LHV Pank is the third-largest bank in Estonia. Its parent company – LHV Group – is Estonia’s largest domestic financial group and capital provider. LHV Bank created waves when it kicked off as a cash-free bank. Today LHV is a banking and financial services company and promises to be “fully configurable and modular.” That’s why LHV has become the preferred banking partner to fintech companies.
The fintechs prefer to work with LHV as it’s capable of providing a myriad of services – from real-time pound and euro payments to virtual IBANs, currency exchange accounts, and FX transactions.
LHV established a presence in the undisputed fintech capital of Europe – London – in 2018. In February this year, it filed for a full UK banking licence to further its operations in the country and to better serve its global client base
Recently LHV made a one million EUR investment in the Estonian financial technology company Modular Technologies whose trademark is ‘Tuum.’
LHV selected Tuum’s platform as the core system for its new fintech-focused UK headquartered bank. LHV’s UK branch currently offers banking infrastructure to more than 200 international financial services companies, through which LHV’s payment services reach clients worldwide.
“Our co-operation with Tuum is important in two respects – technology-wise the UK bank will be built from scratch. We are keeping certain components that we’ve developed for fintechs, but the core system will be purpose-built from scratch,” explains Andres Kitter, the Head of LHV UK. “While we built the core banking system for our LHV Pank in-house, for LHV’s new UK-based bank, we decided to outsource the construction of the core banking system. Before choosing Tuum, we carefully analysed the offering of five similar service providers. We have worked with Tuum in the past, and in fact, we got to know their product so well that we decided to invest in them.”
With an abundance of fintechs around, providing services from money transfer, payments to investing, and loans, what is the competitive edge of a so-called traditional bank?
“A bank is much more than an institution. Of course, there are fields where fintechs excel – money transfers, wallet services, securities trading activities, virtual assets, crowdfunding, to name a few,” says Andres Kitter. “But a so-called traditional bank has many other services – the fintechs have yet to solve the needs of small and medium-sized companies, let alone the needs of corporate companies.”
Kitter admits that fintechs have disrupted private banking. “They do money transfers conveniently, more efficiently, and faster. People with a nomadic lifestyle get better service from a neobank than from their domestic brick and mortar retail banks. Fintechs have also revolutionised trading – thinking of Robin Hood, eToro, Lightyear, and alike – but the bank’s capabilities in product development and launching similar products cannot be underestimated. With all these new players around, we get a more interesting, diverse market where the client can choose the most suitable provider for their lifestyle,” concludes Kitter.
Big in the UK
“The fact that LHV is present in London, serving over 200 fintech customers – out of which 20 are unicorns – is a correlation of many positive factors,” says Kitter. “It is a combination of [the bank’s founders] Rain Lõhmus’ and Andres Viisemann’s entrepreneurial and visionary DNA, our technological capacity to build services desired by fintechs, and I believe that our team is very entrepreneurial by nature. Not to mention that the background of our fintech banking team is technology-centric – our Director of Banking Services, Jüri Laur, worked at Skype, Microsoft, and in online gambling, and I also worked at both Microsoft and Skype.”
Both men also say LHV’s customers have served as good teachers. “We were the first to onboard Wise and Coinbase in 2014.”
Coinbase, a major virtual assets exchange service provider, offered an excellent learning curve and enabled LHV to develop products to suit their needs (and subsequently, other crypto firms).
Jüri Laur chimes in: “You can be the best in Estonia, the best in the Baltics even, but there will always be a glass ceiling. If you want to offer scalable services, you must serve customers internationally. How many end customers do we serve worldwide? The number is definitely at least twenty times higher than the population of Estonia.”
So it is safe to say that clients like Wise and Coinbase pushed you to internationalise faster?
“A little for sure,” Kitter agrees, adding. “LHV itself moved vigorously towards real-time payment processing as soon as Single Euro Payment Area (‘SEPA’) instant emerged, opening it up for our customers. We also joined the UK Faster Payment scheme very quickly after that, which works in real-time. There are not many banks that can make euro-pound real-time payments. LHV is such a bank – we can transfer money in seconds for 500 million customers.”
Geographically LHV’s focus remains on the EU and the UK. They are not looking beyond this region for various reasons. “We can provide better and more thorough service by concentrating on this region,” Kitter says.
“I deal with our customers daily and often have the creeping feeling we are a half step behind them, but when I look to see what other banks are doing, we are ahead of them by a mile at least!” says Jüri Laur.
LHV is not new to investing in other companies, like the previously mentioned fintech Tuum; it also made a capital investment in a UK fintech called Bank North. “Bank North is delivering to the SME loan market, something we are not doing ourselves in the UK for the time being. Our ambition is to be a growth company,” Andres Kitter says.
Why has LHV built such a loyal fintech client base?
“What sets LHV apart is that we offer a complete package of services,” says Andres Kitter.
“Banking is a closed club; fintechs need a bank that holds their customers’ funds, there are certain types of accounts where this can be done, and they need access to payment schemes,” Jüri Laur adds. “We have essentially productised the starter kit for providing a financial company. We could even offer this kit as a white-label service to other banks.”
“Another important factor – we have created a risk framework for evaluating financial technology companies,” adds Kitter. “All this – how we manage risks, evaluate these customers on an ongoing basis, and the profile of transactions has been developed over many years. It is not easy to copy, and this know-how is quite specific. Today we are also more conservative; it has been a part of the learning curve.”
Andres Kitter says LHV’s approach to risk management considers four factors: process, people, technology, and policies. “We deliver with these four important components. For example, anti-money laundering and monitoring tools must be as real-time as our payments. In the future, the role of technology in risk management will increase. Today, about five to six of these software solutions are related to risk management. One of our technology partners is another Estonian regtech company Salv. We use Salv for several functions – for data quality monitoring, as an anti-money laundering and sanctioning tool, and to exchange information about suspicious transactions with other financial institutions via Salv’s proprietary communications platform AML Bridge.”
Another service to tip the scales in LHV’s favour for its fintechs clients is their ability to offer cross-border financial services that many bigger European retail banks do not.
What are the trends you are currently observing in the Estonian fintech landscape in the global market?
“Recently, there has been a strong shift towards investment services, accompanied by economic cyclicality,” says Kitter.
“Fintechs have followed a certain path thus far – they open a company in Europe, then in the UK, Singapore, and the US. But now there is a new trend to open a branch in Brazil, which has always been a closed market, but now its central bank has created favourable conditions for non-bank companies to join their payment systems,” says Jüri Laur. Adding that the trends are tied to what different states do – when the right conditions are created, fintechs will follow.
LHV UK’s main customer base consists of licenced e-money institutions, and a quarter of that market has been already gained. “Another quarter is not up to our standards, and the rest is yet to be gained,” says Jüri Laur talking about LHV’s future in the financial capital of Europe.
communications manager at the e-estonia briefing centre