We had a chance to catch up with Juhan Peet, Head of Treasury for one of our newest partners, Estonia’s LHV Bank, at our recent Raisin Partner Bank Conference. LHV’s term deposits are currently available on our German and Austrian platforms. We took the opportunity to ask him a few questions about LHV, working with Raisin, and what he sees on the horizon for his bank and the industry more broadly.
Tell us about LHV — what makes you unique and how would you describe your core mission?
LHV was founded in 1999 as a brokerage company, evolving into a fully-licensed bank ten years later in 2009 — right in the middle of the financial crisis. Now, another ten years on, as the UK is planning its departure from the EU, we’ve opened a branch in the UK. We want to be near our fintech customers in London, given the city’s role as a European hub for startups and particularly fintechs. We have all the products in place for our 150.000 retail and corporate banking clients and are deploying a lot of resources to service our customers in the fintech scene.
Being bold, thinking big, and if need be, swimming upstream is in our DNA.
Working closely with fintechs globally as well as close partners in Estonia — by combining traditional banking services with new solutions developed by our customers themselves — has yielded good synergy and great value for both us and our customers. This means that we’re not only servicing our 150K banking customers in Estonia but actually millions of customers worldwide. We have to bear that in mind while developing our systems, products, and services and ensure that everything we do is scalable.
There are fewer and fewer physical borders in banking, thus open banking, instant payment schemes (perhaps cross-currency), and other digital solutions are becoming a hygiene factor for us. Being bold, thinking big, and if need be, swimming upstream, is in our DNA.
How do you see the partnership with Raisin?
Our cooperation with Raisin is strategically important for LHV as it enables us to diversify our funding profile by reaching markets that would otherwise be costly for us to enter, given the set-up costs alone. Sound liquidity risk management is at center stage for LHV’s treasury operations, thus term deposits from European savers are a good addition to our funding mix, allowing us a low-risk funding source with which we, in turn, can support the Estonian economy by making funds available to local companies. Generally speaking, banks can use partnerships with Raisin for various purposes. Considering the size of Raisin’s core markets relative to small- and mid-sized banks’ funding requirements and the behavioral nature of retail deposits, the platform can be used by banks who are otherwise unable to attract longer term liquidity from international money markets. This is especially true for the EU’s border countries, given the prevailing inefficiency of the markets. Taking all aspects into the equation, the pricing of such deposits is rather fair and, frankly speaking, matches the indicated credit spread of many institutions on the platform.
Our cooperation with Raisin is strategically important for LHV as it enables us to diversify our funding profile by reaching markets that would otherwise be costly for us to enter.
What are some key factors in how European banking is changing, and how will the changes affect your customers?
I think that Brexit, AML and regulations, PSD2 and profitability are surely some of the major topics for most European banks, perhaps for banking globally. The UK leaving the EU is a headache not only for the UK banks, considering that London is one of the biggest finance hubs in the world and most first-tier EU banks are present there. We’ll see a wave of subsidiarization, duplication of functions, and ring-fenced capital and liquidity, which is all very costly for banks — and this will happen on both sides of the Channel. The political motivation for European banks to do business, say, in Paris, is plausible.
Anti-money laundering (AML) and know-your-customer (KYC) rules require both banks and fintechs alike to put material effort and resources into onboarding, monitoring, and screening their customers. Regulators demand higher than ever transparency: it’s either black or white, grey isn’t tolerated. Many banks have already said for years that the cost of doing proper AML/KYC, having increased dramatically, has made some types of relationships and areas of business unprofitable, and many have even exited. That’s very true for correspondent banking relationships and means that more and more institutions are cut off from some settlement schemes, particularly USD payments.
We see opportunities here rather than just costly problems.
The new payment directive, PSD2, will require banks to open up their customers’ account and transaction data for other service providers via APIs: this is new to the larger part of Europe and thus involves a change of mindset for bankers. All of this puts pressure on profitability, which many banks struggle with anyway, given the current interest rate environment in Europe. Much of this cost eventually translates into higher interest margins and transaction fees for customers.
Our agenda is of a similar nature, although we see some opportunities here rather than just costly problems. E.g. setting up shop in the UK now, we find ourselves one of the few banks in Europe to be members of the UK’s Faster Payments and SEPA Instant Payments. These programs allow our customers to make real-time payments in both Euro and Pounds around the clock, which is also great for our fintech clients, who have traffic from mainland Europe to the UK and vice versa. Given that payment services are the backbone of our product offering in this space, we’re investing constantly and heavily in AML and KYC technology and require our partners to do the same.
We consider ourselves the link between fintechs and banking infrastructure: we have the know-how and the confidence to say it out loud.
With Estonia leading the way in digitization with one of the highest online banking penetration rates, your digital ID card system and so on, do you see LHV playing a role on that frontier?
We consider ourselves the link between fintechs and banking infrastructure: we have the know-how and the confidence to say it out loud. We’ve developed a number of digital services in the past few years — for example, together with the local tax authority, we developed a new type of payment for small companies, which allows them to make salary payments, tax payments, and tax declarations for the tax board all in one click. Another ongoing project we have is the development of a business activity account for private people, meaning that occasional, seasonal, or project-based work won’t in the future require starting an entire business, since we’ll take care of the client’s taxes.
LHV is also one of the first banks in Estonia to adopt video identification for new customers, we’re one of the only two banks who work with e-residents and their businesses, we were the first to integrate TransferWise payments into our electronic channels, and so on. All this has translated into massive use of our e-channels. We only have two branch locations, both of which are cashless. This kind of digitalization is completely normal for us and we develop our services accordingly, often thinking “mobile first.”
With LHV Youth Bank you’re reaching out to a population that we’d also love to convince to save more, earlier. How is the development of the youth bank going, what are attitudes like, and how do you see younger people evolving as savers?
Our Youth Banking initiative was just launched recently with a bold kick-off campaign and was very well received, by boys and girls alike. It’s a full package offering for youth, including bank cards free-of-charge, payments, insurance on purchases, mobile banking, student loans, and various discounts with the Youth Card for things like fitness center membership, transportation, shops, etc.
Since our mission is to help create Estonian capital, the micro-investing product is also integrated into our Youth Bank offering. We’ve made it very easy, by allowing our young customers an opportunity to start saving, collecting a small sum from each card transaction that can then be invested into low-cost ETFs of their choice. The aim is to advocate starting to save early, and to emphasize the importance and impact of compound interest over time. We’re thinking about adding an aspect of gamification into the product to make savers more enthusiastic, and turn saving and investing into a lifestyle.
A warm thank you to Juhan Peet for taking the time to introduce LHV! We’re looking forward to everything our partnership with LHV will bring to Raisin and our customers across Europe.