FinTech Banks Fill SME Funding Gap Created by Russia-Ukraine Conflict

In the post-Brexit scramble to maintain their European footholds and take advantage of European passporting rules, a slew of U.K. businesses turned to FinTech-friendly Lithuania, catapulting the small Baltic state and its capital city, Vilnius, into a leadership position on Europe’s FinTech scene.

Read more: As Brexit Looms, FinTech Firms Scramble For Lithuanian Licenses

According to Mantvydas Štareika, CEO at Vilnius-based neobank SME Bank, the government and the central bank of Lithuania have been the primary drivers of this FinTech-friendly regulatory environment.

For example, they’ve made it easy for foreign companies to secure electronic money institution (EMI) licenses relatively quickly, in less than a year, with additional support from expert consultants who help guide firms through the application process.

Read also: Turning Compliance Burden Into FinTech-Regulator Collaboration

These favorable policies have contributed to making tiny Lithuania the destination of choice for U.K. firms like FinTech unicorn Revolut, which was granted a Lithuanian banking license by the European Central Bank in December 2021. In comparison, the firm’s U.K. banking license, which it applied for in early 2021, has yet to be approved.

Related: Revolut Bank Granted Full EU Banking License

Štareika also cited infrastructure as another reason for Lithuania’s attractiveness, pointing to the high internet access, strong labor force and advanced transportation networks within the city as part of what makes Vilnius “one of the best cities in the Europe for FinTechs, neobanks, [and] digital-first companies to establish themselves [in].”

Closing the SME Financing Gap

Despite its attractive banking landscape, the country’s market size remains relatively small, with a population of less than 3 million and only about 10 financial institutions, mainly traditional banking players, in operation.

These incumbent banks, according to Štareika, are more interested in “big tickets” and tend to overlook the small and medium-sized enterprises (SMEs) that represent over 90% of companies and together form the backbone of the local economy.

The fact that the risk assessment process is the same whether banks are evaluating a $150,000 or $100 million loan is why they mostly prioritize larger, well-established firms to maximize their returns, he pointed out.

That then leaves a large SME financing gap in the market, one which he said licensed digital banks like SME Bank can help fill. Launched in 2021 and considered Lithuania’s first neobank, the newcomer aims to expand its services beyond the Baltic state and the 10 European countries where it currently operates to the rest of Europe over time.

When it comes to their competitive advantage, Štareika pointed to the collaboration between SME Bank and its sister FinTech company SME Finance as a winning strategy that enables them to provide flexible and longer-term loans in situations where regulation poses a limiting factor for the licensed virtual bank.

To take it up a notch, the neobank has also partnered with a Lithuanian payment infrastructure provider, kevin, to create a one-stop shop for its eCommerce clients that facilitates online payments and enables account-to-account payments across the Baltics.

Learn more: Lithuanian FinTech kevin Nets $65M for A2A Infrastructure

The plan is to leverage the data and information gathered on payments collection to offer eRetailers artificial intelligence-driven, revenue-based financing of up to €50,000 ($50,000) based on their expenses and profit — all in under 24 hours.

And at the end of the day, Štareika told PYMNTS, combining the needs of SME owners into a single platform should be the new normal. “It’s no longer interesting to use the services of a company that is only providing payments or only currency exchange or only payment initiation services. [What] companies are looking for is a multipurpose [platform] where financing is the main service [with] other products filling in the gaps.”

SME Lending Hit Hard by Russia Threat

Earlier this year, the small Baltic country, which is in a risky enclave due to its border with Russia and Belarus, declared a state of emergency in response to Russia’s assault on Ukraine.

Related: Lithuania’s Startup Scene Shows Resilience in the Face of Looming Russia Threats

Also related: FinTech-Friendly Lithuania Raises Alarms After Russia’s Invasion of Ukraine

That ongoing threat, Štareika said, has led to a tightening regulatory environment and the constant need to monitor transactions and the anti-money laundering (AML) sanctioned list to “protect their books and to be on the same page with the regulator.”

And although not having ties with companies in Russia or Belarus has played in their favor, he added that they have had to be more cautious in offering financing to SMEs in the region. On the flip side, the macroeconomic uncertainty has also led to a drop in demand as most small businesses are now reluctant to take on additional loans — until the end of the year at least.

“It’s not because they don’t want to grow, they [just] don’t know what the future will look like,” Štareika explained, highlighting the need to educate merchants on adopting a healthy approach to borrowing even in the face of the skyrocketing inflation and high energy costs plaguing the three Baltic states of Estonia, Latvia and Lithuania.

At the end of the day, it’s all about reassuring SMEs that lenders understand their plight and are there to support them “whether [or not] they will be able to repay [their loans],” he said.

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