In July, Marius Jurgilas, board member at the Bank of Lithuania, spoke to us about how Lithuania joined the fintech revolution, what makes it particularly attractive to fintech companies – and how he sees the role of central banks in the post-Covid-19 recovery. Given the current situation, however, we kicked off our interview with a couple of questions on the impact of Covid-19 on the economy, before turning to the main focus of the interview – how digital finance is changing the economy.

The Covid-19 pandemic represents an unprecedented global challenge. Some parts of Europe are still recovering from the 2008 financial crisis – how severe do you think the economic impact might be for the Eurozone economy?

Uncertainties abound, as there are many factors at play, including not only prospects of a second wave or the availability of a vaccine, but also the degree of the long-term scarring effects on the economy. While coming up with a specific point estimate is a guessing game, what we can say now with a sufficient degree of confidence is that by the end of 2021, the euro area GDP would still remain below the pre-crisis level. And the outlook is further darkened by the external environment: take, for instance, deteriorating prospects in a number of emerging markets where Covid-19 cases have been rising.

At this point in time, we do observe an uptick in economic activity and sentiment. Yet even the best-case scenario would be a U-shaped recovery, which is probably going to be uneven, both across sectors and across countries. Some countries may find it more difficult to creep back to the pre-crisis levels, perhaps due to dependency on tourism, slower phase-out of social distancing measures, or a relatively weaker fiscal response during the pandemic. An asymmetric recovery may reinforce some of the trends of divergence that we have seen after the global financial crisis. On the other hand, a strong recovery in other countries can generate positive spillovers across the Eurozone.

And how do you think the EU should respond? In particular, how do you see the role of central banks?                                

Unlike the previous crisis, this time the monetary and the fiscal policy in the euro area have acted in tandem. We have seen large-scale fiscal expansion led by Germany. All across the world central banks are expanding their balance sheets and augmenting their bond-buying programmes – not only in Europe, but even in the emerging economies. Central banks have not run out of ammunition to fight crises in the low interest rate environment – contrary to the prior fears.

On top of that, we are discussing a sizable common European fiscal response in the European Commission’s €750 billion Next Generation EU proposal. The EU-level response should be geared towards ensuring an even recovery across all of the euro area and the EU, allowing for a smooth transmission of the ECB’s monetary policy. Thus, the upcoming negotiations are crucial, as the devil is always in the details.

Lithuania and its capital Vilnius are fast becoming well-known hubs for fintech. Can you tell us how this came about?

It's no secret that financial services are undergoing great technological transformation. We have chosen to play an active role in this process.

Lithuania is now a number one jurisdiction for electronic money institutions in the European Union. More than one-sixth of European electronic money institutions are licensed by the Bank of Lithuania.

What was the key to success? We have an appealing narrative: policy changes in Lithuania created a more conducive ecosystem for innovative fintech companies to address their own challenges. Our businesses and consumers need faster, cheaper and more innovative financial services. We also need innovation and other high value-added jobs to be created not in some far-away country but here, in Lithuania. That is exactly what we have managed to achieve.

Sure, a big part of this success rests on the fact that we have improved our processes and changed some of the regulations. However the crucial change was a change in culture at public institutions. For example, one of the strategic objectives for the Bank of Lithuania is to become a financial sector partner, promoting innovation and sustainable growth.

What makes Lithuania particularly attractive to financial technology companies?

A wide fintech ecosystem is in place: more than 200 fintech companies have been established, numerous fintech hubs, accelerators and university programmes are available. Having such a vibrant community helps: everybody wants to be in a place where things are going on.

Lithuania is particularly strong when it comes to payment and electronic money institutions, not least because these companies have full access to the payment system (CENTROlink) at the Bank of Lithuania. In addition to this, we have built a licensing regime for specialised banks with the minimum capital requirement of € 1 million (instead of  € 5 million for traditional banks). While such a bank can provide pan-European financial services, we have also introduced risk mitigating restrictions (e.g. no investment services).

The Bank of Lithuania is willing to take the driver’s seat on the innovation highway: not only to monitor the evolution of technologies, but to participate in their development as well. Therefore, fintech companies can test innovative solutions in our regulatory sandbox and the LBChain sandbox (the blockchain-based technological sandbox), with our assistance and consultations on the applicable regulations.

The push into fintech also carries risks. What do you see as some of the major challenges?

There are various risks involved. To name just a few: cybersecurity and other operational issues, cross-border consumer protection, financial crime (especially for the purposes of money laundering and terrorist financing).  Our priority is to develop the robustness of risk mitigation and cybersecurity, with a particular focus on anti-money laundering (AML) and combating the financing of terrorism (CFT).

How do you strike the right balance between supervision and fostering financial innovation?

Aiming to achieve a balanced approach, we maintain a supportive attitude to foster innovation in the financial sector. At the same time, we demand strict regulatory compliance to ensure appropriate risk management.

Given the growing number of electronic money and payment institutions in Lithuania, supervision of these financial institutions is being continuously improved (with a dedicated unit established). Enforcement of AML/CFT, prudential and customer protection requirements are the key areas of supervision for these companies.

In addition to fostering innovation in financial services, the Bank of Lithuania is willing to innovate as well. Right now we are testing a regtech solution that would streamline reporting procedures and reduce the administrative burden and reporting costs for both supervised entities and the regulator. It will allow the supervisory authority to generate reports in an accurate manner and gain near real-time insights on potential market risks.