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Looking into the future of tech on the crossroads of hype and hope 8 Finance in Latvia Issue § 1 , September 2018

The biannual magazine of the Finance Latvia Association

As a result of the development of the finance industry and growing cooperation between participants in the sector, as well as the sustained creation of innovations in financial technology, the Association of Latvian Commercial Banks has expanded its activities and this summer became the Finance Latvia Association. The organisation’s development strategy states its aim of becoming a broad platform for cooperation between finance, technology and related industries, as well as for interest representation in Latvia, the Baltics and Europe. Established in 1992, it is one of the oldest and most experienced business organisations in Latvia.

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© Finance Latvia Association, 2018 THE MESSAGE

Living up to the growing challenges

“The Baltics punch above their weight”. This was the his is a time of rapid local and global de- conclusion of a Tech.eu study called An Exploration of velopment in many spheres, where the the Startup Ecosystems, published last December. And boundaries between the finance sector, financial and other services, and the regu- indeed, as European Commission Vice-President Valdis latory environment are being blurred. So Dombrovskis put it during one of this year’s major it’s not surprising that the Finance Latvia tech-related forums, ”the Baltics are among the EU’s Association is also going through a trans- FinTech leaders, thanks to the early adoption of digital formation of its own. As cooperation and openness are T the key factors in ensuring sustainable development in technology, a sense of entrepreneurship, and growing finance and its related industries, we are now welcom- cross-border cooperation, to name a few factors.” ing financial technology companies, financial service Being at the forefront fuels new ideas and further providers and companies from related industries to development. But it also places added responsibility on join the cause. Due to these changes, the need for plat- us to become ever more agile and innovative, and at the forms such as this magazine has been steadily growing same time more risk-conscious. over the last few years. Every member of society must be able to receive first-hand information about topical issues and challenges, and what to expect from them. Over the last year we have focused on the associa- tion’s three priorities as reflected in our vision state- ment: development, technology and compliance. While fostering development the challenge has been to find new sources of growth, e. g. to expand the provision of services for the local economy. This has in turn meant a greater need for digital service development, for com- pliance and for establishing a clear vision of excellence for the next three years. We must note that the industry According to the latest is still addressing issues stemming from the fact that research from Citadele until 2014 banks focused on clients from CIS coun- Bank, 81% of respondents tries, often taking on excessive risk. A real challenge surveyed in Latvia believe lies in accelerating this process. We have developed, that innovative digital approved and introduced Policy Guidance and Guide- services help save time. lines on AML, Countering Terrorism Financing and This high level of digital Enforcement of Sanctions, as well as GDPR compli- savviness in the local market, ance guidelines. We have been actively monitoring and as well as the fast pace ensuring implementation of these guidelines, stress- Guntis Beļavskis, of global technological ing that any related decisions be made in the interests Chairman of the development, has of the public and financial sector as a whole. Finance Latvia already given a boost to Boosting innovation in the region is the main focus Association Council entrepreneurial energy in of this first issue of Finance in Latvia. Last December, and Chairman of the the Baltics. Therefore, it is the Association approved the Open Digital Finance Management Board vital to establish a strong Framework, which promotes a vision of Latvia being at Citadele Bank platform for cooperation at the forefront of Open Digital Finance in the EU by among all parties involved. the end of 2022. According to a survey commissioned This includes regulatory by Master­Card (Nordic Fintech Disruptors Report 2018), convergence — aligning the Nordic and Baltic markets already have an impres- legislation across the sive track record of creating FinTech companies that Baltics — so that companies succeed regionally and globally — ​indeed, over half of operating in all three Europe’s FinTech success stories originated in the Nor- countries can leverage the dic and Baltic region. And with the rapid regulatory strengths of these markets changes at local and EU level, we intend to strengthen as an effective springboard this leading position, bringing on board the right part- for working further afield. ners and facilitators needed to reach this goal. ● ON THE RADAR — 6 —

A drive to transparency

Compliance with sanctions, the with all our improving control systems and various strategies and business regulatory and legal requirements as well. models used by banks, risks in However, it is absolutely clear that the price of mistakes would be extremely high, so no dealing with shell companies — ​ precaution is too great. these topics have been on the minds of those involved with Sanctions, sanctions, sanctions Latvia’s financial industry for a few Understanding sanctions is one of the months now. This eventful year areas that should be focused on. Not only Uldis Upenieks, because there are so many and the list tends Co-chair of the Finance has made everyone realise that an to grow while you’re looking at it, and thus Latvia Association acceleration of the transparency one should be vigilant to ensure that sanc- Compliance and Control measures whose implementation tions are not being violated today even if Committee, Chief was begun last year was a prudent everything seemed to be OK yesterday, but Compliance Officer step; however, even more effort also because there is no definite checklist and Member of the given on a customer’s or a deal’s evaluation. Management Board at is going to be needed in order to So every bank needs to assess the risk on Citadele Bank advance in that direction. Uldis its own and make the decision about each Upenieks and Juris Bogdanovs, transaction going through it. What does the the two co-chairs of the Finance business model look like? Who benefits Latvia Association’s Compliance from it? Where are the cargo deliveries go- ing? If they are going to countries close to or and Control Committee, have bordering countries under sanctions, what come together to give important is the risk of this deal being just the middle insights into the topic. part of a chain that ends in non-compli- ance? And questions of this kind just keep Ensuring the highest standards of compli- piling up. There are three types of sanc- ance throughout the financial sector, and tions: national, international and extrater- the sustainable development of the industry ritorial, and they can be measures against and the whole Latvian economy is only pos- certain persons or companies, or even sible through joint effort. Something that is against whole sectors of an economy. As Juris Bogdanovs, often not understood is that comprehending managing them is extremely complicated, Co-chair of the Finance and complying with sanctions and ensur- it is advisable for companies working with Latvia Association ing efficient KYC procedures is not only international clients to have a sanctions of- Compliance and the responsibility of banks ​— ​in the process ficer or at least to outsource this function Control Committee, of anti-laundering and countering terror- to competent parties. For companies the Head of GSI ism financing all parties must be involved, risk is enormous ​— ​for example, a shipped Investigations in Latvia including companies, clients and govern- order can never be paid, as such a transfer and member of the mental institutions. Yes, this asks for more would be blocked due to suspicion of non- Management Board resources from all these parties, and asks compliance. So, it is advisable for compa- at Swedbank Latvia these parties to once again reconsider the nies to talk to their bank before entering risk appetites, business focus and strategic into a deal, just to make sure the bank is stance of the industry participants. We are satisfied with the client’s understanding fully determined and committed to fighting and the logic behind the compliance. financial crime and protecting the integrity of the financial system while serving our To shell or not to shell? economy and customers in good standing. What are shell companies and why do they We are aware that this will require a con- get so much attention? Companies regis- stantly evolving level of legal and compli- tered across the world ​— ​even in so-called ance sophistication, since, sadly, all kinds offshore zones ​— ​can be created for abso- of “bad guys” ​— ​criminals, cartel members, lutely legitimate reasons. Companies that terrorists ​— ​are also striving to keep up have a real business facility and activity, Finance in Latvia § 1 — 7 —

In October 2017 the Finance that produce or trade things, pay taxes and due diligence and such clients’ risk as- Latvia Association Council regularly submit the reports, have nothing sessment might take too much resources. approved a document on to worry about. However, those that fail to So, if a client is unwilling to de-risk their self-regulation of the indus- provide convincing evidence of at least two business model, a bank might refuse to try ​— ​Policy Guidance and of these activities will have banking services provide services to them. Guidelines on Anti-Money discontinued due to presenting a high risk Much of the ongoing practical debate Laundering, Countering of tax evasion and incompliance. For any between the corporate and banking sectors Terrorism Financing and En- financial institution, transparency of their boils down to putting substance over form forcement of Sanctions to corporate clients is one of the top priorities. or form over substance in both the compa- ensure that in the next two And most companies based in Latvia really nies’ and the banks’ decision-making proc- to three years members have nothing to worry about. It is interna- ess. For example, should Office of Foreign of the Association reach tional corporate clients that need to make Assets Control’s (OFAC) sanctions only be the highest international an additional effort and ensure full coopera- complied with in deals using US dollars as standards in preventing and tion with their respective banks. a currency? The Association’s stance on this combating financial crime. It is clear: all sanctions have to be complied is important to mention that Assessing and handling risks with in all currencies. That is, when mak- the new policy established This is where the need for stronger KYC ing a decision to invoke the ‘comply or ex- a principle of zero tolerance and client research practices comes in plain’ principle, the drivers of the decision for infringements of the law again. There is no practical checklist in should be the highest ethical standards and and illegal activities, and this case either, so it’s every bank’s respon- the interests of the public and the financial committed to strengthen- sibility to demonstrate enough caution to sector as a whole, instead of the profit mo- ing active cooperation ensure compliance. These principles are tive. This is the only approach that will en- with governmental institu- not new — ​it has always been essential sure long-term sustainability on the market tions and law enforcement for banks to know their clients and their for any financial services provider. authorities. While the ad- clients’ business. What has changed is the herence to the principles responsibility for thoroughness, and the Coming closer for cooperation stated in the guidelines is tolerance to the level of money launder- There has been a need for closer coopera- voluntary for the members, ing risk a client might present. There are tion between the banking and governmen- and some industry partici- various risk parameters banks work with: tal sectors in information sharing for a pants may disagree with the the client’s business model; sources of in- long time, and a lot has changed since early Association’s position, it vestment and ultimate beneficial owners; 2017 — ​a time when dialogue between the is clear that active internal nature of their markets; business partners; parties was rather inactive. The Financial re-structuring has started, suppliers and clients ​— ​also, atypically large Intelligence Unit has been established and and that the companies, transfers or payments by persons other its role reassessed to ensure more proac- which are here to stay, have than company customers will certainly tive, committed and cooperative work. At already accepted the new draw attention from the bank ​— ​all that can the same time, meetings between the banks rules of the game. be roughly summarised as risk created by a and the State Revenue Service are now client, by the markets they work in, by the held regularly, promising visible results. products or services they produce or use, There are three tiers to this cooperation: and by the supply channels they employ. the exchange of views and information, A financial institution has to com- information sharing using the Joint Money plete enhanced due diligence on its client Laundering Intelligence Taskforce (JMLIT) within 45 days of the moment when trig- model, and, finally, installing a special gers for such a review arise. In this case a framework regarding taxes. client must be willing to cooperate quickly The Association-approved AML/CFT enough and to the fullness of its capac- policy and guidelines clearly describe the ity. For corporate clients it is also impor- standards and the additional procedures tant to realise that for a bank to provide that need to be introduced in the industry. services to a business model that raises And it is certain that over the next few years many red flags on its internal compliance banks will continue to strengthen their dashboard might be too expensive, only internal control systems and train staff in activities required to conduct enhanced order to reach the common goal. ● LEGAL EXCHANGE — 8 —

The new General Data Protection Regulation: Making it work

It has been a few Myth 1: The GDPR is an unnecessary Myth 3: There are no cases in which months since May, when additional burden on organisations processing personal data without General Data Protection This is a common misunderstanding, and consent is lawful is usually based on an awareness that there This could not be further from the truth Regulation (GDPR) were already strict data protection laws in if consent is the right lawful basis for became applicable, and place across Europe. Then why was imple- processing. In fact, consent constitutes speculation about its menting the GDPR and spending all these one of the six lawful bases for process- impact was at fever pitch. resources necessary? Actually, the GDPR is ing, from which banks more often use For Latvian financial not a revolution but rather a necessary reg- only four. That is why clients’ data can be ulatory upgrade, harmonising the key regu- processed and stored without consent. services providers, no lations that had existed for almost twenty This is the case, most frequently, when drastic change took years. Those companies which already had the law imposes an obligation to process place ​— ​the industry’s effective data governance and management data. For example, if there are reasons to level of personal data processes in place did not need that much suspect that a client might be involved in protection for clients has more to be done in order to be ready for fraudulent actions or unlawful activities, the GDPR. Many of the key components of their data can be transferred to third par- always been high here. personal data protection remain the same: ties within the framework of anti-money However, despite the lawfulness, transparency, fairness, accu- laundering activities. In such cases, the wide publicity for many racy, security, confidentiality, and respect data subject’s right to be forgotten does months before the GDPR for the rights of the individual whose data not apply either. Another case when per- became applicable, many is being processed. What is new is that the sonal data is necessary for entering into GDPR adjusts the regulation to the digital or performance of a contract with the other companies still age and harmonises requirements across client — ​for example, loan agreement. Per- came to that milestone all EU member states. sonal data can also be processed when it is unprepared. And for necessary to pursue the legitimate interest most, it is their way of Myth 2: It’s all about (giant) fines of the controller. For instance, in order to thinking about their The GDPR is not about punishing or- ensure service quality assurance and proof ganisations; it is about preparing them of transactions, banks may record phone clients’ personal data for dealing with security vulnerabilities calls with their clients. and its value which has and raising the level of protection for to change first. Some of personal data across the whole region. It Myth 4: If a company has a process the fundamental truths is understandable for organisations to be for consent management in place, about the GDPR are still taken aback by the hefty potential fines, it is fully GDPR compliant as the regulation envisages monetary It is a common belief that a customer misunderstood. fines of up to 4% of total worldwide an- putting a tick on a webpage, giving consent nual turnover. However, an administrative to their data processing, makes a company fine is just the final step in a long proc- fully GDPR compliant. As mentioned above ess designed to understand the nature, in Myth 3, in addition to consent there are scope and cause of the violation by a data some other lawful bases. So, the regulation controller or processor. Not every personal touches upon far more issues than simply data breach will result in a fine, and it’s complying with the requirement for con- definitely not the case that every fine will sent. It calls for re-evaluation of the whole be of the maximum possible amount. So philosophy of data security management focusing on this aspect would mean miss- by companies. One should start with an ing the true point of the new regulation. audit in order to understand the amount of Moreover, loss of reputation and customer personal data, what is being gathered and confidence is a much greater threat to a why. Then an organisation can thoroughly company than a fine imposed by the data work out and implement internal data protection authority. So in order to work protection procedures. These should in- successfully within the new regulation, a clude provisions for protecting data by de- company should make data privacy and sign and by default, for protecting personal security a part of their mindset. data if it is being transferred outside the Finance in Latvia § 1 — 9 —

EU, and allow customers to exercise their resonate widely. Yet there are often less rights with regards to their data, including notorious cases of data theft or loss, the right of access. due to a simple human factor, although this doesn’t make the consequences of Myth 5: The GDPR is a set of rules harmo­ breaches of this kind any less painful for nised throughout the EU, so if an organisa­ customers. The General Data Protection tion is compliant in one country it is com­ Regulation makes provisions not only for pliant in all EU countries technical and organisational measures While this was certainly the hope go- that need to be taken by organisations Veronika Sajadova, ing into the process of creating the new to protect their customers’ data against Co-chair of the Finance regulation, it didn’t quite work out that breaches, but also requires them to take Latvia Association way. The member states did not agree on actions that would make breaches of this GDPR working group, all aspects of the regulation and were al- kind less damaging, such as storing older Data protection officer lowed to add special rules. Currently there data in an anonymised way, not storing at Swedbank Latvia are more than 50 of them ​— ​the most data without a clear purpose, and paying prominent are related to the processing of special attention to health data and other employee data. So Latvian organisations sensitive information. For the banks, the GDPR operating outside of Latvia must acquaint was mostly an adjustment themselves with each country’s specific Myth 8: The GDPR is just an IT issue of their processes and pro- rules and laws and have sufficient flexibil- Not exactly. And this relates not just to the cedures to the new regula- ity in the technology and processes they GDPR, but to data protection as a whole. tory requirement. Still, it use to comply with all of them. This is a pie to be eaten from both ends — ​ demanded a great deal of enhancing the data security hygiene and hard work from us. In order Myth 6: It applies only to EU companies the technical ability to withstand a breach to form good practice and The GDPR has an extraterritorial scope, on one side, and having the undivided at- ease the financial industry’s which means that it would also apply to a tention of the management to the matter preparation for the new company located outside of the EU offering on the other. Because if the head of an or- requirements, in 2017 the services and goods to individuals in the EU. ganisation doesn’t care about it, an IT spe- Finance Latvia Association For example, the GDPR would apply to a cialist will care even less. In fact, the GDPR developed and approved US company selling textiles from its online specifically forces organisations to work the Guidelines for Imple- platform to customers in the EU. Moreover, interdepartmentally to ensure compliance. mentation of the GDPR the regulation applies not only to custom- In order to fully understand the flow of with the aim of promoting ers, but also to an organisation’s employees data, where it originates and where it is go- a single approach in imple- in the EU. It is important to note that it also ing to be stored and why, information from menting it throughout the applies if a company is just monitoring the multiple departments is required. Thus, whole sector. If we take behaviour of individuals in the EU, even if the whole organisation should be trained Swedbank’s case, prepara- the data is not being stored permanently and be aware of the best practice in order to tion for the GDPR meant not (such as a research firm). Similarly, the meet stringent requirements. only training about 2000 GDPR continues to ensure that personal employees, but also the data transfers to non-EU countries are pos- Myth 9: GDPR compliance is revision of 5000 coopera- sible, as was the case under the previous focused on a fixed point in time tion agreements, as banks, legislation, subject to specific provisions One should be prepared for the GDPR being data controllers, are and circumstances ​— ​​for example, the bind- compliance to be an ongoing journey; it responsible for the whole ing corporate rules. definitely didn’t end on May 25th. The data processing chain. So GDPR requir­es ongoing effort, continu- it was extremely important Myth 7: The GDPR is mainly to prepare ous training and changing organisations’ that the companies we against external cyber security incidents mindset about processing and storing cus- were working with were Stories like the Cambridge Analytica data tomers’ data as the markets and data en- guided by the same princi- scandal or the data breach of the sports vironments change. It is a long-term and ples and sense of responsi- company Under Armour’s app MyFitness­ cyclic work for enhancing and maintaining bility as we were. Pal, in which around 150 million users’ trust from customers ​— ​something which data was stolen, make headlines and is hard to gain, and so easy to lose. ● READING FUTURE — 10 —

Looking into the future of tech on the crossroads of hype and hope

Ten years after the financial crisis another challenge is lurking ahead — ​new technologies. Some of them have the potential to disrupt the financial system again, reshaping completely its relationship with governments and customers alike. But will this happen? The answers to many questions are still uncertain. Finance in Latvia § 1 — 11 —

The future of financial tech- Picking up the speed Ding-dong! It has been recognised that there is a need nologies has been among to move from the situation where every company stands for itself towards an ecosys- the central topics of discus- tem economy, where everyone who has been proved to be of value can participate sion for the Latvian financial and profit from what one is doing best. Bigger institutions need not only to ensure sector this year. It started exponentially faster growth and adaptability, but also to deliver real value to the end building up in 2017 with the customer. Because today the challenge is not about technology and figuring out its submission of proposals applicability — ​​​technology is not a goal in itself. It is much more about sustainability, to the European Commis- customer trust and proving that a new business model can run for decades, not just sion (EC) by Latvia’s financial for the current moment. Maybe that’s why the revolutionary tagline “in few years industry associations and there will be no banks and FinTechs will take over” which was on the tongues of later with the Finance Latvia many analysts and businesspeople a few years ago, is not heard much these days. Association’s approval of Banks are still there with their aura of tradition and prudence. But what should be the Open Digital Finance definitely gone by now is slowness and reluctance to engage in change — ​​this is Framework, which has the something that no company working in the financial sector today can afford. ambitious goal of bringing Latvia to the forefront of So what’s the plan? March 8th, 2018 was marked by a special event, which open digital finance in the was covered extensively not only by traditional media, but also enthusiastically EU by the end of 2022. shared across social networks by FinTech start-ups, industry enthusiasts and any- one excited by new opportunities. The European Commission unveiled details of Early this year the topic was its nineteen-step FinTech Action Plan to promote the digital transformation of the followed by expert discus- financial services sector. The initiative had long been awaited by all member states, sions about the regulation and NGOs of the financial sector in many countries, including Latvia, had submit- of remote identification ted their proposals for it last year. And with the launch earlier this year of the EU and onboarding, as well Blockchain Observatory & Forum by the European Commission, we can hope to as about the overall vision become fully equipped to make Europe a single market with rapid advances in new for the financial industry as technologies, such as blockchain, artificial intelligence and cloud services — ​​a safe such. And some time after market and one that is easily accessible for consumers, investors, banks and new that Valdis Dombrovskis, market players alike. Vice-President of the EC, These steps are especially welcome because the USA and China have taken their presented to the Baltic finan- financial technology markets so far ahead of Europe. It is anticipated that it won’t cial industry the EC’s Action be long before they decide to come and compete for the European financial services Plan on Financial Technology, consumer market. “The rapid advance of FinTech is driving structural changes in which lifts the curtain on the the financial sector. In such a fast-moving environment, overly prescriptive and EU’s set of priorities for the precipitous regulation carries the risk of undesired outcomes. However, there are near future. In this article, also risks that refraining from updating policy and regulatory frameworks may place we give you a picture of the EU financial service providers at a disadvantage in an increasingly global market. most hotly debated issues. There is also the possibility, for example in the case of cyber security, that key risks remain unaddressed,” states the communication from the Commission about the action plan.

Sandboxes and crowdfunding Among many other activities this year, the Commission will host the EU FinTech Laboratory, where European and national authorities will engage with tech providers in a neutral, non-commercial space dur- ing targeted sessions on specific innovations. It is planned that a comprehensive strategy on distributed ledger technology and blockchain will be worked out, ad- dressing all sectors of the economy. Additionally, the tech providers will consult on how best to promote the digitisation of information published by listed companies in Europe and how to connect national databases using innovative technologies, which should give investors far easier access to key information required for their investment decisions. Workshops will be run to improve information-sharing in the field of cybersecurity, and, finally, the Commission will present a blueprint for best practice regarding regulatory sandboxes, based on guidance from European supervisory authorities. Regulatory sandboxes are gaining popularity, mostly in de- veloped financial markets. This term refers to a regulatory framework that allows FinTech startups and other innovators to conduct live experiments in a controlled environment, under the supervision of a regulator. At the same time the Commission has outlined new rules that will promote growth in crowdfunding platforms across the EU’s single market. Crowdfunding is currently underdeveloped in the EU when compared to other major world economies. Once adopted, the proposed regulation will allow platforms to offer their services READING FUTURE — 12 —

across the EU on a single base of regulations regarding information disclosure, governance and risk management, as well as a coherent approach to supervision. Crowdfunding will improve access to funding, especially for start-ups and other small businesses.

And who will be leading the way? What all this means for banks is that they have to step up their game and move faster, embarking on a fundamental transformation. Developing and implementing everything in-house and taking six months to say yes or no to an idea doesn’t work anymore. Baltic banks already have a good track record of working with FinTech startups, making them integral part- ners — ​​testing, analysing and embedding new products into the bank’s ecosystem and customer’s interface. The financial sector is now all about becoming even more intuitive and all-encompassing. The market is crowded and nobody is waiting for cli- ents to come to them. Sooner rather than later, supportive and easy-to-use customer services won’t suffice on their own anymore and the question to ask will be not “where should a customer click next?”, but “who will do the clicking instead of the customer?”. This is where AI and robo-assistants come on the scene. And banks who have gathered so much data about customers’ financial behaviour over the years are in a good place to take the lead in bringing personalisation to a whole new level. At the end of the day, it doesn’t matter to the end user what channel the service is supplied through, as long as it brings value and is simple enough to use. It’s so much easier to maintain one relationship (with a bank) than a dozen (with payment companies, wallets, investment services, analytics apps and others) and so having your smartphone screen crowded with endless app icons. And those companies that are able to make themselves trusted information operators now will be at the wheel, deciding which product to add or not to add. And those who control the interface will also control relationships with customers, as well as the end price — ​​and thus have much higher earning potential.

The transformation of competition Digitisation is nothing new; we have seen it advance for about five decades now. But further developments call for another kind of competition in the market. Banks no longer look at FinTechs as companies which will eat their lunch, but instead see them as companies which could help them to strengthen their position on the market. Working with FinTech startups might not be the most predictable process in the world, but in order to create a cus- tomer-driven ecosystem, the inflow of new ideas is vital. As the creation of sandboxes and, eventually, new regulation should open doors for untapped opportunities and for testing and embedding new products influenced by new technology, we should be able to look forward to lower banking costs and the creation of more convenient services with enhanced accessibility. However, banks are not only looking out for new ideas. Initiatives such as technology labs, investing in prototypes, and idea-

“To compete globally, Europe’s innovative companies need access to capital, space to experiment and scale to grow. This is the premise for our FinTech Action Plan. An EU crowdfunding licence would help crowdfunding platforms scale up (…) and match investors and com­ panies from all over the EU, giving more opportunities for firms and entrepreneurs to pitch their ideas to a wider base of funders.” ​— ​Valdis Dombrovskis, Vice-President of the EC (Brussels, March 8th, 2018) Finance in Latvia § 1 — 13 — Photo: Audiovisual services of European Commission European of services Audiovisual Photo:

In his speech during the “Future of Financial Technology in the Baltics and the EU” event, Valdis Dombrovskis noted that, according to the World Economic Forum, Latvia, Lithuania and Estonia are all in the top 7 in Europe for entrepreneurship and innovation. READING FUTURE — 14 —

“I see blockchain as a game changer and I want Europe to be at the forefront of its development. We need to establish the right enabling environment ​— ​a Digital Single Market for blockchain so that all citizens can benefit, instead of a patchwork of initiatives. The EU Blockchain Observatory and Forum is an important step in that direction.” ​ — Mariya Gabriel, EU Commissioner for the Digital Economy and Society (Brussels, February 1st, 2018)

pitching channels for employees are coming to life in banks in the Baltics as well. Moreover, successful measures to get employees into that entrepreneurial mindset and promote innovation culture might become instrumental in competing among the interface-holders. Recognising the need for quality development rather than physical expansion, some financial institutions are putting a cap on the number of employees, and some are reducing the number of branches they have, encouraging customers to use online and mobile banking.

All eyes are on blockchain But which one of the many new technologies will be the one to cause a snowball effect and win it all? Many of the hopes are concentrated on blockchain. Last year, Accenture Consulting calculated and published potential cost savings for a so-called High Performance Investment Bank Model, which would fully embrace and integrate blockchain technology (Banking on Blockchain. A value analysis for investment banks.). The report claims that, on average, estimated potential sav- ings will be around 30% annually, and adds that “at this stage, these estimates could prove conservative.” “Blockchain is challenging industry players to fundamentally reimagine their data-sharing processes. There is no turning back,” state the authors. The technology, they predict, will influence all areas — ​from business operations to compliance, financial reporting and centralised operations like onboarding. Another analysis looking at investments in FinTech (The Pulse of FinTech Q2 published in 2017 by KPMG) also documents a growing interest in blockchain, stating that it “remains a catalytic force in FinTech innovation.” Both the financial and governmental sectors are increasing their investments and efforts to be on top of the latest blockchain de- velopments, and “the diversity of blockchain prototypes and pilot projects appear to have grown exponentially.” However, there are still many unresolved questions (like how blockchains are going to communicate with each other, what the implications for compliance are, etc.), which results in lack of implemented production systems. “Over the next few quarters, there needs to be a shift from proving the technical capabilities of blockchain prototypes to proving that blockchain can create value by transforming different organisational functions,” theKPMG report concludes.

There are no safe bets One cannot perfectly predict the future of the financial sector — ​it is created through hard work, experiments and listening to customers. And if a company strives to grow by embracing new technology, this aspiration de- mands a high level of dedication and prioritisation. “We think nowadays it is impera- tive that also in banking services one should be able to introduce innovations as fast as in FinTech,” said the Technology Development Director of a Latvia-based bank, having just launched ‘all the bank in one’ app with extended functionality, Face ID and Touch ID for authorisation — ​which all took just 10 months to develop. “During the course of development we thought and worked not like a bank but as a FinTech company,” he added. And we look forward to more agile thinking and dedication of this kind quickly becoming a new standard in the Baltic financial sector. ● Finance in Latvia § 1 — 15 —

Luminor: working like a FinTech The Baltic states are an exciting place to be right now if you are part of the financial services sector. While previously one would Dmitrijs Latiševs, think of New York, London and Frankfurt Jevgenijs Kazanins, Member of the Finance as the hubs for financial innovation, the Head of Daily Banking Latvia Association next wave of innovation might actually Products at Luminor Supervisory Board, Chairman of the Board take place in the Baltic region, with money and Executive Committee, transfers, peer-to-peer lending and the CEO at BlueOrange application of blockchain being the main areas in which Baltic FinTech startups excel. The rapid development of Limitations create opportunities One might find it ironic, but in the con- technologies has fostered text of cooperation between FinTech companies and local banks, it is the limitation changes in the financial in- of the Baltic financial market that creates unique opportunities for both parties. dustry: from classical institu- For innovative projects, cooperation with banks forms a unique kick off platform tions banks have evolved that helps to prove the value of their business model, and afterwards to expand to into platforms for meet- other markets. And for banks, it gives more freedom, agility and potential for in- ing their clients’ financial novation ​— ​we don’t have to invent everything from scratch ourselves. Commercial needs. Today banks must banks in the Baltics have always been the front runners of digitalisation and now be safe, fast and flexible; they are fully embracing Open Banking. Openness of the society, higher business they should be able to offer flexibility arising from smaller scale, as well as limited heritage of legacy systems their services and financial and processes, allow the banks to deliver innovations at extremely fast pace. In solutions anywhere and any a way banks in the Baltics were made to try harder, so they are more willing to time. Remote authentication review their procedures in order to successfully work with FinTech companies. and remote services are There is a strong interest in the industry in cooperation of this sort, and Luminor among the most up-to-date is no exception in this respect. Understanding the shifts in customer behaviour, solutions for this issue. For now that the formula “need a financial service? go to your bank!” doesn’t work instance, in the spring of anymore, Luminor last year included data intelligence, the integration of innova- 2018 BlueOrange became tion and improving customer experience through cooperation with FinTechs into the first online bank in Latvia its strategic development plan. We are already actively working in these directions, to receive permission to preparing efficient integration infrastructure, and reviewing and negotiating with perform customer onboard- numerous FinTech projects. ing using a remote or online authentication process ​— ​a Spotting the innovation momentum There are several challenges on the process which allows us to way to truly getting the hang of working with FinTech companies. And here we offer online services to a aren’t even talking about IT, but rather about banks’ internal organisation and pro- much broader range of resi- cedures. First and foremost, how should you choose a new partner? A lot of good dents of Latvia: individuals new ideas die without funding, as already established projects are safer to work with. anywhere in the world. We However, they do not offer the precious innovation momentum that brings greater believe that, with the tech- value later on. And working with ideas which are not even on the market yet is nologies being developed, riskier than working with established ideas, and a bank has to evaluate and consider the possibilities offered these risks. In each case such decisions should be made rather sooner than later, so by banks will become ever we are reviewing our standardised procedures and trying to be more flexible. wider, which will further promote healthy competi- The main challenge and advantage is speed When a project is finally cho- tion and also positively in- sen, the next challenge is to quickly introduce it to the market. If there is a problem fluence the range of options of being slow, it will always be on a bank’s side ​— ​​never on the side of the FinTech available to clients. company. So we learn from and adopt their proven practices to work more quickly and in a more proficient manner.Luminor has practically merged its daily products department with IT, forming agile cross-functional teams. For any company, the process of restructuring and modernising organisational structures and internal processes can be hard and even painful at times. So you can’t make it without power- ful drive and determination ​— ​​and this is what we have at Luminor. ● TALKING FUTURE — 16 — Cooperating with robots

How technology will bring humanity closer together, the growing importance of creativity and how banking will look like in a few decades — these are just some of the questions touched upon by two of the most sophisticated digital banking gurus in the Baltics, Ģirts Bērziņš and Iļja Nogičevs in their fireside chat. Let’s join them. Finance in Latvia § 1 — 17 —

How is artificial intelligence (AI) specific tool and getting results that are understood in banks today? already structured, like “your custom- Ģirts Bērziņš It’s a buzzword. Today in ers are complaining about this, this banking everything is based on data; it’s and that. And if you fix this and that, a non-material service — ​money and cash your results will be much better.” Previ- are already a secondary stage. So AI can be ously there’d be a few operators trying applied pretty much everywhere; there are to do all the data entry and analysis by no limits. If I look into the future, I see that themselves, which takes ages. That’s there may not be just one robot working my understanding of the AI applica- Ģirts Bērziņš, with all the customers, but each customer tions which currently exist. The next Co-chair of the Finance will have their own virtual assistant (VA) or stage is machine learning. How do you Latvia Association robo-private-banker looking after them, and train an algorithm and how will this Digital Transformation knowing about their particular spending, algorithm be capable of training itself? Committee, Member and about their lifestyle and habits. So, in- And then the last one: the output, and of the Board, Head of stead of relying on mass marketing and try- how to bring it to the customer. Either Strategy, Digital Banking ing to sell stuff, virtual assistants will make it’s via some sort of hint to the person at Swedbank AB customers want to buy stuff by giving them who is serving the customer, or it’s via advice. Here, trust is the most important a chatbot or VA. And here it’s actually “I believe the future thing, as customers will have to trust that up to the customer to say “no, I’d like will come to life much their VA is working in their best interest. to speak to somebody, but I’d like that faster than we think now. And maybe your personal assistant will tell to be somebody human-ish.” Because as yet we’re still you that it is in your best interest to go and dependent on the tools buy this product from a competitor of your ĢB You are right. I just think the challenge that customers have. bank. Because for your particular need it’s lies in how we think about the development However, AI will be built much better — ​and since it’s your trusted of AI, as we tend to only think about it from into the world outside. So advisor telling you this, you would do it. And the perspective of what we know today. the infrastructure is ready.” from the open banking perspective, this is the most crucial thing banks need to under- Making the most of one’s personality stand: that you may need to give something ĢB Our chat is being recorded at the mo- up, but you will gain much more back in the ment, but imagine if it wasn’t just tran- shape of trust — ​the more trust you have, scribed into text straight away, but that it the more business you can do. was also adapted by AI or your VA to fit exactly its reader’s personality. We know that Iļja Nogičevs I totally agree with what humans differ: some are visual types, and you just said. For me it’s important to for them maybe it’s better to convert a text know where I can turn if I have a ques- into an info-graph or a picture. Others like tion to ask. And I feel that this is the bullet points and PowerPoint presentations. status we’ll be fighting for — ​to be the And some might like formulae! AI will in- one you come to with a specific ques- dividualise services. By the way, this is how tion. And it’s OK if you are not selected humanity started; there wasn’t any mass Iļja Nogičevs, for all the services your customers production of one-size-fits-all products. And Co-chair of the Finance need. I was also thinking about wheth- I think of this as maximising human capac- Latvia Association er AI is just a buzzword or not, and ity, in a good way. Not squeezing people out, Digital Transformation now I actually decided that it’s rather a but boosting their personality. And think Committee, Head of long-term trend. Talking about it from wider than banking — ​your individualised Digital Development a more primitive perspective: it’s just robo-teacher or enhanced doctor with im- at SEB bank robots mimicking humans, and it’s mediate access to a vast amount of data already been there for some years. For and research. Imagine now that you have a “Yes, it will be nothing like example, when a customer sends an in- choice between using a regular doctor or an what we have now. Yes, surance agreement including extensive AI-enhanced one. I think that before long we should definitely think terms and conditions for their insured you will come to prefer the latter. about how it might be, mortgage, we have a machine to read and also think about what it and put it into the system. It’s al- IN Again, my thinking is: ‘step by would be the baby steps.” ready up and working, and we’re quite step’. There will be nothing like what good at things like this. Text, voice and we have now tomorrow. Yes, we should speech recognition, this is the basic definitely think about how it might stuff, but what about understanding be, but also think about what the baby unstructured data? For example, we’re steps will be to get there. And maybe getting information from all these I am too cautious, but I would say that, questionnaires and putting them into a in order for us to succeed, there are a TALKING FUTURE — 18 —

lot of things that need to be prepared or cally advanced customers stop at the point at least done in parallel. I’m thinking where they need support. And then the gap here about legislation. And as banks we between the experience of helpline support are regulated quite differently, so we and an instantly responsive VA is enormous. cannot do things like that at the snap Self-service has raised the customer’s expec- of a finger. One can buy a company or tations to a level that they now think every- services, which then would be integrat- thing should be instant. AI will help solve ed into a bank’s offer but then there is this problem. the question of the legal burden — ​who is doing that? Is it you, or is somebody IN I agree that this is true with regards doing it for you? to basic products like daily banking. Still, if we are thinking about financing ĢB I can explain why I believe this shift will and investment, I have a strong feeling come to life much faster than we think it will that customers are not ready yet to get at the moment. Because in implementing this instant advice. This also may be a better self-service, we’re still dependent on question of perception — ​why I am pay- the tools that customers have. However, AI ing so much if this takes so little time? will be built into the world outside. So, the Customers tend to perceive the process infrastructure is ready; it’s just a question of getting advice as more valuable if it is of use. Self-service will fully disappear after longer. So, I think that maybe it’s better some time, except maybe for those who still to put it just as assistance, not as a robo- would like to be in control. advisor.

… and the button which ĢB Yes, I was rather talking about customer shuts it all down support. But since you touched the topic IN And another thing AI can do: it of advisory services and sales, I think that can make you feel in control. selling financing, for example, will stop too. Nowadays payments are already built into ĢB That’s a good point, and I have one real-life situations — ​that’s the first banking example in mind. We all know that in the service which is disappearing. Today you world there are several boxes with special will use Taxify or other services — ​you just buttons that launch things. I think that in use it and your payment is made automat­ the future there will probably be only one ically. Because what the customer needs self-service button remaining… is not to make a payment, but to get a taxi ride. Also, customers don’t think of their IN ...the one which shuts everything needs as things like ‘a consumer loan’ or down. ‘a mortgage loan’, but as ‘a house’ or even ‘improving my life’. It’s obvious that with ĢB Yes, the one which stops everything. time financing will be built into situations Because I think that humanity will become that somebody who arranges the service extinct the moment it loses control. And this will take care of. That’s the thing — ​almost is a real-life example. We know that there all the services that banks provide today are companies that stopped AI projects are not primary needs of customers; they because the robots started speaking a are secondary needs. And in the future language that humans did not understand. such services will become invisible for the And that means you’re out of control. So, customer. Except, I’d say, advisory services. I hope that humanity will still manage to Advisory service is a first level need — ​how keep this ‘stop’ button. should I manage my finances in order to improve my situation? What is the future going to look like? ĢB I am quite sure that AI and VAs will IN I think this is a question for the come very soon, and that customers will customer: “how do you see interactions adapt to them quickly. And then it will dis- in your daily life?” Imagine that in the rupt the whole service industry because you future you come home from your vaca- suddenly won’t need to understand exactly tion, for example, and your fantastic VA how a service provider’s website works in says “I see that you’ve spent less than order to use the service, for example. And you thought you would. Would you like yes, for services where customers already to put the money left over into your sav- know what to do, self-service is brilliant. ings account, so your next vacation will But quite often, even the most technologi- be sooner, or so you can afford a fancier Finance in Latvia § 1 — 19 — Photo: Finance Latvia Association media archive media Association Latvia Finance Photo:

Ģirts Bērziņš (left) and Iļja Nogičevs (right) met on the premises of the Finance Latvia Association to talk about how AI is going to change the way we understand services, interaction and information flow, as well as how banking is going to transform over the next two decades. TALKING FUTURE — 20 —

hotel next time?” So, here I see our job ĢB A lot will happen in twenty years. And as being how to bring in more value. here one more thing we should consider in coming back to banking services — ​banking ĢB Well, maybe not in this stage but the services are invisibly interconnected. So, if next one, I think that AI will basically disrupt we want to meet our customers, we don’t how we understand all areas. Let’s take HR, always have to push our customers to come for example. Today HR strives to maximise to us. For most situations, they can be wher- value for each employee. In the future, each ever they are — ​Facebook, Amazon, etc. And employee will have a virtual HR assistant, banking just happens. Now customers have who will take care of their personal skillset. the feeling that banking happens only when You can’t efficiently develop skills for all customers interact with the bank (and at the employees from a central point. It’s in the moment this may still be true). But bank- hands of each individual employee. And now ing is moving away from this. In the past you’ll have a VA saying “look, there is this you visited a bank branch something like vacancy. Knowing your skills and strengths once a month or once a week, then banking it’s going to be a good opportunity, so now started happening daily via apps. But today let’s have this module of training…” banking is not even instant — ​it’s becoming constant. IN Or something like: “I feel like you’re lagging behind...” Will the Baltics become the next hub for innovation? ĢB Yeah, and “I know where you want to ĢB Will the Baltics be the next Silicon Val- be in your career in five years’ time. So you ley? No. It can be a chapter or it can plug should be more active in this area. Maybe into the ecosystem of another region. But go to this conference, learn that.” So, I think it’s just too small. And in terms of becom- that this will open up new opportunities, ing a part of something bigger, I think the which will maximise the human potential. outlook is rather good. Really finding a niche, like, for example, Tilde have done IN Because we’re used to thinking with small language technologies; I haven’t that AI will take our jobs, that it’s only seen anybody else in the world who has about cost reduction and stuff like that. progressed so far with this type of algo- But this is not how it works. The way rithms. But I think any company will start we’d like to see this is basically ‘how to have a problem if it decides to limit itself can we help’ — ​to help the customer or to here. They need to become part of some- the employee, or the nation itself. And thing bigger, a part of development of this from the perspective of a new customer, kind of AI on a larger scale and plug their what we’re talking about now is in fact developments into somebody else’s ecosys- already operational in HR — ​there is tem. So if this happens, then we will have technology that can understand your a bright future. behaviour remotely and from all the readings it takes interpret what you like IN I think we have a high level of or don’t like, what your preferences are. potential, as the customers and the Imagine the use of this technology from economy at large and the players on the a recruitment perspective. market are all ready to try, test and do this. The Baltics are a good playground ĢB I think that the recruitment process will (sorry, I don’t want to say Latvia — ​it’s become obsolete too, because if you have way too small). But as you said, it’s a your virtual HR assistant in the organisation very small playground. The only ques- you’re working in, the assistants from all tion is about the scalability perspec- the different organisations will agree among tive. It’s OK for trying out and testing, themselves what the best place for you is. but what’s the next step? If you don’t have this established, you can have a IN And it could be that your VA will say chapter, a hub or whatever, but what’s “Ģirts, now it’s time for you to work in next? Where will you take what you’ve another bank, because it’s a much better created and copy it on a different scale? workplace.” And our VA will say “do you For the bigger players like US and know about Ģirts? He’s kind of OK — ​ China, it’s kind of easier for them to do let’s take him.” And today it sounds like that. And here we don’t have a strong a joke. But the question is: will it be a partner. Is it Europe? Is it the Nordic joke in twenty years? countries? Maybe, I don’t know. ● Finance in Latvia § 1 — 21 —

Ģirts Bērziņš The more humanity invests in robots, the more people come closer to each other. Because there will come a time when we don’t need to solve small technical tasks anymore. Then humanity will need to solve creative challenges. And for creativity people will need to move closer. I think that creativity is the next step after Industry 4.0. Yes, today AI can compose music, but it composes it based on the past. It’s too much synthesised. The next frontier will be to disrupt true creativity.

Iļja Nogičevs Customers need to feel like they are the key and that the bank is doing the boring work for them while in many cases staying invisible. However sometimes they would still like human interaction. We can create a super virtual assistant who will know where to invest and what your risk tolerance is, but one still should remember — ​ let’s start from single and simple things and build up trust. And it is our job to make clients’ lives better, to assist them in taking the right decision. INSIDE OUT — 22 —

On the Inside out pages, banks share information about their projects and ideas, introduce new personalities and talk about pressing issues in

the sector. Everybody is welcome to read and discover the life of Latvian banks — ​the life which goes on behind the sleek front- end office. In this issue we will talk about the largest service centre in Latvia; financial literacy and banks’ contribution to society; supporting businesses through financing; cooperating with FinTechs; and the future of private banking.

Photos: corporate media archives of SEB bank, PrivatBank, Swedbank, BlueOrange and Signet Bank INSIDE OUT Finance in Latvia § 1 — 23 —

SEB Global Services: Fostering a culture of innovation

SEB Global Services, a company within the SEB Group which provides high- Having grown many quality services for SEB Group customers and has business divisions at times over since its twenty sites all over the world, was the first centre in the banking sector establishment in in Latvia established with the intention to grow into a Global Business 2006, SEB Global Service Centre (GBSC). Today, after more than twelve years of operation, Services is still it is one of the largest and well-established global service centres in the displaying rapid country, employing more than 500 people. With a unique onboarding development and and mentoring programme, SEB Global Services is a great place for the has ambitious plans development of raw talent, encouraging a culture of continuous innovation for the future. and operational excellence — ​it is a fantastic opportunity for graduates to gain international work experience while remaining in Latvia. The deputy head of the company, Alesja Kirčenko (in the photo), notes about the company’s culture: “Open-minded, ready to learn and develop — ​ that is the profile that new employees who we immediately click with have. Fostering innovation within the organisation is in the DNA of our company culture — ​when doing any task we always ask ourselves how we can go about it more efficiently.” AsGBSC s are becoming one of the priority sectors for development in Latvia, SEB Global Services is looking for more opportunities and quality growth on the local market, in areas such as banking and finance operations, risk, compliance,IT and automation. EXCELLENCE INSIDE OUT — 24 —

PrivatBank: Promoting and investing in financial literacy

This year the JuniorBank School celebrated its fourteenth graduating Since 2011, when class. The students not only learnt the basics of economics, but also the financial literacy acquired practical skills in handling money, financial discipline and programme was drawing up a budget. Kids of eight to fifteen years can sign up absolutely established with free, and learn from PrivatBank experts in Latvian or Russian. the support of Anna Svarena, the Head of the JuniorBank School, says: “Some of PrivatBank, almost our first programme graduates have already finished high school and 1000 students in Riga, are studying further, dreaming of a career in banking or management, Liepaja, Rezekne and some even aspire to open their own business. JuniorBank School’s and Daugavpils have popularity among schoolchildren is an indication of how important both learnt essential skills kids and their parents consider an education in the modern world of in finance. finance to be.” She adds: “An understanding about finance and money is slowly growing in children, and it is even advised to impart the first knowledge about it at the age of three. Our school is a great opportunity to broaden kids’ horizons and understanding about the world.” KNOWLEDGE Finance in Latvia § 1 — 25 —

Norvik Bank: Holacracy — ​ developing an entrepreneurial mindset throughout the business

In this knowledge-based economy, traditional management hierarchies are TRENDS showing their limitations. When this is combined with dynamically changing technology, the challenges to current management theory are significant. At the same time, having an entirely ‘flat’ organisational structure with unclear responsibilities for people in the team may seem too relaxed. In this light, let’s take a look at Holacracy — ​the middle ground in organisational structures, with well-defined roles, while still maintaining a peer-to-peer atmosphere and culture.

Holacracy is a management theory built around ensuring that personnel are autonomous and self-reliant, without ignoring the greater whole of which they are part. This helps to reduce administrative functions and internal bureaucracy, without harming productivity and efficiency. The key to success with Holacracy is based on its constitution that is elaborated on its homepage (www.holacracy.org) and in numerous research books on this topic (Brian J. Robertson. Holacracy: The New Management System for a Rapidly Changing World. 2015). The first article in the Constitution — ​“Energising Roles” — ​explains the overall approach. One of the key steps is defining ‘roles’ within the organisation, and ensuring autonomy of execution for each role. A role can be one-to-one, many-to-one or one-to-many in terms of people executing the actions defined in that role. An employee is not defined by their job title or job description in this approach, but can dynamically Text by Oliver move between roles over time. This provides fluidity and dynamism, and helps Bramwell, CFA, keep people permanently motivated by new challenges. Take a look at the Holac- CAMS, Chairman racy website for more details, and consider to what extent this new approach to of the Board at management can be implemented in your organisation. Norvik Bank together withFinTechs next generation services Swedbank: ambitious accelerator programme is set to begin this fall, creating a space where together with companies are continuing to work on collaboration and piloting ideas first accelerator programme graduated in June this year and several the first FinTech accelerator programme inThe the Baltic countries. ecosystem of the Baltics. It is also the home of a chance to introduce innovation culture whilst supporting the startup work actively on their own business ideas at one of the most views spectacular of the Old Town. Startup companies Swedbank’s Riga headquarters is home to space DoBe, with a co-creation collaboration opportunities for FinTechs on a wider scale. What’s more, which has been so far joined by over 1400 developers, With the launch of wanting to build next generation banking services together. the more bank points connection between and FinTech companies As Open Banking continues to build momentum, there will be many extensive experience of experts from all its home markets, and grow their business thanks to the FINTECH INSIDE OUT INSIDE B2B Swedbank. After such success in the first round, the second FinTech companies can learn from leading Swedbank’s Open Banking platform last autumn, Startup Wise GuysStartup in acceleration programmes. Building Swedbank, giving the bank Wise Guys Fintech Swedbank opened Swedbank — 26 — ​ home markets. four in customers sevenmillion than more its for banking build thefuture of to companies FinTech with together working is Swedbank Finance in Latvia § 1 — 27 — INITIATIVE

SEB bank: Financial literacy starts in schools

In 2015, SEB bank Latvia started its tradition of visiting schools to teach In the last three years high-school students about financial literacy and smart ways of money SEB professionals management. Later colleagues from Lithuania and Estonia also joined have visited 500 the initiative. In total during this time SEB employees have visited 500 schools in the Baltics, schools in all three Baltic countries. “Every year between 50 and 70 giving over 1000 colleagues voluntarily take part in the initiative in each country. They lessons on financial gladly share their knowledge and experience with young people, offering literacy to more than not only theoretical knowledge but also their personal experience. 21 000 kids. Furthermore, the youngsters are very responsive as an audience — ​they are knowledgeable, interested and actively participate in discussions. I’m really happy when students ask me questions about how to properly save money or share their thoughts about the pension system — ​we see that the young generation is thinking long-term, which is a good basis for us to create a developed and prosperous country together,” says Ieva Tetere (in the photo), Chairwoman of the Board at SEB bank, who also visits schools and meets young students every year. INSIDE OUT — 28 —

BlueOrange: Bank financing as a fundamental for business

BlueOrange Bank has many years of experience in lending and trade A strong economy is financing. Among our clients are local and international entrepreneurs shaped by successful who are engaged in the import and export of goods via Latvian businesses. Our ports. They use the ports’ infrastructure and services of the logistics bank’s long-term companies, thus increasing the amount of cargo going through Baltic objective is to seaports. At the same time, we grant loans to large-scale companies that facilitate this successfully develop their production activities in Latvia. We support common growth. transport and logistics companies in Latvia, in this way helping them to compete with international enterprises and further increase domestic cargo turnover thanks to their growth, as well as promoting the export of Latvian goods, developing infrastructure and at the same time creating new jobs in the Latvian transit sector. The support offered byBlueOrange to sectors such as consumer goods and food manufacturing, the metal and wood industries, and transport and logistics, as well as real estate development, has facilitated the growth of both medium and large-scale businesses. In the last five years the total sum of loans granted has grown by 4.5 times and in 2018 it is planned to grant financing of up to 100 million euros. The bank is planning to keep on working in this direction, developing trade financing services and granting loans to transport and logistics companies, producers of goods and international businesses working in other sectors, which efficiently use bank financing and develop their businesses, thus adding value to Latvia’s job market and economy as a whole. DEVELOPMENT Finance in Latvia § 1 — 29 —

Signet Bank: The future of private banking in the age of tech

Private banking is much more than just finance. It is about interconnected relationships between a RELATIONSHIPS client and a bank driven by a mutual goal to be successful, so that the client receives financial solution exactly tailored to his or her real needs.

That’s why I think that in the 21st century, when Roberts Idelsons, technological development has changed our perception the Chairman of the of ourselves and of the world around us to an Board at Signet Bank unprecedented extent, as well as revolutionising global competition by introducing rapid-growing client service tools, personal interaction and the ability to listen closely to a client’s needs will be no less valuable and crucial than the newest technology solutions. In capital management we often face non-standard situations, and to solve them it’s important not only to answer the client’s questions about ‘how’, but also to look deeper and answer ‘why’, ‘for what purpose’ and ‘whether’? In order to offer the most suitable solution for capital preservation and growth, one can’t replace this exchange of information only with robots and other technological solutions. In the future there will undeniably be a specific range of products that will be based on AI. However, while technology and figures present a rational outlook, a person’s decision-making process includes emotions. And if we can be available in order to support and advise on these decisions, we are ready to do so anytime, including beyond the internet or telephone zone of coverage. IN PERSPECTIVE — 30 —

Lending index in the private sector: Growth and responsible lending

At the beginning of this Development of the lending sector results loans taken out by a borrower both from year the Finance Latvia from supply and demand synergy with financial institutions and other licensed Association presented the government handling the broad set of lenders when evaluating their ability to factors in the middle. The level of lending repay a new loan. This would eliminate its own lending index, is directly correlated to the overall state situations in which a person is able to which analyses fourteen of the economy and the most important simultaneously take or receive a loan different indicators, task at hand for the government, and for from several enterprises at the time when integrating the most the Parliament of Latvia (the Saeima), is to commitments for previous loans are not significant aspects foster its growth using the instruments at yet met. At the moment, the law does not their disposal. It was this field in specific envisage a direct duty or possibilities for related to the banks’ where the Finance Latvia Association took a lender to evaluate all other loans given willingness and ability an active part in advancing important to a borrower; it is left to the discretion of to lend, as well as initiatives for more responsible lending. each lender. And so far this approach has borrowers’ willingness This year the Finance Sector’s Develop- not proved itself to be successful. and ability to take out ment Council established a workgroup Second, it is of vital importance to under the umbrella of Ministry of Finance decrease the barriers to information loans. The index has with the aim of developing, by September exchange between the banking sector and observed rapid growth 1st, a range of suggestions for fostering non-bank financial sector. At the moment of lending in the private more responsible consumer lending lenders in these sectors are not allowed sector over the last three and reducing the extent of the informal to share information about borrowers’ years. It has attested economy. The complex of draft laws successfully repaid loans. An informa- and suggestions developed and jointly tion flow of this kind could be organised economic growth, submitted for consideration to the Saeima through a credit information bureau or as well as residents’ by the Ministry of Economics of Latvia a similar body within or regulated by ability to borrow for in cooperation with the Association, and the Bank of Latvia. The third suggestion their needs and banks’ by the Ministry of Finance and deputies is to make insolvency proceeding from readiness to lend. of the Saeima this year already includes 2000 to 5000 euros without debtor’s measures such as significantly decreasing assets being disposed of available to the Despite this, people are the interest rate ceiling for daily lending disadvantaged groups. At the moment, to still cautious: the ability and setting 0.07% as the maximum rate initiate proceedings of this kind is only to borrow in the private allowed, and widening the scope of the possible starting from 5000 euros and sector in general is Credit Register by including lenders li- involves expenses of around 1200 euros. higher than the desire censed by the Consumer Rights Protection Ways of decreasing expenses should also Centre, as well as imposing limitations on be discussed and anticipated. to do so. What does remote short-term lending. Finally, the application of a single this mean and how can In 2016 over 1.1 million cases were approach to the credit risk management this period of stability handed over to debt collector companies tools for financial institutions and be used for further for further pursuance. Such a high other licensed lenders is essential. At development? number of debtors struggling to keep up the moment all the lenders working in with loan payments creates systematic the private sectors are supervised and motivation for such borrowers to look for licensed by the Financial and Capital possibilities to receive their salaries in Market Commission (FCMC), and other ways that encourage the development of lenders are overseen by the Consumer the informal economy. That is why the Rights Protection Centre. However, the Association’s suggestions on strengthen- Association’s position is that, with regard ing the principles of responsible lending to credit risk management, a single legal were principally concerned with disad- framework would be more efficient. Such vantaged borrowers. an approach would exclude the applica- The suggestions developed by the tion of arbitration courts in the sphere of Association mainly concern four issues. consumer rights protection and is a good The first one is the importance of tak- example of preventing the fragmentation ing into account the whole scope of the of market regulation. Finance in Latvia § 1 — 31 —

1 Banks’ ability to lend 2 Banks’ willingness to lend (intermediate index) (intermediate index)

115 115 111.02 110 110 105 102.71 105 100 99.30 100 10 0 95.81 10 0 95 95 90 90 85 85 Kārlis Danēvičs, ...... Co-chair of the Finance 0 0 Latvia Association 2015 2016 2017 2015 2016 2017 Lending Committee, Member of the Board at SEB bank 3 People’s ability to borrow 4 People’s willingness to borrow (intermediate index) (intermediate index)

Lending in the private 115 115 108.16 110 sector showed stable 110 105 105 102.21 growth: it outpaced last 100 99.97 100 year’s index figures, mark- 10 0 97.18 10 0 ing a 4 percentage point 95 95 improvement — ​the sharp- 90 90 est increase in the last 3 85 85 years. When compared ...... with 2016, results in 2017 0 0 2015 2016 2017 2015 2016 2017 show a steeper increase in people’s ability to borrow (+8%). However, willing- 5 Lending in the private ness to borrow has not sector (resulting index)* grown as fast (+2 %). In a 115 country where pessimism * The Lending index is a unique 110 prevails, nobody is willing 104.30 and complex measure used in the 105 to take on additional debt 99.79 100 private lending sector. It measures 10 0 and invest. This leads to both the willingness and the abil- 95 an economy with limited ity to borrow of Latvian custom- 90 development. If the mood ers, as well as the willingness and 85 is too optimistic, it can lead ability of banks to lend. Fourteen ... to the economy overheat- different measurements are taken 0 ing. So, lending is like a bal- into account, including delays in 2015 2016 2017 ance wheel — ​it can quickly payment, changes in the unem- pull the economy up or just ployment level, proportional share as quickly pull it down. To of the informal economy, financial keep society’s mood in a More initiatives are expected to follow data from the banking sector, state of cautious optimism on the topic from governmental bodies consumer sentiment, etc., thus is a huge challenge that and deputies. It is now clearly understood providing a complete picture of the government and banks that in order to ensure the development lending — ​the propelling force of need to address. Today of a long-term lending environment, the economy. The Lending index Latvia is on the right path, further improvements are needed both has been developed in coopera- no shocks are anticipated. concerning the process of loan granting tion with leading Latvian lending and the whole life of the loan until its full and economic experts by analys- repayment. ● ing world best practice. EVENTS — 32 — 2O18

January 10 March 9 April 10 Pan Baltic event Approval of proposals Forum “Pension savings: “A Nordic vision of for several legislative Trends and challenges” the financial industry” amendments A discussion with the participation The Finance Latvia Association, Working towards effective self- of representatives from govern- the Association of Lithuanian regulation for the industry, the mental bodies, the banking and Banks and the Estonian Banking Finance Latvia Association Coun- insurance sectors, and the Asso- Association, organised a Baltic- cil approved the policy and guide- ciation about the structure of pen- level event in Stockholm, Sweden lines on anti-money laundering, sion savings, as well as upcoming with more than 40 participants counter-terrorist financing and challenges and ways to solve them. to share experience of FinTech sanctions compliance. implementation. April 19 March 23 Financial literacy day for What’s up What’s January 26 An international discussion the winners of the panel Discussion on the future “The future of Financial game “European Money regulation of remote Technology in the Baltics Quiz” from Ogre electronic identification and the EU” with the The European Banking Federation and onboarding participation of Valdis initiative for schoolchildren, or- The Association, in collaboration Dombrovskis ganised in cooperation with bank- with Cobalt Latvia, the University The discussion on the European ing associations in 30 countries of Latvia and Microsoft Innova- Commission’s initiatives on Fin- with the aim of promoting finan- tion Centre, organised an expert Tech was organised by the three cial literacy among young people. discussion to showcase the digital Baltic banking associations. On the day, the top three achievers onboarding solutions that are enjoyed a day-long programme of already in use by financial sector financial literacy atSEB finance players in some EU countries, and March 26 centre in Valdlauči. discuss what it takes to achieve Seminar about daily compliance with the global AML/ digital processes in banks, CFT standards. financial technologies April 26 and innovations Signing the “Memorandum The seminar was targeted at the of Cooperation for the February 1 employees of the Ministry of Jus- development of Global Lending index presented by tice to acquaint them with the dig- Business Service Centres” Finance Latvia Association ital reality in the banking sector. The Ministry of Economics of Presentation of the latest results the Republic of Latvia, Riga City of the Lending index — ​the first Council and the Investment and all-encompassing measure of April 4 Development Agency of Latvia; the interaction between lending Decision to set up an and the National Alliance of Real growth trends and Latvia’s eco- Advisory Group for Estate Developers, the Finance nomic situation. Managing Change in Latvia Association and the Foreign the Financial Sector of Investors’ Council in Latvia, sign a Latvia, and Coordinated Memorandum of Cooperation and February 2 Communication commit to the action plan for fur- Approval of Guidelines During the meeting with the ther development of Global Busi- for implementation Association and heads of the ness Service Centres in Latvia. of the GDPR largest banking groups, the The Guidelines were developed Prime Minister of Latvia, Māris by the Association’s GDPR work- Kučinskis agreed to the estab- April 26 ing group, in cooperation with its lishment of the Advisory Group Workshop: Cooperation Legal, Compliance and Internal for Managing Change in the between entrepreneurs Audit committees. Financial Sector of Latvia. and banks Finance in Latvia § 1 — 33 —

A meeting of more than 60 September 11−13 making bodies and the broad- Latvian entrepreneurs was or- Services and Outsourcing er public, and given the sensitivity ganised by the Association in Week 2018 (Vilnius) of the financial services sector, cooperation with the Employers’ The autumn edition of Europe’s the EBF Cybersecurity Confer- Confederation of Latvia and the number one shared services and ence aims to facilitate dialogue Latvian Chamber of Commerce outsourcing event. Offering a rich between the involved parties and and Industry. programme and over 70 inspira- exchange of expertise on the chal- tional speakers talking on digital lenges faced by banks. transformation, data analytics, May 17 retention and millennial engage- Accepting ten new ment, among other topics. October– associated members November Ten new associated members ACAMS Baltic Chapter joined the Association. It is de- September 26−27 event (Riga) clared it now also welcomes Fin- Digital Finance Europe An international-level event fo- Techs and companies in related and European Banking cusing on public-private, public-

industries to join the organisation. next What’s Summit 2018 (Brussels) public and private-private partner- The European Banking Federa- ships in fighting financial crime. tion (EBF) and B-Hive present June 14−15 this event with speakers from EU Riga Compliance Forum institutions, regulators, financial November 28−29 The Association cooperated with professionals and innovators who Conference on Invest­ experts from Temple Grange Part­ will discuss the latest transforma- ment, Technological ners and Consortix in hosting an tion of finance,AI , FinTech col- Transformation and Skills event to ensure the implemen- laboration and regulatory impact. (Luxembourg) tation of the highest AML/CFT “Financing Growth” is the theme This high-level event, co-organ- compliance standards, and of the for the summit. The key focus ised by the European Investment OFAC sanctions in particular. will be the role of banks in financ- Bank and European Central ing the economy, as well as the Bank with the cooperation of challenges and opportunities for the Massachusetts Institute of August 9 Europe in the coming years. Technology, Columbia University Workshop “Blockchain in and the European Monetary and the financial industry — Finance Forum will provide a future perspectives in October platform for leading academics, EU and Baltics” Professional courses at policy-makers and practitioners The Association together with RTU Riga Business School to share their views and knowl- the EC Representation in Latvia The Certified Anti-Money-Laun- edge of investment finance and and Eversheds Sutherland Bitāns dering Specialist’s (CAMS) course competitiveness. Law Office organised a discussion (6 weeks), The Chartered Insti- amongst policymakers and expe- tute for Securities & Investment’s rienced practitioners on the fu- (CISI) courses “Fundamentals of November 30− ture of blockchain in the financial Financial Services” (7 weeks) and December 1 industry from the EU and Baltic “International Introduction to In- Digital Freedom perspective (over 80 attendees). vestment” (8 weeks) at RTU Riga Festival (Riga) The regulation “Procedure and Business School. At the Digital Freedom Festival, scope of remote identification to which the Association is con- performed by a subject of the tributing as a content partner, Law on the Prevention of Money October 17 around a thousand participants Laundering and Terrorism Fi- The EBF Cybersecurity will discuss the latest trends in nancing” which came into force Conference (Brussels) tech, their impact on startups and on July 6th was also introduced In the context of an interest in cy- corporations, on policymaking during this Baltic-level event. bersecurity by regulators, policy- and modern lifestyles. HIDDEN TREASURE — 34 — The song must go on media archive media Swedbank Photo:

This year, when Latvia celebrates its 100th birthday, Swedbank In the photo young sportsmen introduced the app DzieDot designed to ensure that the from the Mītava rugby club singing will go on for generations to come. Now everyone can master singing using the learn to sing and practise popular Latvian folk songs in chorus, voice game app DzieDot. while the app will select a section based on the singer’s voice and play supporting voices for a more confident performance. And, yes, now everyone can make a stylish music video too!

Find in this issue:

A drive to transparency 4 Making the new GDPR work 6 Comprehending disruption 8 Cooperating with robots 14 Lending index 28

& Inside out 20