Innovation in Payments – How Lithuania is leading the way

In December 2018, Google received an e-money license from the Central Bank of Lithuania. This will allow Google to process payments and issue e-money throughout the EU. Prior to this, Google Pay had limited authority and used to save customer card details in a digital wallet and use that for payments. Now, they can store and transfer funds directly.

What is interesting about this story is how Lithuania has become the darling of FinTech, BigTech and financial institutions alike. It has so far issued 39 such e-money licenses, making it second only to the United Kingdom in the EU. Lithuania certainly seems to be doing it right.

Regulatory Innovation

Regulatory bodies aren’t really known for their innovation. Their job is to protect the interests of the consumers and the state and leave the innovation to the private market participants. However, the Central Bank of Lithuania has gone a step beyond and is actively innovating to attract financial services companies to its shores. One such innovation is the “regulatory sandbox”.

Regulatory compliance is certainly a major cost centre and technical hurdle for financial service providers. There has to be zero tolerance for lapses when it comes to compliance and all the checks and balances can make innovation difficult. The Bank of Lithuania offers a regulatory sandbox for companies offering “financial innovation”.  This means that new and innovative products (or existing products being offered in an innovative way) can be tested in a LIVE environment for 6-12 months with the help of the Bank of Lithuania.

The Central Bank provides consulting to the service provider to ensure compliance with all the necessary rules and laws. This makes Lithuania a great destination for new start-ups who simply do not have the capital or resources to hire an army of experts to do the regulatory or compliance work for them. If the live testing proves successful, the service provider can obtain a license from the Bank of Lithuania to roll out the service in the entire EU! This is regulatory innovation done right.

Cutting red-tape

The attractiveness of the Lithuanian model is not only restricted to start-ups though. It takes only about 3 months to obtain an e-money or payment institution license in Lithuania compared to around a year for many other EU countries. And since such licenses are valid for the whole of EU and its 500+ million strong consumer base, it is little wonder that companies are opting to hit the ground running by entering the market through Lithuania.

Creating an Ecosystem

The attractiveness of Lithuania to FinTech is not only about speed, but also about openness and creating a vibrant ecosystem that attracts them. The Bank of Lithuania is actively fostering FinTech innovation and this is reflected in their policies and service offerings like CENTROlink payment system.

Once the seeds for the creation of an ecosystem are planted, the whole thing tends to snowball from there. Existing FinTech companies attract new ones who want to collaborate or tap into the same talent pool. This seems to be happening to an extent in Lithuania which is certainly punching way above its weight when it comes to attracting financial services firms and start-ups.

Read more articles about the Bank of Lithuania and their PSD2-based ecosystem for FinTechs.

Blog post by Dr. Ulrich Scholten

About the author

Ulrich Scholten is an internationally active entrepreneur and scientist. He holds a PhD in information technology and owns several patents on cloud-based sensors. His research on cloud computing is regularly published in highly rated journals and conference papers. From 2008 - 2015, he was associated research scientist at the Karlsruhe Service Research Institute (KSRI), a partnership by KIT and IBM, where he researched network effects around web-platforms together with SAP Research.

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