In the past year, Latvia’s financial sector has gone through decisive changes, becoming less vulnerable to financial crime. But the new, more rigid regulations have led to a dead-end in our financial system – many businesses, especially from non-EU countries, find it very difficult to open bank accounts in Latvia. Is this situation a hurdle for the fintech industry or an opportunity?

In reaction to the assessment carried out by the Financial Action Task Force (FATF) and the threats to include Latvia in the so-called ‘grey list’ of high-risk money-laundering countries, Latvia’s financial sector has seen an overhaul and implementation of a new financial crime prevention system. In February 2020, these changes were praised by legislators as having restored Latvia’s reputation as a country that prevents terrorist and proliferation financiers from manipulating the state’s financial system for criminal gain.

Eight months later, we have gained a new perspective on the matter. While the government, Financial Intelligence Unit of Latvia, the Financial and Capital Market Commission (FCMC), banks, and many other involved parties have made a significant effort to free the country of systemic, large-scale money laundering risks, the financial sector is arguably facing new major challenges. The new stricter demands enforced upon banks have made Latvia’s commercial environment lose its competitiveness in the eyes of foreign businesses. Moreover, the growth of local businesses is halted as well.

Everyone admits the problem

Lately, even the politicians are starting to admit that the current approach from regulators is suffocating the financial sector. Latvia’s Defense Minister Artis Pabriks recently said that while it’s necessary to fight money laundering, the safety requirements enforced upon banks and, therefore, on their clients have become “exaggerated,” especially when it comes to businesses from non-EU countries. He pointed out that the Ministry’s non-EU defense partners who want to operate in Latvia feel unwelcome and held back. In the minister’s opinion, Latvia’s current financial legislation is “endangering every company that wants to invest in Latvia or import or export with non-EU countries.”

The president of Latvia Egils Levits has stated that the country needs to take a few steps back in the path it has taken this year:

“We cannot go back to the system that tolerated money laundering operations, but we also cannot disrupt the economy and enable a universal citizen monitoring mechanism. (..) We simply overreacted to the previous situation and took the measures too far.”

Presently this is a hot topic, and involved parties are still brainstorming about the possible solutions. There have been attempts to improve the situation, such as the conference “Banks in a changing world” that took place in September with many high-profile financial experts and political leaders participating.

The unwelcoming welcome of Belarusian companies to Latvia

At the moment, we see a real-life example of the absurd situation our financial system finds itself in. In August, reacting to the events in Belarus, the Investment and Development Agency of Latvia (LIAA) offered Belarusian businesses a ‘fast track’ relocation to Latvia. Several tech companies have shown interest in this offer; however, opening a bank account for the relocated Belarusian companies has proved to be an arduous task that could take up to one month.

While all the involved parties can see the irony of this situation, and the FCMC has agreed to revise this regulation, this process could take several months. Meanwhile, all we can do is express support to the Belarusian businesses and wish them the best of luck finding opportunities for relocating to a more forward-thinking country.

Trend: people choose fintech over banks

One might think that such loopholes could be an opportunity for licensed fintech companies that provide the service of opening bank accounts. But again – it’s not as easy as it sounds.

Unlike Lithuania, where such intermediary bank accounts are opened by the Central bank, in Latvia, this is done by commercial banks that aren’t always forthcoming to companies that they see as potential competitors. There have been promising fintech startups in the Latvian market trying to offer intermediary bank services, but their lifespan has been relatively short.

Presently, none of the P2P lending companies operating in Latvia have bank accounts in the top 3 Latvian banks. At TWINO we’ve also felt the reluctance of banks when it comes to opening accounts for fintech companies.

Ironically, we can see a trend that banks are losing their customers to fintech companies anyway. Not only are individuals and businesses choosing international fintech apps and services to open their bank accounts, but they also increasingly prefer non-bank lending services. Last year, alternative lenders issued 41 trillion in US dollars, while the loans issued by banks amounted to 38 trillion USD.

What’s next?

We can all agree that the financial sector required changes. The government, banks, and organizations that monitor financial operations have done an impressive job of freeing the country of large and systemic money laundering risks. We have turned this ugly page in our history, and now we can focus on other priorities like regaining the trust of investors and innovating the financial sector.

But the existing financial system regulation is arguably too strict and shortsighted. It poses a serious challenge not only to attracting foreign talent but also to local small and medium companies. What we can all look forward to is increased flexibility and moderation in how banks are allowed to pick their clients.

On a different note, the financial landscape is changing across the world, not only in Latvia. With the COVID-19 crisis reducing the value of assets, banks (especially European) have a reduced lending capacity. At the same time, people are increasingly willing to pay more for speedy and user-friendly services and thus go for smaller, more progressive financial providers. For these reasons, we are likely to see a shift in the power structure between traditional financial institutions and innovative fintech companies.