Navigating the digital wave – Citi exclusive interview
Marine Krasovska, Director of financial innovation department, FCMC, offers key insights into the Latvia-based fintech landscape

Could you please share some details regarding your professional journey and your role at the Financial and Capital Market Commission?

I was co-founder of a European fintech company focusing on SME crowdlending when I got a message that FCMC is developing its fintech sector. Launching a fintech and collaborating with other tech companies gave me hope that the fintech industry has huge business potential and supportive regulation might be the engine for further development. Besides, I have accumulated huge experience in banking, leading development directions in product development, lending, SME development and corporate strategy in top Baltic banks. I joined FCMC at the end of 2020 when the new Financial Innovation Department has been established. 

Fintech development is one of the FCMC priorities. The major goal of the Financial Innovation Department (FID) among supervision role, is to contribute to the development of financial technologies and fintech environment in Latvia. We support fintech companies in any stage of development, consulting in licensing, regulation, supervision processes. Our target is to reduce barriers to innovations by providing professional expertise in the areas of payments, crowdfunding platform operations, crypto assets. We help market participants to improve their understanding of business continuity aspects, ICT and cyber-risks management. Another focus of FID is the implementation and development of SupTech and RegTech solutions, to make the FCMC supervision process more modern, digital, and automatic. 

To support fintechs and facilitate innovations we have launched two instruments: Innovation Hub and Regulatory Sandbox. The Innovation Hub is a place for payment institutions and other FinTechs, InsurTech, RegTechs to get professional advice regarding licensing, regulation, legislation, or any consultancy.

A Regulatory Sandbox is a place where fintechs whose activities require an FCMC license may test innovative financial products or business models following a specific testing plan agreed with the FCMC. In June 2021, a first participant of FCMC Regulatory Sandbox has completed the tests of financial solutions that would be used in banking to automatize transaction monitoring in the AML area. The demand for regtech technologies is growing worldwide. 

How would you describe the fintech ecosystem in Latvia? 

Latvia is one of the most popular fintech destinations and startup-friendly countries in the world by Index Ventures. Latvia-based fintechs are not limited geographically and establish companies worldwide in Switzerland, Africa, UK, Asia in lending, payment, asset management areas.

Low costs, access to local banking infrastructure, fundraising and getting an FCMC payment (PI, EMI) license to operate throughout Europe are some of the benefits offered to Latvia-based companies.

Besides licensing, the Latvia-based fintech ecosystem provides other significant elements. First, anyone may get a StartUp visa in one month and enjoy the easy reallocation procedure developed by the Latvia-based Investment and Development Agency. Secondly, Latvia has an attractive tax regime for startups: when reinvesting the profit, the income tax rate is ‘0’. Thirdly, the Latvia-based startup ecosystem is improved by stock options regulation, now fintechs can give away their shares to employees to attract skilled tech talents. The main target of Latvia-based stock options regulation is providing advantages to companies: motivation boost for employees by increasing own wealth with company value, increase engagement and enjoy tax-free remuneration tool and lower tax if law requirements are met.

Skilled people are the major strength of Latvia, accumulated in digital banking experience and IT services. This enables launching startups, that develop new financial solutions in payment, investment, lending and crypto business. Accounting, customers’ support services are the most popular back-office functions due to easy access to digital business infrastructure and human resources. The effect of such activities is the increasing trend in RegTech development. 

Despite these benefits, the Latvia-based FinTech Ecosystem still requires improvement. Answering this challenge, two initiatives are launched in the country: Startup law and FinTech strategy. 

The Latvia-based Startup Law now is more friendly by the unique tax regime that attracts the most talented programmers, designers, coders at low costs by fixing social tax payments. It means regardless of salary amount paid, combined with 0% individual income tax rate, the 340.90 EUR is your max tax payment per employee. In short, when a startup pays two min wages to employees it saves money. One more benefit of the law is 45% governmental support to co-finance high-quality specialists.

Major priorities of Latvia-based FinTech strategy are to decrease barriers for industry development, define directions and improvements according to global technological trends. FCMC, industry representatives, and the Ministry of Finance are working under strategy pillars and targets. Major elements of Latvia-based FinTech strategy are technology infrastructure, access to equity, access to talents and Latvia-based fintech branding. Friendly regulation also is one of the top elements among access to open data, payment infrastructure, and Sandboxes. 

What are some interesting growth segments in fintech? Which are the hottest fintechs in Latvia?

Currently, there are about 100 active fintech companies (among 400+ startups) that are operating in Latvia in various business segments, like payment institutions, lending services, investment platforms, crowdfunding platforms, data and analytics services. Financial software developers and IT companies, RegTech and SupTech are an integral part of the financial technology sector as well.

The structure of the fintech landscape is well diversified: payment & remittance, EMI, lending, investment services, RegTech and identity, blockchain, analytics, and Big Data. According to FCMC Innovation Hub statistics for Latvia, crowdfunding platforms and RegTech companies are major growth segments. We see an increased number of fintechs in compliance and risk management areas providing automating the KYC processes and anti-money laundering (AML) monitoring tools, thus saving time and resources for both financial sector participants and their customers. 

At the beginning of 2021, the interest in crowdfunding platform regulation and licencing has also significantly increased. Currently, the FCMC experts, together with colleagues from other EU regulators, are working on the drafting of technical standards for the regulation.

The hottest Latvia-based fintechs are recognised globally and well-known among individual and institutional investors are represented by investment firms. Mintos is a European P2P investment platform with EUR 6.7 billion investment volume; Altero, the most successful loan aggregator; Creamfinance in 15 counties and 4finance in 10 countries are specialising in consumer lending. Nordigen is the most successful Open Banking fintech, providing account information and transaction categorisation services in 31 countries, connecting more than 1000 banks via a PSD2 API platform. Bitfury, Twino, Viainvest, Crasula are also very successful fintech companies.

From your experiences working with the banking sector, which are the biggest hurdles banks have to take when digitising their business? What do banks in Latvia have on their agenda when it comes to innovation?

Access to large budgets and infrastructure make banks perfectionists maintaining functions, ensuring continuity, and working under several complex projects simultaneously thanks to well-structured process thinking. New banking solutions are implemented slower due to the complexity of old IT systems, multiple business focuses and compliance issues. Unfortunately, banks are less likely to take a risk of new tech implementation and are reluctant to collaboration with fintechs, despite the potential business opportunities. As a result, banking services stay standardised and are not responsive to individual customer needs. Fintechs are more focused on specific customer segments. Thus, payment institutions having technology partners are more successful in business without complex banking infrastructure.

A major part of the banking IT agenda is not necessarily focused on innovation, but compliance projects and the digitalisation of old processes. In my view, the reasons why banks are not adopting new technologies are: 1) lagging behind as entrepreneurs; 2) banks fear losing business to fintechs; 3) fragmented and completed IT systems; 4) long approvals, burdensome procedures; 5) reluctance in taking business risks and individual responsibilities.

Banks often forget that the fintechs are faster to adopt innovative technologies, and now, private or business customers can receive better financial service (accounts, cards, payments, loans, factoring, investments, FX, trading, etc) outside the banking sector.

Recently, FCMC concluded market research among financial sector participants in Latvia to observe how financial service providers are adopting new innovative solutions. Banks, insurance companies, investment brokerage firms, payment institutions, EMI, and other fintechs have contributed to this research by responding to the technologies they are now using or plan to use in future. Generally, the most popular technologies in the Latvia-based financial landscape are API (27%), contactless payments (19%), biometrics (16%), cloud services (15%), Big Data (6%), AI and ML (1%). Only 15 respondents from 125 indicated that they have special dedicated teams focusing on the development and adaption of innovations.

How do you see the role of banks (small and big) in the ever-changing payments landscape? What advice do you have for banks? 

Banks should move away from classic business models and put customer experience at the centre of the business strategy. I think that small banks with local capital should demonstrate more flexibility, more focus on UX, customisation, a little more courage concerning innovation, as they have all the instruments to reshape their business models. 

To stay afloat, big banks must allocate resources for the adoption of new technologies like blockchain and AI. Blockchain technology can accelerate payments in real-time and cross-border. FinTechs are actively adopting AI-based compliance tools for transition monitoring, customer onboarding, that are developed by RegTechs. By using old infrastructure, the banks will not be able to support innovations in payments, identity, and digital currencies. We truly encourage partnerships between banks and fintechs. 

By completing requirements (equal across the EU), such as the origin of funds, the reputation of the members of the board, beneficiaries, compliance with AML requirements, it takes just 3 months to obtain approval for a payment institution or EMI license in Latvia. That means that starting a payment business is easier than ever before: by using SaaS or banking-as-service solutions, you can launch a payment institution at the lowest development costs.

Of course, payment innovation is not without security risks, thus banks and payment institutions must pay greater attention to cybersecurity. 

About Marine Krasovska

Marine is banking professional, ex-cofounder in crowdlending Fintech company. Came to FCMC directly from industry with huge experience in financial sector working on leading positions in top Baltic banks: Luminor, DNB, SEB. She has heading corporate strategies in Luminor, Business solutions department, providing product development customers and SME banking in DNB. Launched new products and digitalizing services. Marine has managed corporates’ credit risks and lending process in SEB. Marine is curious and result oriented leader who likes bringing new ideas two solution, define strategy and applies positive problem attitude. In FCMC, Marine is responsible for supervision of PI/EMI and other FinTech companies and development of Fintech environment in a Latvia by improve regulation and providing support. Among others, responsible for ICT security supervision among financial institutions, and implementation of SupTech and RegTech solutions, to make supervision process more modern, digital and automatic.

About FCMC

FCMC is the national regulatory authority established in 2001 which promotes the stability, competitiveness, and development of the financial and capital markets, and protects customers’ interests. FCMC operations are governed by the Law on the FCMC. Major activities are prudential supervision, development of regulation methodology and analysis, protection of interests of depositors, development of fintech, licensing and authorization, prevention of financial crime and compliance with sanctions. FCMC also is responsible for promoting financial literacy in a country. The Board of the FCMC is composed of three members appointed by the Saeima of the Republic of Latvia. The activities of the FCMC are financed by financial and capital market participants.

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