Latvia: a new location for international financial services and fintech?

Riga, the capital of Latvia, has long aligned itself with international financial institution operations. It has a history of handling Russian transactions and now, being part of the euro area, Latvia prides itself on offering financial as well as regulatory and legal certainty. Guntis Rubins, Counsellor of Ministry of Economics of Latvia in the UK, and Head of Representative Office of the Latvian Investment and Development Agency in the UK, speaks to Jo Murray about Riga’s historical role as a financial services provider, what modern-day Latvia can offer foreign companies, and how fintech can thrive in Latvia.

The Republic of Latvia, bordered by its Baltic cousins – Estonia to the north and Lithuania to the south – is home to a small population of just 2 million residents. However, it has big ideas about its role as a member of the EU and what it has to offer foreign companies.

Being an independent country has not come easy to Latvia. After a chequered history, independence was declared following WWI but Soviet occupation in 1940 put the country back under external control. A year later, Nazi Germany took over until Soviet re-occupation in 1944. It took until 1991 for independence to be fully restored. In a major leap towards building a modern, west-facing economy, Latvia joined both the EU and NATO in 2004. In 2014, it adopted the euro as its unit of currency and, in 2016, Latvia became a member of the OECD. In what has been a whirlwind of economic, regulatory and statehood activity, Latvia has set its own stage as an independent but European, EU and Baltic Sea Region country.

About 30% of Latvia’s population is Russian-speaking. In addition to ethnic Russians who have made Riga their home, the city has also long been a holiday destination for Russians attracted to Riga’s large collection of art nouveau buildings, constructed a century ago when Riga experienced a financial and demographic boom. This made Riga the fourth largest city in the Russian Empire and its largest port.

Today, nearly 25% of FDI into Latvia relates to the financial services and insurance sectors; next comes real estate followed by manufacturing. But financial services is key to modern Latvia’s FDI strategy.  More than 20 local credit institutions and foreign bank branches already operate in Riga; the majority of them focus on servicing international clients. What is more, Latvian banks are expanding overseas, points out Mr Rubins, referring to the representative offices already established by three Latvian banks in London.

Large Nordic banking groups like SEB and DNB, as well as global companies like Cabot, Allnex and Solvay SA, have already moved either their back office operations to Riga or have created global business services centres there. Financial operations taking place in Riga include: trading and payment processing transactions; client support; securities settlement; and risk and control operations. Some foreign companies – like Tieto, Tele 2 and Circle K/Statoil – have been located in Latvia for years; and companies from Japan and China are now also expanding to Latvia. The Big Four accounting firms are also present.

“We know how to service international customers,” says Mr Rubins. “We have been a bridge between West and East since Hanseatic times.” But is not just about Riga’s traditional role of servicing the CIS countries trade or wealthy with a penchant for holidaying in the Latvian capital and nearby resort Jurmala; Latvia’s FDI strategy has a much more international flavour about it.

Being part of the EU, the euro and OECD brings with it high standards of governance and it is this governance upon which Latvia’s banking sector is being built. And let’s not forget, all Latvia’s financial infrastructure has been built over the last 25 years so there are few complex legacy systems to unravel. Apart from providing real-time gross settlements in euros, the central bank maintains a retail payments system currently being upgraded to process instant payments in 2017. A Baltic financial infrastructure hub is also being built in Latvia. The Nasdaq/OMX group has decided to consolidate the three Baltic central securities depositories into one legal entity, Nasdaq CSD, registered in Latvia (with branches in Estonia and Lithuania), along with migration to Eurosystem’s single Target2-Securities settlement platform in 2017.

What is more, the Latvian Government has taken the necessary steps to address the risks associated with money laundering and counterterrorist financing by establishing and enforcing legislation to ensure stability and transparency of the local financial markets. And while the government is pushing the banks to be more transparent, the banks are pushing for increased efficiency and are happily harnessing the innovation coming out of the fintech community emerging in Latvia but hopefully elsewhere too.

Mr Rubins points out: “Financial institutions that are open-minded towards financial innovation will find Latvia an attractive hub of fintech start-ups, which have emerged here due to a combination of excellent IT infrastructure, lower labour costs, access to highly skilled talent from a developed financial industry, and supportive regulatory framework.” Latvia has adopted a new law to support and promote start-ups through a number of tax relief measures. Latvian born fintech companies like Bitfury (blockchain technology), Creamfinance (paperless loans), Mintos and Twino, which provide peer-to-peer lending platforms, ranked among the largest and fastest growing in Europe.

All this is handsomely assisted by Latvia’s 25Mbps broadband rate with average internet speeds of 16Mbps. Among OECD countries, Latvia has the 3rd highest percentage of fibre connections in broadband subscriptions: 59.7% compared to the OECD average of 17.9%. Internet in Latvia is not only fast but secure; data processing centre “Dattum” operated by Lattelecom and conforming to Tier III standards, is responsible for this.

Mr Rubins concedes that Riga will never be London but with the Latvian ICT sector boasting a talent base of 20,000, there is very specific knowledge to be harnessed, especially by London-based fintech companies looking to outsource a defined project. The beneficial cost of this approach does not need to be explained.

Of course promoting financial services and fintech are recent activities for the Latvian Investment and Development Agency. This is a country that is traditionally associated with manufacturing, engineering and tourism. It is also a well-established distribution centre between east and west with logistics, freight and transportation along a well-trodden route being vital to the economy.

However, the reality is that capital and labour intensive industries are difficult to scale up and competing with established markets is hard; therefore financial services, fintech and start-ups are very much on Latvia’s radar. They can be scaled up quickly, and the talent to service these sectors is available locally, so increasingly financial services and fintech are becoming a talking point between Latvia and the rest of the world.