Estonia’s largest homegrown banking group is opening a branch in London to serve the UK capital’s fintech community.
Andres Kitter, the head of LHV’s new UK operation, says the move was a natural one for the bank. “We already service around 40 fintech customers, most of which are UK registered, so it makes sense for us to move to London along with our customers,” he says.
Founded in 1999, LHV began life as an online asset manager and expanded rapidly to become the second-largest pension fund provider in the Baltics. In 2009, the firm acquired a banking licence and started targeting SMEs and financially literate consumers with digital banking products.
Five years later, the bank made international headlines when it helped US cryptocurrency exchange Coinbase enter the European market. Since then, LHV has added several other cryptocurrency platforms to its client base – and turned away more, according to Kitter.
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| Andres Kitter, LHV. "We already service around 40 fintech customers, most of which are UK registered." |
“We are very selective about who we work with,” he says. “We need to really understand what they are doing, who their customers are, and how they monitor transactions in the blockchain. “Not all start-ups are in a phase where they meet the highest standards of compliance and KYC. Some companies that would like to be our customers actually need consulting rather than banking at this stage.”
Kitter is confident that this will change, however. “There is a lot of energy and brainpower being generated around cryptocurrencies,” he says. “They will soon understand about the need for compliance and realize that they have to invest in order to meet banking industry standards.”
LHV has also built up a following among payment fintechs. In 2015, the bank partnered with TransferWise, a UK-based firm that also originated in Estonia. LHV offers TransferWise’s international payments service through its mobile banking app.
Payments providers currently make up the majority of LHV’s fintech clients but the bank is now positioning itself to serve a new generation of fintech start-ups inspired by the introduction of Open Banking in the UK and the EU’s PSD2. “This will create a second wave of fintech firms,” says Kitter.
LHV has already opened a London office in the tech hub of Old Street and expects to start onboarding clients in the second half of this year. The bank’s offering for fintechs will include real-time payments, overdraft facilities and foreign exchange. Lending and cross-border services will be provided via its headquarters in Tallinn.
Brexit effect
The decision to open in London was made a month before the Brexit vote but LHV’s management was undismayed by the outcome, according to Kitter. “It didn’t make a difference to our focus,” he says. “London is the fintech capital of Europe, if not the world, and we believe that won’t change after Brexit.”
The UK’s decision to leave the EU could even work to LHV’s advantage, he adds. “We are a eurozone bank so if companies need to open up an additional base in Europe after Brexit due to the disappearance of existing passporting rule then we’ll be able to help them,” he says.
Kitter notes that LHV already has experience of bringing global fintechs into the EU. “One of our customers is headquartered in Australia and doing fintech business in Asia-Pacific,” he says. “When they expanded to Europe they needed a banking partner and came to us.”
LHV UK’s main competitors in London will likely be other fintech-focused players such as ClearBank, the UK lender launched last year by WorldPay founder Nick Ogden, and German payments giant Wirecard rather than traditional banks, according to Kitter.
“I wouldn’t say fintech companies have been dismissed by large banks but there has been some reluctance to work with them,” he says. “This is partly because they have been seen as competitors but also due to a lack of risk appetite.
“If you don’t understand a customer then it’s easier to say no rather than spend time digging into their business model and getting to grips with the technology.”
By the same token, fintech firms prefer to work with digitally sophisticated banks, adds Kitter. “When fintechs are building up their services they expect their banking partners to have a similar technological background,” he says.
In this respect, LHV has good credentials. Since inception, the bank has been technology-focused. It only has two physical branches in Estonia – in Tallinn and Tartu – and builds all its digital platforms in-house. A quarter of the bank’s staff work in IT development.
With an eye to the fintech market, LHV has been particularly assiduous in developing APIs. It was also an early adopter of blockchain, building a closed-loop micropayment platform using the technology in 2014. “We wanted to verify whether blockchain was suitable for financial transactions so we ran a closed test with our employees and some of our merchant customers,” says Kitter.
LHV was founded by Estonian entrepreneurs Rain Lohmus and Andres Viisemann, who still have a combined shareholding of more than 30%. The group raised €46.2 million from retail investors via an IPO on the Nasdaq Tallinn Stock Exchange in 2016 and had a market capitalization of €268 million at the end of December. More than 80% of current shareholders are customers of the bank.
