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Despite their strategic location between East and West, the Baltic states of Estonia, Latvia, and Lithuania are often overlooked by executives in Western Europe, Asia, and the United States as a place to do business. When in fact, the Baltics have emerged as a significant hub for fintech innovation and are not merely small, post-Soviet states.
With a combination of business-friendly policies, forward-thinking government initiatives, a tech-savvy population, a skilled workforce, a culture of entrepreneurship, and proximity to major European markets, these countries have created a fertile ground for startups and technology innovation. In this blog, we will explore the evolution of the fintech scene in the Baltic States, the current landscape, government initiatives, and how one can enter this thriving ecosystem.
But first, here’s a brief history…
The Birth of Baltic Fintech Startups
The Baltic states’ transition to digital economies and services created a strong foundation for fintech innovation. Estonia, Latvia, and Lithuania lacked legacy banking infrastructure and “leapfrogged” directly to digital financial services. Companies like TransferWise (now Wise), which was co-founded by Estonians Kristo Käärmann and Taavet Hinrikus, gained international recognition for their pioneering peer-to-peer international money transfer service.
Fintech growth in the Baltics was also driven by high rates of IT literacy, mathematical and engineering talent, and the adoption of emerging technologies like blockchain. Government initiatives encouraged fintech innovation and supported the ecosystem.
The Baltic states also noted traditional financial institutions recognizing the potential of fintech, and were ahead of the curve. Banks and insurance companies started collaborating with startups to modernize their services and deliver a more seamless customer experience. Such partnerships allowed fintech startups to leverage the infrastructure and customer base of established financial institutions, while the latter could tap into the innovation and agility of startups.
Historical Context
When Estonia, Latvia, and Lithuania regained their independence in 1991 from the Soviet Union, they faced major economic challenges but also recognized new opportunities. The countries moved rapidly to develop market economies, privatize state assets, and encourage entrepreneurship.
They also invested heavily in education, science, and infrastructure. This created favorable conditions for technology innovation and startups to flourish.
Meanwhile, the Baltics embraced the internet and digital technologies before many other nations, which may have been somewhat of a surprise to those in the West.
In 1997, Estonia introduced a ‘Tiger Leap’ initiative to computerize schools and promote IT skills. Lithuania also prioritized developing advanced internet infrastructure. This allowed the Baltics to become early adopters of digital technologies and e-services.
Today’s Baltic “Fintech Scene”
The Baltic states also noted traditional financial institutions recognizing the potential of fintech, and were ahead of the curve. Banks and insurance companies started collaborating with startups to modernize their services and deliver a more seamless customer experience. Such partnerships allowed fintech startups to leverage the infrastructure and customer base of established financial institutions, while the latter could tap into the innovation and agility of startups.
Today, the Baltic fintech ecosystem consists of over 500 companies. Fintechs address needs from digital payments and lending, to the blockchain, cryptocurrency, insurtech, and more.
Estonia’s TransferWise, Lithuania’s Vinted and Revolut have all achieved “unicorn” valuations of over $1 billion.
Key Sectors and Case Studies
The fintech ecosystem in the Baltic states has grown significantly and now encompasses a wide range of sectors, including:
- Payments and Money Transfers: The region has produced successful payment platforms like SEB Bank’s Go & Grow and Monese, which have all since achieved global success in digital payments and money transfers.
- Crowdfunding and Peer-to-Peer Lending: Platforms like EstateGuru and Mintos have gained international recognition for their peer-to-peer lending solutions.
- Digital Banking: Companies have attracted substantial user base such as Revolut, amassing 30 million retail customers worldwide, and N26, 8 million worldwide users.
- Insurtech: Startups like IIZI are modernizing the insurance industry by providing high-quality insurance services in an online self-service environment.
Investment and Funding
The Baltic startup scene received over €1.603 billion in investments in 2022, a testament to the ecosystem’s vitality. These three small but mighty markets have become a magnet for fintech investment and both local and global venture capital firms have been pouring funds into the region’s startups.
Also, the emergence of accelerator programs and incubators, such as Startup Wise Guys and Rockit, has played a pivotal role in nurturing fintech talent and providing access to funding, mentorship, and networking opportunities.
Government Initiatives
Proactive government initiatives and policies have also been crucial for boosting the Baltic fintech sector. Here are a few examples:
- e-Estonia
Estonia’s e-government initiatives have been instrumental in fostering the fintech ecosystem. The country’s digital infrastructure includes the use of blockchain technology in government services, digital identity through the ID card, and a secure, tamper-proof digital ecosystem.
One of the cornerstones of e-Estonia is the e-Residency program, which allows individuals from around the world to establish and run businesses in Estonia, providing access to the European Union’s single market. Fintech entrepreneurs benefit from the simplicity of starting and operating their businesses, making Estonia an attractive destination. The country has also pioneered digital taxation services for companies.
- Regulatory Sandboxes
The Lithuanian regulatory sandbox, established by the Central Bank of Lithuania, is an initiative that allows fintech companies to experiment with new products and services while ensuring regulatory compliance.
This sandbox provides a supportive environment for testing innovative solutions without facing the full burden of regulatory requirements from the start. The move on behalf of the government has encouraged innovation in areas such as digital banking, regulatory technology (RegTech), and blockchain technology.
- Support for Blockchain and Crypto
Lithuania has actively positioned itself as a hub for blockchain technology and cryptocurrency-related projects. The country’s regulatory framework for blockchain businesses and cryptocurrency exchanges has attracted companies looking for a favorable environment for their operations.
Latvia provides tax breaks and co-financing for qualifying startups. This has resulted in the formation of numerous fintech startups, namely Indexo, Creamfinance, and Twino. The country has become a regional leader in peer-to-peer lending and algorithmic trading. Riga, Latvia’s capital, hosts an annual fintech conference that draws participants from across Europe.
Of note, all three Baltic countries have also invested in STEM education and technical training to build the talent pipeline. The Baltic governments have collaborated regionally, as well through the Baltic Innovation Fund, which provides financing for Baltic startups to scale across the region. Initiatives like the Baltic Ventures Accelerator also aims to grow the regional fintech ecosystem.
Leveraging Opportunities in the Baltic Fintech Scene
So how do you get involved with this key sector in the Baltics?
For interested financial services or fintech companies and professionals looking to get involved, the region provides a unique combination of advanced digital infrastructure, engineering talent, and supportive policy environments.
Here are a few other ways:
- Partner with local banks and financial institutions seeking to digitize or amplify its digital transformation.
- Tap into local tech talent by establishing offices in Baltic tech hubs. Market Spotlight: Lithuania.
- Leverage Baltic startups’ expertise in areas like cybersecurity, blockchain, and digital identity.
- Test your products with the Baltic consumer basis, which has traditionally be open to adopting and trying out new fintech solutions.
- Use Baltic “testbed” environments like e-Residency and regulatory sandboxes to pilot innovations.
- Tap into acceleration and incubation programs, and EU funding dedicated to Baltic fintechs and startups.
With the Baltics solidly established as a global fintech hub, the opportunities for companies from other parts of the world for collaboration and growth are plentiful. The manageable size and regional connectivity make the Baltics an ideal launchpad for fintechs looking to expand in the European market. Government initiatives, a supportive regulatory environment, and the region’s tech-savvy population have all played crucial roles in fostering this ecosystem placing the Baltic States on the map as a fintech hotspot.
