) and enterprise technology solutions (17%).

Ecosystem representatives admit in interviews that although the fintech sector in Latvia has significantly developed and expanded over the last decade, a full-fledged dialogue with the fintech industry still has been overshadowed by the stigma of payday lending of the past. However, recently, the need for more effective competition in the financial services market and the breakthrough of the economy are increasingly contributing to the discussions of politicians and policymakers about the need to support and develop the fintech industry in Latvia.

 

The experience of neighboring countries – a lesson and a window of opportunities for Latvia?

Lithuania has made the strongest statement in the fintech space among the Baltic countries. Since 2016, it has purposefully positioned itself as a fintech hub, especially in the areas of payment services and electronic money solutions. Thanks to a clear strategic vision and action plan, the number of fintech companies increased from 82 to 230 between 2016 and 2020. This growth was driven by fintech access to the Single Euro Payments Area (SEPA), which was provided in Lithuania already in 2015. This allowed Lithuania to attract companies that were looking for a base in the European Union after Brexit, such as Revolut.

However, since 2021, Lithuania has experienced several scandals related to fintech companies in the payments sector, as a result of which Lithuania has moved to a much more cautious licensing and supervision approach, emphasizing quality over quantity and the importance of risk management in its strategy.

Estonia is a leader in the European Union in the development of digital governance and state e-solutions, and initially, its approach to fintech innovations was also very open, especially in the field of cryptocurrencies. Estonia positioned itself as a global crypto center early on and became one of the first countries in the European Union to issue licenses to cryptocurrency service providers – by 2019, almost 2,000 companies had received such licenses. However, this open approach created significant risks of money laundering and sanctions evasion, due to which Estonia has introduced a significantly stricter approach since 2020 and has become wary of the development of the fintech sector in general.

The study highlights that the examples of both neighboring countries show – innovation development must be balanced with targeted risk management. The shift in Lithuania and Estonia to a more cautious approach also creates a “window of opportunity” for Latvia to make a breakthrough, if the lessons learned are wisely applied.

 

What should Latvia’s next fintech strategy be?

Latvia developed its first fintech strategy for 2022-2023 and approved it in January 2023. Ecosystem representatives interviewed as part of the research evaluated this as an important step for fintech areas to be “put on the map”. The work done so far in the development of the regulatory and supervisory environment was particularly appreciated, especially the creation of the innovation center, the introduction of the regulatory “sandbox”, which provides an opportunity to test innovative financial products and business models, as well as the fintech planned for the next year companies’ access to the SEPA payment system. The fintech ecosystem itself has also developed significantly, and there has been improved collaboration and communication between ministries, regulators, and industry for common goals.

However, to make a significant breakthrough in the field of fintech, a much more unified, ambitious, and targeted national strategy is needed. So far, there has been no discussion at the highest political level about what exactly we want to achieve in the fintech sector, what is our strategic goal and most importantly – what is our risk appetite.

The new strategy must answer several important questions.

First of all, Latvia must determine its level of ambition, risk appetite, and attainable goals – the representatives of the ecosystem surveyed within the study emphasized that until now there has not been a sufficiently clear and unified national vision for the development of the sector. The experience of other countries analyzed as part of the study shows – those countries that have prioritized development areas are doing better. It helps to concentrate the available resources for the achievement of specific goals and also allows countries to position themselves internationally in a more targeted way.

The surveyed fintech companies emphasized that taking into account the relatively small market of Latvia and the Baltics, fintech should primarily be seen as an exporting industry that tests products and business models in Latvia in order to provide services throughout the European Union and the world.

Clarity about risk appetite is necessary to prevent frequent policy shifts from very open and ambitious to very conservative, as companies need predictability. Not all start-ups will be successful, and that’s normal – it’s important that in these cases, the business is wound down in a way that protects the consumer and doesn’t pose risks to financial stability or the reputation of the sector. The experience of Lithuania and Estonia shows that from the point of view of risks to the country’s reputation, the most important are money laundering and the legalization of criminally obtained funds.

Fintech should not be seen as an isolated niche with its own strategy but as a very precise and targeted connection with plans to develop the financial sector and promote its competition (e.g., capital market development plans, sector competition evaluations) and common national economic development strategies (e.g., start-ups, artificial intelligence, international competitiveness, and export development policy).

The industry also made recommendations for improving the regulatory environment – a clearer and faster licensing process, expanding the functionality of the regulatory “sandbox”, reviewing the consequences of the “overhaul” of the financial sector, and the need to assess whether fintech companies have a level playing field to compete in specific financial services markets.

Secondly, the interviewees emphasized that the fintech sector and the strategy itself need one political “owner” who would be responsible for its development and ensure the coordination of the various institutions and stakeholders involved. Currently, the system is very fragmented, the roles of the involved institutions tend to overlap and there is not always a consensus on the distribution of roles and responsibilities.

Thirdly, the new strategy should be made more effective – it should be developed not for two, but for at least 5 to 8 years, ambitious and measurable goals should be set, not just a list of tasks, and its progress against the set major goals should be evaluated and reviewed at least once a year.

By creating a smart and effective strategy, the Latvian fintech industry can become a cornerstone of economic and innovation growth, strengthening its positions both in the Baltic region and globally. Will we welcome our first fintech unicorn?

Read the full research: https://finance.rbs.lv/wp-content/uploads/sites/15/2024/12/What-Should-Latvias-Next-National-FinTech-Strategy-Look-Like.pdf

 

The study was developed within the project “Knowledge and Research Capacity Strengthening of Anti-Money Laundering, Financial Sector Technology and Analysis” funded by the EC Recovery and Resilience Mechanism. The authors of the study are economists and experts of the Baltic Finance Center Madara Ambrena, Alexander Apostolides, and Kristine Dambe.