Interview by Zoya Malik
With BREXIT looming, forcing many large banking groups to consider exiting Britain, LHV, Estonia’s largest payment partner for global fintechs and fastest growing domestic financial group, is doing the opposite and expanding into the UK in a bid to become a critical service provider to London’s burgeoning fintech sector.
With the imminent functioning of its London branch, Zoya Malik, managing editor TFT, met Andres Kitter, Head of LHV UK to ask about Estonia’s regulatory framework for fintech development and how Kitter believes LHV will fill liquidity gaps for European and UK fintechs, payment providers and lenders
ZM: Kindly describe LHV’s services to fintechs?
AK: LHV has always looked at fintechs from a different angle. We’ve always been open to innovation and new business models. Whilst many start-ups have struggled with opening a basic bank account, LHV has been willing to start providing access to payment infrastructure, card acquiring and various treasury services for many years, along with providing financing services for more established fintechs.
Our core offering today revolves around Euro safeguarding accounts, SEPA and SEPA instant payments, virtual IBAN-s, FX services etc. In May LHV will join UK Faster payments after which LHV will be one of the few banks able to provide both Euro and Sterling real-time payments. LHV’s fintech clients will also be able to access and provide the very same services and solutions to their customers.
Payment services continue to dominate as a disruptive force amongst fintechs. In order to be effective, they need a reliable partner that understands their needs and speaks the same language – that’s where LHV comes into play. All of our services will be accessible through API – LHV Connect.
ZM: What is pound payment systems?
AK: LHV is a direct member of the pan-European Euro clearing system SEPA – we are also one of the founding members of the SEPA instant real time payment network. Being a direct member allows the bank more flexibility and control over our risk appetite. Same approach has been adopted in the UK, LHV is building a direct connection to the Faster Payments scheme and manages a direct relationship with the Bank of England. Faster payment service remains a key requirement from our fintech customers and in May 2019, we will be delivering on our promise to directly support the British pound payments.
ZM: How is LHV working with Estonia’s financial regulator to support the Estonia fintech market and especially ICOs and blockchain development? What more needs to be done?
AK: In today’s rapidly changing financial services space it is critical to have a good relationship and be in regular contact with all stakeholders, including the regulators. LHV rolled out a stable coin back in 2014, whilst keeping the regulator informed about our plans.
One of our clients, Funderbeam, that provides primary and secondary marketplace for early-stage investments, bypasses VC companies and gives retail investors access to a market that’s traditionally dominated by angel investors and large VC funds. As Funderbeam’s exchange platform is based on blockchain technology, LHV had a long discussion and planning phase to figure out how the actual legal and banking framework could be built. This only works if one has knowledgeable people and can collaborate closely with regulators.
Payment services continue to dominate as a disruptive force amongst fintechs.
We always encourage involving regulators as early in the process as possible, though one must recognise that other authorities might not always be as forward-thinking as they are in Estonia. It is important to differentiate whether a novel idea is an innovation or legal arbitrage – in most cases it is difficult to draw the line between ICO token and security and this causes many disputes between token issuers, regulators and banks. In reality – if it looks like a duck, swims like a duck, and quacks like a duck, then it’s probably not a chicken.
A good regulator always finds time to factor in innovation and its potential influence and implications to the current legal framework and suggest a way forward. Stability of the financial system, protection of market participants and legality, including the avoidance of terrorist financing and money laundering, are key considerations that are driving regulators.
ZM: Who are the banking intermediaries providing services to fintechs?
AK: LHV’s UK focus is on the fintech companies needing access to the banking and payment infrastructure in pound sterling and euro area – neo banks, money transfer services, FX providers and also a small number of well-established crypto currency companies. This list is not limited, there are new ventures and ideas popping up constantly outside of the traditional banking sector which will change the financial services in the future.
ZM: How is LHV an influencer bank?
AK: We strive to be an influencer bank in everything we do. Estonia is our home market and LHV has a long-term ambition to become the most important and profitable bank in the country. LHV is already punching way above its weight – if you look at our market share, in the 6 years since gaining our banking licence, we have already had more than 15% of the population open accounts with us. We influence Estonian entrepreneurship and people’s financial behaviour with the best market knowledge, activity and innovative services.
In the long-term, we see ourselves as a bank that is at the forefront of modern banking in Europe. As an influencer, we contribute to the development of financial services. We position ourselves as a new generation bank capable of integrating and connecting traditional banking with a new generation of financial services. We appreciate open banking principles and want to be integrated with European banking infrastructure and our existing technological level enables us to provide services to international financial technology companies.
ZM: How does LHV partner fintechs and offer an open approach, link fintechs with open architecture and banking infrastructure. Please offer a case study.
AK: Successful partnership with fintech requires an open mind, good infrastructure, adaptability and technology; and willingness to dive into regulatory discussions. As most of the fintech business models are different, they require tailor-made banking relationships, which start with thoughtful analysis of the fintech business model, risk management optimisation and involving the key people from the get go. In the current banking landscape where money laundering and terrorist financing are growing threats, it is very easy to disregard the growing fintech space and ignore the new interesting companies.
In the long-term, we see ourselves as a bank that is at the forefront of modern banking in Europe.
When we started to offer banking services to our first wave of fintech customers, we did not have a fully functional API available. We took the opportunity to build it from the ground up whilst being in close discussions with clients, making sure we understand and cater to their needs. The same model was repeated when we developed the virtual IBAN product – after countless interviews and discussions with customers, the product specification was completed.
With the instant SEPA, Faster payments and Virtual IBAN services managed via a single API, fintechs are able to build/provide a very bank-like experience to their customers and we are proud to provide the infrastructure.
The product development won’t stop here – we will continue to directly deliver new custom-made solutions to fintechs to accommodate their future needs.
ZM: When is the bank opening in the UK and what is your target market?
AK: LHV established the branch last year and since then has been preparing the integration of Faster Payments scheme to its portfolio of services. Currently we are in the final stages of integration and Faster Payment launch is planned at the end of May 2019. This date will also mark the official launch of UK bank accounts and sterling payments. Until then we will provide services to fintech companies from LHV headquarters in Tallinn.
LHV has an existing portfolio of fintech companies that are waiting to gain access to the UK payment schemes. As the fintech scene is very active, we have a constant flow of incoming new clients. Our target fintech client operates globally and is in need of good technical infrastructure that provides access to Euro and Pound Sterling instant payment, virtual bank account numbers, FX services and other complex financial services. UK has a population of 66 million, London is the fintech capital of Europe and there are more than 500 million potential customers in the SEPA area, therefore it’s crucial for us to have a presence here.
ZM: What capital and liquidity challenges are fintechs facing in the UK? Why do they an Estonian bank as a solution? What gap are you filling?
AK: LHV focuses on providing bank account infrastructure, payment and FX solutions. The poor quality of these services is often the biggest gap in fintechs’ service offering and LHV has solutions ready for implementation.
From May 2019 onwards, LHV will be able to provide the same services in both Euro and Pound Sterling areas, and that will be one of the key differentiators and core advantages for us. LHV does not offer all the capital and liquidity solutions as fintechs’ funding is dominated by the venture capital providers. Although should the fintech company be in the stage where their financial situation is sustainable and more traditional funding models can be applied, then LHV has solutions available.
ZM: What is your feasibility for growth in the UK market? What areas are you focused on serving?
AK: Despite the looming Brexit and uncertainties that come with it, we’re certain that London will maintain its title as the fintech capital of not only Europe, but also the world. London’s significance was clear in the first half of 2018 when fintech funding deal statistics revealed that for the first time UK exceeded the US in the value of fintech deals. We believe that steady funding flow will create strong foundations and thereafter lucrative opportunities for new ventures and client bases for LHV.
ZM: What has been your experience working with regulators in the UK? How is this different from Estonia regulator?
AK: LHV has very positive experiences working with both regulators – although the setup of regulators can be different, the main working principles and purpose of maintaining financial system stability, market participants’ protection and validation is the same.
We always encourage involving regulators as early in the process as possible, though one must recognise that other authorities might not always be as forward-thinking as they are in Estonia.
Therefore, there is no big surprise. Obviously, we have a longer working relationship with the Estonian regulator and therefore it is somewhat easier, but that does not mean we have some advantages here. The relationship is strict and pragmatic from the supervisory perspective. What we have experienced in the UK is also very positive. Although the Brexit has increased uncertainties, the PRA (Prudential Regulation Authority) has been very approachable and supportive and the same can be said for the Estonian FSA.
In the fintech space, one thing which is definitely worth mentioning is the FCA Regulatory Sandbox – this provides an excellent opportunity to test your products in a controlled environment. There is no exact equivalent in Estonia, but that may soon be available.
ZM: What is your view on how fintech development will be impacted by the outcome of Brexit?
AK: A no-deal Brexit will impact the fintech sector in many ways. I think the most significant impact will be keeping UK-based fintech EU operations going. The existing simple pan-European passporting of regulated financial institutions will cease to exist for UK regulated companies and EU establishment needed for the EU client serving fintech. This itself increases the cost base, creates additional regulatory overheads and takes away the focus from developing the core product. Despite the very strong fintech funding, the overall VC funding to UK companies fell by nearly 30% in 2017 vs. 2018. The full impact of the funding will be clear after/if Brexit finally happens.
UK and EU markets are certainly very attractive for tech companies and after overcoming the hurdles of regulation caused by the Brexit, companies will continue to service customers in the same manner as they’ve always done. Brexit will potentially have an impact to the UK population, and will create uncertainties for migrant workers – this itself may impact certain fintechs whose client base is largely made up of migrants and people that’ll be impacted by the immigration law changes.
