What is happening with Lithuania and its distribution of banking licenses? This small European country has already issued over a hundred licenses to fintechs, and in the year 2018 alone, the number of companies operating in this sector increased by approximately 40%.

The Bank of Lithuania wants to increase its competitiveness on the domestic market, so the current policy was created in cooperation with the Lithuanian Ministry of Finance. So does the country where contactless payments appeared only in the year 2016 have a  chance of becoming a European Fintech paradise?

In the year 2018, there were around 180 Fintech companies operating in Lithuania, employing more than 2,600 workers in the process. The Bank of Lithuania states that 70% of Fintechs  operating in the country have their headquarters located in Lithuania.

However, the reverse situation is unknown: how many companies that have received license permits from the Bank of Lithuania, actually conduct their business inside the country?

Available public data shows that 96% of Fintech companies operating in Lithuania perceive Europe as their most important market. Europe, not Lithuania.

How Fintechs are treating Lithuania?

Supervisors and regulators should ensure that companies operating in a given country have licenses from local supervision.

And it is not about some sort of “economic nationalism”, but a consistent licensing policy is a primary concern for the security and transparency of the market. Many criticise the Bank of Lithuania for giving away licenses left and right, while a significant number of fresh companies do not intend to operate inside the country at all.

Many of these Fintechs are treating Lithuania as a base for the conquest of the other, more attractive European Union markets. Thanks to the so-called “passport rules”, obtaining a license in one EU country allows for the provision of services throughout the whole region.

Since in Lithuania the approval time for a license is much shorter than in other countries, it's no wonder that many Fintech companies choose to do this.

Some new British companies, for example, are trying to keep their influence on the Continent under the shadow of Brexit.

The Bank of Lithuania admits that they are very aware of the problem and do not want to accept Fintech companies that are not interested in operating in Lithuania. They intend to bring additional regulations so that they will not repeat previous mistakes.

Areas of interest

Lithuania is a country with a population of just 3 million, so the market is not particularly attractive for many newly licensed Fintech companies. However, the waiting time for an electronic money institution license is just 3 months.

Compare this the majority of other countries in the European Union, where this time is 6 months minimum. According to data from the beginning of 2019, 110 new Fintech companies received their licenses in Lithuania, with dominating fields being:

● Electronic money institutions - 45%

● Payment institutions - 43%

● Crowdfunding platforms and P2P - 9%

● Specialized banks - 3%

Around sixty more applications are currently being considered. Most of them are applications from the same fields as listed above. The Bank of Lithuania expects that in the year 2019 it will receive about a hundred of new applications for licensing from Fintech companies.

All of this can mean that by the beginning of the following year, almost 300 Fintech companies will receive their permissions form the Bank of Lithuania - in comparison, in the year 2017 there were only 117 permitted Fintech companies.

Although apparently impressive, such a dynamic growth may raise certain fears and associations with the crisis that struck Iceland more than 10 years ago.

Will Lithuania become second Iceland?

The story draws comparisons with the fall of the Icelandic fund called Icesave, which was entrusted by over 300,000 British citizens. The fund offered an exceptionally attractive rate of return, but after its liquidation, users lost deposits of a total worth of £4bn.

The Icelandic deposit protection system was not being able to deal with the heat and some in the media are drawing parallels between Icesave and how willingly Lithuania grants licenses for new entities.

The Bank of Lithuania, however, refutes these allegations. According to Marius Jurgilas, the Bank of Lithuania member of the management board, there have been many changes in the European financial market for the past 10 years.

Many of these changes are directly shutting down comparisons since they were implemented precisely for security reasons. There are additional capital buffers as well as the united EU financial supervision.

Also, none of the newly-built specialised Lithuanian banks has started operating yet. The Lithuanian regulator ensures that along with the increase of risk it will take appropriate measures to secure the market.

Marius Jurgilas says proper controls will prevent such a threatful scenario in advance.

Is criticism of the Bank of Lithuania excessive? Lithuanians have simply implemented a policy that is lawful on both legal and economic grounds.

Reducing bureaucracy and waiting time for licenses does not necessarily mean that the security rules are not being properly regulated. Lithuania is just using its moment now. Its central bank is taking concrete steps to stimulate fintech's growth.

Are all these steps justified? We can only wait and see.