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Crisis is a positive catalyst for Latvian Fintech’s Growth?

Crisis is a positive catalyst for Latvian Fintech’s Growth?

Published at Baltic Times

Latvia just celebrated 30 years after declaring the restoration of independence, during all these years Latvia has continued to play a role of a financial bridge. Only the direction of routes has changed: in the first 20 years of independence, the money flow was from the East (Ex-Soviet Union countries) to the West. Today it goes through Latvia to the rest of the world. Development of the financial sector created a strong foundation for the current status of Latvian Fintech. More than 50 banks existed, now locally they are less than 20. Accumulated capital employed tens of thousands of bankers and financial specialists who today are investors and managers in ambitious financial projects.  

Additionally, to banking legacy, four completely different factors might be mentioned for the rise in the Latvian FinTech Industry as it looks today. Firstly, it is the financial crisis of 2008 with the lack of lending both for natural and legal persons. Secondly, the current era of low (and even negative interest rates in Europe) with more than 10 billion of close to zero interest rate deposited in European banks. Thirdly, the boom of the crypto economy with its potential to become a replacement for fundraising and money transportation. And lastly, tectonic changes in AML regulations and supervision that resulted in the American FinCEN decision against ABLV bank and closure of some other non-resident banks with a simultaneous outflow of approximately EUR 8 billion from the Latvian Banking sector.

As a result, the current Fintech Landscape according to collected and analysed by Venture Faculty information (see Table) is saturated with 88 Fintech Companies and startups. From those, 23 are in the P2P lending and P2P crowdfunding, 17 Fintech Lenders, 21 Fintech payment solutions and SaaS companies, 11 operating in the field of blockchain technology and cryptocurrencies, 15 companies working in the sector of IT and Big Data for Fintech companies and lastly IPAS Indexo pension fund. The Latvian Fintech Ecosystem consists not only of companies registered or located in Latvia but also companies established by Latvian citizens and neighbouring country companies that play a significant role in Latvia or companies who provide their services only abroad.

There are 23 P2P platforms operating in Latvia, out of which Grupeer and BoldYield are currently on hold and some might even be involved in scandals of potential fraud. Latvian landscape platforms form almost 60% of the EUR P2P market share, approximating the total EUR market to be a bit over 11.22 billion EUR and holding approximately 300 million EUR in active funds in Latvian platforms – attractive investors from more than 50 countries worldwide (mainly German and other west European countries) and working with around hundreds of lending originators from East Asia to Latin America (but mainly from Eastern Europe). The biggest player in the EEA is the Latvian company Mintos that forms over 46% of the market and together with TWINO makes Latvia a kind of capital of P2P market.

Alternative lenders are main loan originators (See Table of P2P) for P2P platforms. The majority of them went into business after the 2008 crisis (as 4Fiannce, ViaSMS, TWINO).  In the current situation in Latvia (and similarly in many other countries), by the statistics of CRPC (consumer rights protection centre of Latvia) of the first half of 2019, there were 57 active non-banking lenders that have been issuing new loans and around 25 PDL issuers forming the total lent amount of almost 295 M  EUR in the first half of 2019.

The COVID-19 situation (lockdown, quarantine and boarders’ closure) is a new reality for the past 2 months and seems that it might become a catalyst that affects and even changes the direction of development of FinTech in Latvia.

Many active fintech companies are in the lending business with an emphasis on subprime (both microloans and installment products) who were active in worldwide expansion (and present in more than 30 countries). All of them are impacted by this situation of changes and creation of protective legislation. As an example, to help people in the current situation the Latvian Government due to the Covid-19 crisis has prolonged the period from which debt collection can be started from 21 to 60 days. As a lot of customers are simply unable to pay their debts on time or are asking for “debt repayment holidays” the lenders are in a dangerous position, as they have to cover their own obligations and fixed costs. The total amount of loans that are on “debt repayment holidays” have already exceeded 350M EUR, and the number is growing. Compliance issues and complexity of new loans issuing combined with lack of liquidity could hit them hard. It’s positive that Latvian fintech companies are flexible and agile, they have already shown their ability to make fast strategy modification in turbulent cases of legislation change.

The P2P hype has been up for a while but as loan originator customers are starting to struggle with paying back their loans, the P2P platform customers, who are investors, are having problems receiving and afterwards withdrawing their invested funds. Scarcity of the investors has created mass fear and a lot of investors are rushing to withdraw money from P2P platforms. Lately, the withdrawal period has stretched. P2P platforms have been reacting and introduced mechanisms in order to decrease the amount of withdrawals and to control the situation. Medium and small platforms have created a secondary market, offering current clients to resell their loans at a discount and increased the “buy back” periods of the loan originators at the same time increasing the overall interest rates to still attract new customers. The massive worry has been also connected with the latest scandals in the P2P industry. As the situation reveals possible scams, various P2P platforms have shut down or put their business on hold. Kuetzal and Envestio were the first of widely known platforms to be assumed not to work in the right manner, and that has damaged investor confidence in P2P. Afterwards, Monethera shut down  blaming the pandemic but they had issues earlier and lately are cutting the customer support and all communication. Only a short time later Grupeer started to face problems, so the investors were not and still are not able to take out their money from the platform. This doesn’t add confidence in P2P.

At the same time due to the latest scandals, the Baltic states are exposed to risk becoming famous for creating platforms that are fraudulent and that are significantly damaging honest players in the scene. The restoration of the reputation of the industry lies in the hands of the largest players, that being said, Mintos and Twino. The biggest players recently have made great PR efforts and have already been preparing for licencing for the Financial and Capital Market Commission and views that as a necessity. Nevertheless, the latest developments in this industry for sure will initiate stricter regulatory framework and supervision, licensing might bring new investors to the platform and transform the biggest platforms to be more successful than before.

With every day the situation gets more complicated.  The key question on which everything depends on is how long? And key things to follow for a better understanding of the future is government decisions on State Aid in the current situation. However, it’s clear that banks will finance less, consumer spending will decrease significantly, and the finance industry market will change as some of the players will not survive. As the banks most probably will decrease the amount of financing, new possibilities for alternative lenders will open up. For corporate financing some players such as Capitalia, Flexidea, Crowdestor and others are preparing themselves for it. As for private lending, at the end of this Covid-19 situation, the people's buying power will be lower, so they might not get loans for bigger purchases but PDL lenders will most probably see an increase in the demand.  The time to recover from the current situation is estimated from 12 to 18 months after the end of the virus spread. Companies that could provide innovative digital solutions for financial sector players will be in high demand.

One of the good effects of COVID-19 is the growth of businesses online: every company (from education to supermarket) wants to make money online. Processing, acquiring, settlements and different payment instruments are in high demand and Latvian Fintech companies based on not only Latvian licenses (various are registered in Lithuania and UK) are actively growing their volumes. This exponential growth is possible also because of IT solutions companies, for example Crassula during the past years developed advanced PSP gateway, core banking, electronic wallets and other fintech technologies. According to Crassula’s management spread information, the revenue growth of the first 4-month period of 2020 is up to 183% compared to the previous period.

Venture capital industry is currently on hold and observing, as a lot of things are not working. This is a good time when the investors can analyse what kind of businesses do not bear the problems arising from the crisis and which ideas are doing better than expected. As the world and business will change dramatically after the crisis the investors are waiting for new game-changing ideas. New startups will have problems attracting funds because surely there will be fewer investors after a crisis ready to invest their money with such a risk and, if the ideas will be similar to some startups or due to crisis failed businesses, it will be extra hard to convince the investors that the idea may succeed. However, Latvian companies entered this crisis more prepared than it was in 2008, many Fintech players accumulated capital and a network of funding partners that could support old companies  during the next year or two and invest into new entities.

It is hard to predict now the picture of Latvian Fintech Landscape but it is easy to understand that relaxed times are over and according to classic Darwin theory, only the strongest and adoptable will survive.  A lot is depending on the State Authorities willingness to support the economy. In order to minimize the economic harm of the crisis, Altum has declared that the total amount that they will be able to grant in order to help businesses is up to 200M euro.  Huge debt has been taken and a bad forecast for GDP decrease exists. . Government are pushed to find new direction of economy development. Meanwhile progressive banks and international players as Revolut might take part of Latvian Fintech businesses.  Because of it friendly attitude of FKTK  and Latvian Bank as new licenses issuing and supporting existing players,  is more than welcome to  assist to growth and development of Latvian Fintech companies, it accumulated  and has great potential.

Written By : Venture Faculty strategical partner Renat Lokomet (with assistance of Jēkabs Hugo Kisils ) and support of Crassula .