Last year, decisive changes took place in the Latvian financial sector, as a result of which it gained greater protection against financial crimes. However, the new, stricter regulation has brought our financial system to a standstill – it is very difficult for many companies, especially from non-EU countries, to open bank accounts in Latvia. Is this situation an obstacle or an opportunity for the financial technology industry?
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In response to the Financial Action Task Force (Financial Action Task Force or the FATF) and the threat to include Latvia in the so – called “gray list” alongside countries with a high money laundering risk, the Latvian financial sector has undergone a thorough rampage, including the introduction of a new financial crime prevention system. In February 2020 The legislators praised these changes because they had restored Latvia’s reputation as a country that does not allow terrorists of terrorism and proliferation to manipulate the state financial system in the name of criminal interests.
Eight months later, we have started to look at this issue from a different perspective. Although the government, the Latvian Financial Intelligence Service, The Financial and Capital Market Commission (FKTK), banks and many other stakeholders have made significant efforts to relieve the country of systemic, large – scale money laundering risks, and the financial sector is clearly facing new, serious challenges. Due to the new, stricter requirements imposed on banks, the Latvian business environment has lost its competitiveness in the eyes of foreign companies. In addition, the growth of local companies has thus been halted.
Everyone acknowledges the problem
Recently, even politicians are beginning to acknowledge that the current approach of regulators is strangling the financial sector. Minister of Defense of Latvia Artis Pabriks recently issued a statement, that, although there is a need to combat money laundering, the security requirements imposed on banks and thus on customers have become “exaggerated”, especially for companies from non – EU countries. He pointed out that the Ministry’s defense cooperation partners from non-EU countries who want to operate in Latvia feel that they are not expected here and create obstacles for them. According to the Minister, the current financial legal regulation of Latvia “threatens any company that wants to invest in Latvia or wants to engage in import or export with third countries”.
President of Latvia Egils Levits has indicatedthat the country needs to take a few steps back on the path it has chosen this year: “We need to get back on track, avoiding the money laundering machine that has been here so far, but without disrupting the economy or creating such a general citizen monitoring mechanism. .) We just reacted very strongly to their previous situation and shot a little over the strip. “
There is currently a heated debate on this topic and stakeholders are still considering possible solutions. There have been attempts to improve the situation, such as the “Banks in a Changing World” conference in September, which was attended by many high-profile financial experts and political leaders.
Unkind welcome of Belarusian companies in Latvia
We are now seeing a real-life example of the absurd situation in which our financial system has found itself. In August, in response to events in Belarus, Latvian Investment and Development Agency (LIAA) offered Belarusian companies “accelerated” relocation to Latvia. Several technology companies have shown interest in this offer, but opening a bank account for Belarusian companies that have come here has proved to be a difficult task, which takes up to one month.
Although all parties involved see the irony of this situation and the FCMC has agreed to review this regulation, the process may take several months. In the meantime, our only opportunity is to express our support for Belarusian companies and wish them success in finding opportunities to move to a more progressive country.
Trend: People choose financial technology companies over banks
One might think that such regulatory shortcomings could create an opportunity for licensed financial technology companies to provide bank account opening services – but here too it is not as easy as it sounds. Unlike in Lithuania, where such temporary bank accounts are opened by the Central Bank, in Latvia this is done by commercial banks, which are not always receptive to companies that see potential competitors. There have been promising financial technology start-ups in the Latvian market that have tried to offer intermediary banking services, but their life has proved to be quite short.
I would like to mention that currently none of the mutual loan platform (P2P) companies operating in Latvia have bank accounts in 3-5 largest Latvian banks. We at Twino have faced the reluctance of banks to open bank accounts for financial technology companies.
Ironically, there is a tendency for banks to lose their customers who choose financial technology companies. Individuals and legal entities are not only choosing international financial technology applications and services to open their bank accounts, but are also increasingly opting for non-bank lending services. Last year, alternative lenders issued 41 billion USD, while bank loans amounted to USD 38 billion.
What will happen next?
We all agree that change is needed in the financial sector. The government, banks and financial regulators have done impressive work to free the country from large-scale and systemic money laundering risks. We have turned this ugly page in our history and we can now focus on other priorities, such as regaining investor confidence and introducing innovative changes in the financial sector.
However, the current legal framework for the financial system is clearly too strict and short-sighted. This creates serious difficulties not only in attracting foreign talent, but also in local small and medium-sized enterprises. Therefore, in the future, we expect more flexibility and moderation in the way banks are allowed to choose their customers.
Turning to another topic, the financial environment is currently changing all over the world, not only in Latvia. The Covid-19 crisis is reducing the value of assets and banks (especially in Europe) have lost their lending capacity. At the same time, people are increasingly willing to pay more for fast and user-friendly service, so they turn to smaller, more advanced financial service providers. For these reasons, we are likely to see a change where innovative financial technology companies will gain more market power than traditional financial institutions.
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