With new EU regulations coming into effect, Fintech sector eager to expand

For the last decade, Fintechs and other non-bank companies across Europe, including Latvia are emerging and gaining market share of the financial services sector. The European Union (EU) revised Payment Services Directive (PSD2) will come into effect in 2018, further fostering competition to traditional banks. The new directive has a wide scope and a large impact on banking. For retail banks it could mean extra costs to implement the directive and potentially a negative effect on the current revenue streams, as PSD2 will allow customers to choose third-party providers to manage their finances. Simply put, the banks will have to give up their long-standing exclusivity on their customer’s payment services and account information. This brings numerous opportunities for the Fintech sector in Europe. For service providers and banks it will mean both more opportunities and potential business risks. A number of Latvian Fintech companies with an international presence are getting their feet in the door and are ready to take on these opportunities.

PSD2 will benefit companies that provide innovative products and comply with high security requirements. Riga-based e-invoicing and financial process automation services company Fitek with over 1000 business clients in Northern Europe is strongly advocating changes and working on improvements in financial services area in Baltic and Nordic countries. “As we see it, the marketplace for financial services will expand dramatically. Geographic boundaries will start to disappear and Fintech companies will be able to offer their product for large number of customers all across EU,” anticipates Fitek’s Managing Director Edgars Strazds. He believes the real winners will be consumers of banking services with access to faster and more personalised products for a lower price.

At this stage, there is an uncertainty of how different aspects of the directive will be incorporated in national laws across EU. This includes the anti-money laundering (AML) and know your customer (KYC) procedures.  Moreover, it is difficult to predict how long will it take for banks to comply with the draft technical standards that are subject to approval in the final version. “The revised directive could bring significant improvements for customers in the usability and speed of delivery channels for financial services coming from both banks and innovative financial service providers,” agrees Mārtiņš Kalniņš, a co-founder and CEO of the mobile payment service company Monea. He, among other Latvian Fintech companies, sees PSD2 as an opportunity to challenge the traditional banking.

​​PSD2, combined with the new Start-up Law in Latvia that provisions a special tax regime for start-ups, make Latvia very attractive for new ventures in the Fintech sector. The new directive has been much anticipated by Latvian Fintech startup community. For ​financial security start-ups like Notakey, this will create a new demand for strong authentication. For peer-to-peer lending platforms like Mintos, Twino and Viventor, this will mean greater transparency and more access to customer banking history to understand more about their customers and offer them more affordable financial products. “For us at Nordigen, more open banking APIs (application programming interface) means more demand for transaction data analytics products. Our next big challenge is how to scale our solution to be able to service all the growing demand,” concludes Roberts Bernāns, co-founder and Head of Development. Nordigen helps banks and non-bank companies improve their credit score systems via automated transaction categorisation.

In addition to the PSD2 coming into force in 2018, the European Commission has just initiated a public discussion of the possibility to decrease regulatory requirements for Fintech sector. Such changes could potentially result in EU passport​ing​ rights allowing Fintech companies to expand across borders and operate freely in the EU's single market. In the future, London could potentially lose it’s edge as the European Fintech hub. In which case, Fintech companies might relocate to other countries in EU with a well developed ecosystem for Fintech. Latvia’s startup environment provides an unparalleled mix of reasonable startup costs, access to international entrepreneurial talent and capital, startup friendly regulation and excellent geographical connections. The country is ripe for further expansion of the Fintech sector, and it welcomes Fintech companies looking to start or relocate to an EU country.

Toms Zvidriņš, Head of the Representative Office in the USA
Investment and Development Agency of Latvia