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Lithuania Lighted Up on the Map of FinTech World: What’s Next?

Lithuania Lighted Up on the Map of FinTech World: What’s Next?

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Amazingly, the Lithuanian FinTech ecosystem report of 2018 revealed that there were 170 FinTech companies based in Lithuania – reflecting 45 percent growth over the previous year – with some 2,600 employees working in FinTech companies, more than 700 of which were newly-employed in 2018. The numbers are still growing this year.

Nevertheless, FinTech companies in Lithuania may face considerable challenges in the years to come, including stricter oversight by the Bank of Lithuania, the growing need for qualified specialists, and difficulties in communicating with credit institutions.

Supervision of Licensed FinTech Companies is Tightening

Recently-adopted amendments to the Law on the Bank of Lithuania have tightened the bank’s supervision of financial institutions and increased the fines and liability for non-compliance with the law, while issues of risk management are regularly raised at the inter-institutional level.

Following the entry into force of the new version of the Board of Bank of Lithuania’s Resolution on the Preparation and Submission of Reports, the amount of information that FinTech companies are required to provide has increased significantly. To meet these requirements, FinTech companies need to hire and train additional staff and appropriately redesign existing IT systems. For FinTech companies with 10 to 15 employees, therefore, these requirements impose a quite heavy administrative burden.

Thus, companies licensed by the Bank of Lithuania cannot lay back: they must constantly update their internal procedures, assess internal and external risk factors, and apply state-of-the-art risk management measures. It is significant that highly trained and qualified employees are needed to properly manage internal processes and meet increased requirements. 

Difficulties for FinTech Companies in Collaborating with Credit Institutions

One of the main problems that FinTech companies face is the refusal of banks to allow them to open accounts. The main options to safeguard client funds include: (i) holding or separating funds from those of other natural or legal persons; (ii) insuring the funds; or (iii) obtaining a letter of guarantee or warranty issued by an insurance company or credit institution of the Republic of Lithuania (including a branch of a foreign insurance company or credit institution established in the Republic of Lithuania) or another EU Member State. FinTech companies may invest these client funds in safe, liquid, and low-risk assets as determined by the supervisory authority.

As the market for investing such funds is currently unfavorable, FinTech companies typically opt to safeguard the funds in a separate account with the central bank or ensuring the funds – although this latter approach is less popular due to the limited supply of insurance products and high fees. However, FinTech companies often face an unfavorable attitude from the banks when they apply to open a customer funds account or issue a guarantee. 

This cautious position of the banks may be due to their unwillingness to take risks for the relatively small return these accounts generate. Usually banks attribute higher risk to FinTech companies due to uncertainty about the origin of funds held in such separate accounts, the companies’ shareholder structures, internal procedures, etc. In addition, the evaluation process required for FinTech companies requires additional resources from the banks. For all of these reasons, banks often refuse to open an account for a FinTech company.

However, the supervisory authority now possesses a tool to deal with this situation. Following the entry into force of the new wording of the Law on Payments, a credit institution refusing to open a payment account for payment institution or an electronic money institution must immediately notify the supervisory authority and declare the reasons for its refusal. This allows the authority to monitor whether the reasons for refusal are well founded and whether the decision is based on the principles of objectivity, non-discrimination, and proportionality. Unfortunately, in practice, such notifications are rarely sent to the supervisory authority.

How can FinTech companies run more smoothly? The solution would be if there were more alternative and realistic options in the market of safeguarding customers’ funds, such as new insurance products or investing in other directions that provide investment return.

Eva Suduiko, Associate Partner, and Justina Milasauskiene, Senior Associate, Cobalt

This Article was originally published in Issue 6.9 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.

Cobalt at a Glance

COBALT is a closely integrated alliance of top-tier law offices across the Baltics, uniting more than 250 attorneys and support staff. During 25 years of experience, we have become a strategic partner to our clients in handling both daily matters and complex large–scale transactions and disputes.

The firm’s broad spectrum of expertise and established position as the market leader gives a comprehensive basis for providing full-service business law advice.

Top international and regional businesses, financial institutions, state and local governments, and the region’s most promising start-ups are among our clients. We offer leading-edge solutions in key industry sectors: Consumer Products, Trade & Distribution, Real Estate & Construction, Pharmaceuticals & Healthcare, Energy & Utilities, Communications, Media & Technologies, Financial Services, Transport & Logistics.

COBALT has been named Baltic Law Firm of the Year 7 times receiving Chambers Europe, IFLR, The Lawyer and Mergermarket awards, and we are regularly listed amongst the top-performing M&A legal advisors in the Bloomberg, Refinitiv and Mergermarket deal tables. Recognized as the No.1 Lithuanian law firm in the Prospera Law Firm Review 2021 and No. 1 law firm in Latvia in 2022, 2020, 2019, and 2018 client satisfaction surveys. We were recognized as a Baltic-wide Law Firm of the Year at the 2022 Chambers Europe Awards ceremony and named the Baltic States Tax Firm of the Year and Pro Bono Firm of the Year at the annual ITR EMEA Tax Awards 2021 ceremony. 

More information on COBALT can be found at www.cobalt.legal.