Banking Transformation in the EU: The Baltic Case

Reforming Baltic Banking - May 10, 2024

The words bank, finance, loan, or transfer are not unfamiliar to anyone old enough to be able to do any monetary transaction. However, there are many new terms that have appeared as a result of the professionalization of the economy within civil society, that is, since citizens have acquired knowledge in economic terms; rate of return on capital, or Net Interest Margin are some of them.   

Perhaps, the almost cyclical economic crises since 2008, the vulnerabilities of the banking sector with the introduction of new technological tools, the uncertainty after the Russian invasion of Ukraine or inflation have created a feeling of concern or interest among society about the need to know what is happening to their money. This, among many other data, is shown in the report presented by the European Parliamentary Group ECR “The transformation of the banking sector in the European Union and Northern Europe and its impact on sector competition in the Baltic States”.  

In this case, although a general reflection is made on the current situation of the financial sector in Europe, the particularities that characterize this sector in the Baltic countries: Lithuania, Latvia, and Estonia, lead to important conclusions.  

First, it is important to emphasize that the work carried out by banking and financial institutions is of relevant importance for society as a whole in any part of the world. In other words, banks are responsible, among other things, for financing bridges, roads, airports, and various infrastructures that are necessary for the proper functioning of any community. Moreover, this is not only a matter of creating new infrastructure, but also of generating new jobs and increasing employment figures, with the consequent benefit for economic and social health.  

The changes or circumstances mentioned above have brought with them profound, almost structural, changes within the financial sector, and this is a direct consequence of the prevailing need for banks to exist, although they need to be reconverted to a more digital reality. Thus, the so-called “neobanks” are born, that is to say, banks that offer only digital services. This, for the current technological times, seems to be an advantage and a more than useful tool to not miss what some have called technological revolution. This, on the other hand, can in no way be to the detriment of a basic service, which, as mentioned in previous lines, seems to affect every person old enough to make an economic transaction. This fact has negative and direct consequences especially on the most aged sectors of the European population, that is, on those to whom we owe the creation of this Europe and this society of peace and, to a certain extent, of prosperity. The European institutions must, therefore, and from their regulatory power, ensure the banking services that the elderly may need, paying special attention, also in those regions with large rural areas, as in Spain or Poland, where basic services are scarce. 

Another interesting conclusion that can be drawn from this report, and which is related to the previous point, is the ESG policies that banks are implementing. In other words, those policies that have the environment, social responsibility, and good governance as their backbone and that have caused so much controversy in countries such as the United States. Here in the European Union, however, more and more companies, including economic ones, are deciding to apply these policies, although they forget to consider what is important for financial institutions: to offer a guaranteed service that works for all citizens, regardless of age, economic situation or context.  

These two issues mentioned above, the application of ESG policies and the new model of technological banks have accelerated the creation of a phenomenon that the report, and here is another of the conclusions, has called costumer mobility. The truth is that according to Accenture’s Global Banking Consumer Survey 2023, only 23% of the citizens surveyed rate their bank’s product range highly and, in addition, the trend seems to be leading to a division in the purchase of financial services in different entities by the same user. This reality, within the margins of the European Union, is more accentuated in the Baltic countries: Lithuania, Latvia, and Estonia, which leads to the last conclusion. 

The Baltic countries seem to have two major problems that make them stand out from the trend that the rest of the European Union states maintain. On the one hand, there seem to be problems with foreign clients operating in these banks due to their geographical proximity to Russia, having to apply strong measures against money laundering or corrupt acts, which has led to a decrease in the number of clients. On the other hand, it seems that banks in these countries, especially in Latvia, are heavily dependent on Swedish banks, which makes them less competitive regionally and locally. This translates into less incentive for them to offer, among themselves, consistent interest rate offers on mortgage or loan repayments, so that the alternatives in these countries are few, making them a European exception.  

Perhaps, therefore, a possible solution to these problems could be a revision of the institutional requirements for banks, respecting their good work and independence, but remembering the need to offer comprehensive services that meet the needs of all social strata, as well as for the Baltic countries to achieve a greater degree of dependence on Russian clients who do not always operate under legal formulas, and to achieve greater financial sovereignty against external agents that hinder competitiveness and services to citizens.