When the Financial Times revealed in May that a large chunk of the money that went missing from Wirecard weeks before its collapse may have passed through a Lithuanian payments company, it prompted an immediate reaction.
Across Europe, a disorderly queue quickly formed of those dying to say: “I told you so.” This included, but was by no means limited to, politicians in Berlin and Vilnius and regulators elsewhere on the continent.
The speed with which they jumped on the story was telling. Ever since Lithuania began inviting fintechs displaced from London by Brexit to relocate to Vilnius back in 2016, many have predicted that it would end in tears for reasons that are not entirely clear. As the number of fintechs in the country has multiplied – to more than 230 at the last count – so has the chorus of naysayers.
As the number of fintechs in the country has multiplied… so has the chorus of naysayers
Much of this unease seems to stem from a vague feeling that Lithuania will eventually get caught up in the money laundering scandals that have engulfed its northern neighbours, Latvia and Estonia.
This ignores the obvious fact that, unlike those two countries, Lithuania does not have a large Russian-speaking population and its banks have never based their business models on funnelling cash from the former Soviet Union into Europe, unlike the other Baltic states.
A more cogent criticism concerns the ability of Lithuania to cover the deposit insurance in the event of a fintech with a banking licence going bust. No one, after all, wants to see a repeat of the situation in Iceland in 2008. Then again, a eurozone-wide deposit insurance scheme is supposedly on the way.
Also, that argument doesn’t apply to payments firms such as UAB Finolita Unio, the fintech suspected by German prosecutors of channelling €100 million to Jan Marsalek, Wirecard’s former chief operating officer.
Concern
According to the FT, the concern here – apparently widespread among European banking regulators – is that Lithuania’s central bank does not have the resources to monitor the number of fintechs operating in the country.
Given that the regulator of Europe’s largest economy managed not only to miss the massive fraud at Wirecard, which may amount to as much as €1.9 billion, but also went into bat for the firm against investigative journalists, this seems slightly specious.
For the record, in 2019, the year before Wirecard’s collapse, German regulator BaFin had 2,722 employees and a budget of €382 million. Bank of Lithuania had around 600 staff members and a budget of €62 million.
Assuming those numbers have not changed dramatically, that would equate to 2.6 staff members per fintech in Lithuania versus 2.9 in Germany. Then again, those German staff also have to regulate 1,800 banks. Lithuania has 13 banks, of which eight are branches of foreign groups.
Of course, Bank of Lithuania has duties beside regulation – although not as many as before the country joined the eurozone in 2014. And Germany has 1,800 banks to Lithuania’s six.
Officials at the Lithuanian central bank also point out that they have turned down hundreds of applications for fintech licences – more than 100 in 2020 alone – and revoked 18 licences since 2018. They might have added that their specialization and experience with the sector makes them particularly well qualified to regulate it.
Will there be further scandals involving Lithuanian fintechs? Very possibly. But that will be because these are firms working at the cutting edge of finance with futuristic technology in a global market not because they are headquartered in Vilnius.
They could just as easily be in Berlin. In fact, on the evidence so far, they are more likely to be.
