Lithuania Economy Briefing: Lithuania Is Becoming a Second Home for the International Fintech Companies Entering the EU Market Linas Eriksonas

ISSN: 2560-1601

Vol. 13, No. 2 (LT)

December 2018

Lithuania economy briefing: Lithuania is becoming a second home for the international FinTech companies entering the EU market Linas Eriksonas

1052 Budapest Petőfi Sándor utca 11.

+36 1 5858 690 Kiadó: Kína-KKE Intézet Nonprofit Kft. [email protected] Szerkesztésért felelős személy: Chen Xin

Kiadásért felelős személy: Huang Ping china-cee.eu 2017/01

Lithuania is becoming a second home for the international FinTech companies entering the EU market

If one would need to sum up in few words the highlights of the economic news coming out of Lithuania during the outgoing year, two keywords would stand up in the first place: GDP (Gross domestic product) and FinTech (financial technologies). The talk about the slowing down economy based on the forecasts of the diminishing GDP figures have been a constant theme in the economic outlook reports put out regularly by the main banks and the official institutions. In one of the recent reports, the bank Swedbankas has predicted the estimated decrease in the national GDP from 3.2 percent in 2018 to 2.5 percent in 2019. The European Commission has further changed the GDP growth rates for Lithuania for the next year by decreasing the estimates from 3.4 percent to 2.8 percent. However, Lithuania’s excellent performance in the international country ratings for business and investment friendliness in 2018 have outweighed the macroeconomic concerns. In the World Bank’s Ease of Doing Business rankings for 2019 Lithuania moved up by two positions taking the 14th position, one position below Taiwan but one above of Malaysia and two above Estonia, Finland (which ended up on the 15th, 16th and 17th positions). Further, the Financial Times' foreign direct investment service fDi Intelligence has ranked Vilnius, the capital city of Lithuania, as the 7th among the mid-sized and small cities in its Global Cities of the Future 2018/19 report along with such old and new economy hubs in Europe as Zurich, Belfast, Luxembourg, Geneva, Edinburgh and Aberdeen. More specifically, the fDI rating singled out Vilnius as being the 2nd in cost effectiveness, the 6th in business friendliness, the 7th in connectivity, and the 9th in economic potential and human capital and lifestyle. How come that the country which has a number of structural economic problems (such as the dominance of lower added-value manufacturing sector, the reliance on the second-tier supplier roles in the global value chains and the diminishing workforce due to out-migration) has become the darling of the international business and investment rankings? The report will aim to provide at least a partial answer by explaining the role and the importance of the second keyword of Lithuania’s economic year, i.e. FinTech, for the promotion of Lithuania as the investment destination and a free-trade jurisdiction for licensing businesses related to electronic payments. When it comes to the overall assessment of Lithuania’s economy from the global economic perspective, one feature, which is an important indicator for the status of economy, is the level of economic complexity in a particular country. The economic complexity index (ECI) is a novel measure that reflects the diversity and ubiquity of a country’s exports. The index considers the number of products a country exports with revealed comparative advantage and how many other countries in the world export such goods. The latest research has confirmed the relevance of the ECI for explaining different growth and development outcomes. There is an empirical evidence that by having a specialization in some products the country could achieve higher economic growth than specializing in others. Especialy as concerning the manufacturing products (which is very relevant for Lithuania having one of the highest GDP shares in the EU attributed to manufacturing), there is a strong evidence which point out to unconditional convergence in labour productivity in relation to ECI.

According to the latest available figures from the 2016 Atlas of Economic Complexity, Lithuania‘s ECI is rather moderate (the ECI value is 0.715); Lithuania is ranked as the 34th position in the latest available ECI ranking for 2016 where, altogether, 221 countries were analysed. For example, the neighbouring Belarus (a major transit corridor for Lithuanian goods to the Eastern markets) has a very similar complextity (being ranked the 31st, that is few positions above Lithiania). Poland is ranked 20, while the Czech Republic is ranked 7. The ECI index captures the information about the complexity of the set of capabilities available in a country and is strongly correlated with income per capita. According to the projected GDP per capita ranking for the period 2018-2023 (based on projection by International Monetary Fund (IMF) outlook April 2018 for year 2018 and 2023) Lithuania is ranked on the 40th position globally, according to the GDP per capita (nominal). Facing the existing and forecasted levels of GDP per capita as well as the productive structure of the economy (where the exports are still driven by medium-to-low added value products) as outlined above, Lithuania has embarked on an entrepreneurial opportunity finding in the global economic system in an attempt to increase the economic complexity in the specialized activities such as FinTech, which in 2018 yielded the first results. The opening for this entrepreneurial thrust of economy came due to the circumstances led by a set of events. As of 1 January 2015 Lithuania became the 19th member of the Eurozone, the 5th Central and Eastern European (CEE) country adopting the euro (after Slovenia, Slovakia, Estonia, Latvia joined the eurozone since 2006). In November 2015 the European Commission proposed to set up a European deposit insurance scheme (EDIS) for bank deposits in the euro area as the third pillar of the banking union. Encouraged by the relocated shared service centres of Barclays, Western Union and other financial institutions (such as NASDAQ) to Vilnius, since 2016 Lithuania has started promoting itself as the hub for FinTech. During 2017 the Bank of Lithuania prepared a FinTech-conducive regulatory and supervisory ecosystem to foster innovation in the financial sector within the next four years. Finally, on 15 October 2018 the Bank of Lithuania opened the submission for applications to enter the Bank of Lithuania regulatory sandbox. According to the information of the Bank of Lithuania, the entrants to the regulatory sandbox are able to test their innovative financial products or business models in a live environment, with real consumers. Sandbox participants will also be entitled to certain reliefs pre-agreed with the regulator, including the temporary lifting of some supervisory requirements. The national bank authorities have confirmed that once testing of financial innovations has proved successful, companies could shift to the usual operating environment. These efforts have yielded the success in attracting not only startups and early venture companies but also some major and up-and-coming players in the industry. Two of them have attracted the attention of the world media. On 13 December Revolut Technologies received a specialised bank license from the European Central Bank, following the assessment and proposal of Lithuania’s financial regulator, and an electronic money institution license from the Board of the Bank of Lithuania. The two companies are part of Revolut Ltd, a digital banking alternative that includes a pre-paid debit card, currency exchange, cryptocurrency exchange and peer-to-peer payments. The bank has ca. 3 million customers and is currently operating from its base at Canary Wharf, London with some operations being carried out in Vilnius. Further, on 21 December the Board of the Bank of Lithuania has granted Google Payment Lithuania (which part of Alphabet Inc., a Google’s parent company), an electronic money

2 institution licence authorising to issue and redeem electronic money as well as provide payment services across Europe. At the end of 2018 the Lithuanian FinTech sector has included more than 100 licensed companies, the majority of which are engaged in activities related to payments, electronic money issuance as well as P2P lending and crowdfunding platforms. Among them are also five Chinese companies, including Paytend Technology, which chose Vilnius for its headquaters in Europe. Lithuania is actively seeking to extend this hub to China and, as agreed at the “16+1” 2018 CEE-China summit in Sofia in July this year, will organize a high-level FinTech company conference as part of the 16+1 cooperation framework in October in 2019. According to the information of the Invest Lithuania, Lithuania is second only to the United Kingdom when it comes to Electronic Money Institution (EMI) licenses. Forbes reported that Lithuania is only second to the United Kingdom in terms of the number of e- money licenses issued and after the Brexit would become the first jurisdiction for e-money licenses in the EU. “The end of this year reflects our efforts and experience of the past few years in actively developing a FinTech-conducive ecosystem in Lithuania. Our regulatory environment and the benefits it offers have been acknowledged by both start-ups and world-class FinTech companies,” said on the record the Board Member of the Bank of Lithuania Marius Jurgilas. The remarkable growth of the FinTech sector in Lithuania has raised the questions how and to what extent the sector can create an added value to the economy. The licensing of the online bank Revolut in Lithuania attracted attention of the British media. The Guardian noted that as long as EDIS is not implemented in the EU “anyone who deposits money in a bank that operates under an EU licence must rely on the viability of the deposit protection scheme of the individual country that issued the license. So Revolut customer deposits will be dependent on the Lithuanian scheme’s capacity to pay up”. The reporter went as far as to suggest an analogy between Iceland 10 years ago and Lithuania, implying that the Bank of Lithuania (representing the population of 2.8 million) is taking over the risk of supervising the UK online bank having 3 million customers. Yet these criticisms have been deftly dealt with by the Bank of Lithuania which assured that it supervises banks in the same way as other central banks in the EU, and that it is done within the EU-wide “single supervisory mechanism”, while the EDIS is in preparations. Until then, Lithuania is taking a brave step forward to become attract money and entrepreneurs in FinTech and become a hub for new economy if not for Europe than at least for the region. The global rankings reflect and attest to that.

References: 1. Penny Mealy, J. Doyne Farmer and Alexander Teytelboym, A New Interpretation of the Economic Complexity Index““, INET Oxford Working Paper No.2018-04, 4 Feb.2018, https://www.inet.ox.ac.uk/files/main_feb4.pdf 2. The Atlas of Economic Complexity, Center for International Development at Harvard University, http://atlas.cid.harvard.edu/rankings/ 3. Lietuvos Bankas, “Google granted an electronic money institution licence in Lithuania”, https://www.lb.lt/en/news/google-granted-an-electronic-money-institution-licence-in- lithuania 4. Joe Wallen, ‘How Has Lithuania Become One of Europe's Most Exciting Fintech Hotspots?’, Forbes, Oct. 28, 2018, https://www.forbes.com/sites/joewalleneurope/2018/10/28/how-has-lithuania-become- one-of-europes-most-exciting-fintech-hotspots/#4b6af3917dc2 5. Patrick Collinson, “Is Lithuania another Iceland banking crisis in the making?”, The Guardian, 22 Dec. 2018, https://www.theguardian.com/money/2018/dec/22/lithuania- iceland-banking-revolut