18 Apr 2019

“If We Want to be Safe, We Need to be Fast”

SAFE Policy Lecture: Lithuanian finance minister Vilius Šapoka calls for a European Fintech Union

Lithuanian Finance Minister Vilius Šapoka wants European policymakers to concentrate more on opportunities of financial innovation than on risks. At a SAFE Policy Lecture on 12 April at Goethe University, he campaigned for a European FinTech Union. For example, crowdfunding and peer-to-peer lending are still working under national regimes, he said. Šapoka advocated harmonized standards and centralized market supervision. He expects disruptive innovations in finance to happen in FinTech, not in the traditional banking sector.

In the past, he argued, European reforms have tackled the stability of financial markets and disparities within the European Union, thereby neglecting global competitiveness with China and the US. If the EU wants to take on a leading role in the financial world, it must be willing to take some risks, he said. “If we only focus on risks, we will crash. If we want to be safe, we need to be fast”, Šapoka stressed. Taking some risks may pay off, he said, pointing to Lithuania as an example. Following the UK, the Baltic Republic has become the second most preferred destination for FinTech companies in Europe, he stated.

Right now, the European Union faces three major challenges, Šapoka said. First, a transformation of financial markets, which are caused by technological progress and new business models, climate change and, among other factors, changing consumer behavior. As a result, traditional banking can no longer meet all needs, he explained.

Second, in Šapoka´s view, Brexit further weakens the role of the EU. Historically, the UK served Europe as a pioneer in financial regulation, supervision, and financial engineering. “The UK is the financial heart of Europe”, Sapoka said. Given that the Capital Markets Union is far from being completed, Brexit will lead to an even more fragmented European financial market. Without fundamental changes in the market, however, it seems unlikely to Šapoka that Europe will catch up.

Third, risk management remains a challenge, he warned. On the one hand, financial stability remains on the agenda; on the other hand, cybersecurity risk and how consumer data can be protected will become a major concern. Also in this field, Šapoka advised strongly for harmonization on the European level. “Cooperation is not sufficient if it does not translate into joint actions,” he cautioned.

Lithuania aspires to become a high-tech country

Šapoka argued that FinTech and blockchain might change the way financial markets are working. However, it is difficult to anticipate how technological progress will change business models and market structures. “Nobody can say what will be in ten years from now,” he said. New players like Amazon or Google might intensify their activity on financial markets and put even more pressure on traditional banks.

For Šapoka, sustainable finance is one field where the EU can occupy a leading role in developing a global agenda. He warned that in the long run, unsustainable projects will be crowded out due to shareholder activism. Šapoka argued that “sustainability” is a moving target: What is perceived today as “environmentally sustainable”, might not be considered as such tomorrow. What it means might even vary from person to person, making it very difficult to agree on a standard definition of “sustainable” financial products. For Šapoka, a joint taxonomy in the EU is a step in the right direction, but will not solve this general problem. He also highlighted the achievements of his country, as the Lithuanian government channeled both private and public green funds in the renovation of energy-efficient buildings.

Lithuania aspires to become a high-tech country. Šapoka´s vision for that is “Litechnica”, with FinTech as the chosen path to success. He stressed two essential elements of its action plan: First, Lithuania provides strong tax incentives for financial innovation, such as tax holidays for startups, a low tax rate on profits, and deductibility of expenses for research and development. Second, the Baltic country allocates sufficient resources to regulatory authorities, thereby removing bureaucratic inefficiencies. As a result, Lithuania has, for example, the fastest licensing process in the European Union, Šapoka said.

Video of the SAFE Policy Lecture with Vilius Šapoka: Speed vs. Security in Europe's Financial Sector. How to Find Balance?