Our top priorities for e-Residency are banking, banking & banking
There’s been a lot of discussion this week about access to banking for e-residents due to two issues:
- Some e-residents have had their business bank accounts closed at Swedbank in Estonia with an explanation that their policy is to only provide these Estonian bank accounts to companies with a ‘connection to Estonia’. This has always been one of their policies, but the fact it has been applied retrospectively is particularly unfortunate.
- Two e-residents have had their share capital certificates rejected by the Business Registry for being sent from a fintech company outside of Estonia. This is despite the fact that 18 previous certificates were successfully accepted for other e-residents doing the same.
Although only a small proportion of e-residents have been affected, incidents like these that cause hassle to legitimate entrepreneurs — even though they are well intentioned — and that is deeply disappointing for everyone who supports the programme. As a result, it has stirred a passionate debate inside Estonia too where it’s fully understood that more must be done to improve access to banking.
Before I go deeper into these two issues, I should start off by saying that our advice to e-residents about how to open an EU company with EU business banking, like in the article below, remains largely unchanged.
A step-by-step guide for using Estonia’s e-Residency programme to become a location-independent entrepreneur.medium.com
We know many e-residents would like a bank account in Estonia so we advise them to work with an established e-Residency business services provider before booking any travel to Estonia for the purposes of opening an account. These companies work closely with the banks and can give the pre-decision before you fly. However, we also recognise that not everyone wants, needs or is able to obtain an Estonian bank account so an increasing number of e-residents actually turn to the fintech industry for their business banking instead. In addition, some e-residents have been able to obtain business accounts from banks in other countries for their Estonian companies.
There have been many debates at the e-Residency programme about which of these three options should be the focus of our resources when it comes to improving e-resident access to banking, particularly as we expect the choice of fintech banking services to widen considerably. We have decided however that all three should be improved in order to give e-residents the widest possible choice of services and to ensure there is no over-reliance on one solution.
In support of e-residents, we engage in discussions with a vast range of companies — including the banks in Estonia, fintech banking providers, and even banks in other countries — to find out how we can help them serve e-residents. We also work closely with regulators, policymakers and other stakeholders inside Estonia.
As I mentioned yesterday to e-residents in the Estonian e-residents Facebook group, the situation regarding banking is constantly changing and some weeks we take two steps forward and other weeks we take one step backwards. This has definitely been one of those backwards weeks, but the overall trend is positive.
It’s difficult to give a running commentary on this process as it involves commercial entities that will want to make their own announcements when they are ready about what they can offer to e-residents. There have been several occasions in which we have gone very far in our discussions with a particular company, only to discover that circumstances have changed and they are no longer able to serve location-independent entrepreneurs. We won’t give up though because the successes we do have along the way are worth it.
I can also tell you that this objective to support our e-residents does not just come from the e-Residency programme, but right across government …including the very top. We are all very passionate about how Estonia can help unleash the world’s entrepreneurial potential through this programme. Both the President and the Prime Minister of Estonia are always keen to know what more we can do to support our e-residents, especially when it comes to banking.
Now let me go into more detail though about the two issues that have come up this week:
Issue 1: Swedbank closing some accounts
Each bank has its own policies about who they open accounts for, but LHV and Swedbank have been the most popular of the Estonian banks for e-residents. These banks have always required a ‘connection to Estonia’ in order to open an account. This is definitely not ideal from our point of view, but many e-residents have been able to satisfy this criteria in various ways, which business service providers in Estonia can advise them about. We are also exploring more ways we can help with this by ensuring there is more business between Estonians and e-residents, such as through the new community platform. It should be noted that another very important consideration for the banks is how much visibility they have of their client’s companies. This actually favours many e-residents, particularly digital nomads, who have a more visible online presence.
However, some e-residents who have already had accounts with Swedbank and thought they had satisfied this criteria have now discovered that their accounts have been closed for not having a strong enough connection to estonia. We are particularly disappointed that this has happened retrospectively, although it may be influenced by the increase in pressure recently on banks (across Europe) to reduce their risks and do more to combat money laundering, which has also unfortunately affected legitimate entrepreneurs.
We are still working on ways that we can provide traditional banks with the ability to open accounts for e-residents without increasing their risks though.
I should also emphasise that we have not seen this trend at LHV, which recently stated that they open accounts for about 70 to 90% of e-residents that apply. This is partly due to the fact that they work very closely with business service providers to the e-Residency programme.
Issue 2: Difficulties registering share capital through fintech accounts
From our rough estimation, about half of e-residents use fintech accounts. These have the advantage of being more widely available and can be opened entirely online. I know a number of people have concerns about using fintech banking, but we expect the market to widen and improve greatly this year, and perhaps soon become the new normal when it comes to location-independent banking.
We’re working to integrate more of these solutions with e-Residency and Estonia’s business environment, as well as address the concerns in order to give more certainty to e-residents using them. One of the biggest issues for example has been share capital and that is what has prompted a number of concerns this week.
Here’s the issue: the law about accepting share capital was written before fintech options became available so there has been differences of interpretation about whether you can register share capital with them. Our legal interpretation has been that it is possible and the Business Registry — which is completely independent and under the jurisdiction of the courts — has made a number of judgements in support of this. However, there have also been cases in which different officials reviewing submissions have made a different interpretation.
The fact that some e-residents have had their share capital rejected is again deeply disappointing, but unlike with a bank account being closed, it can be reversed with new rules and doesn’t stop you from growing your business using the account in the meantime.
We have been working closely with our stakeholders to change the rules so that it is clear that share capital can be paid from a fintech account, including those outside of Estonia. I can now tell you all for the first time that the draft legislation has already been written and we hope it becomes law as early as possible. If so, it would radically improve access to business banking for e-residents.
In the meantime, you can continue to use accounts from the fintech industry for your business banking because Estonia allows you to defer your share capital payment when you start your company.
The key issue is that you can’t pay out dividends until the share capital has been registered. If your company is ready to pay out dividends for the first time and its share capital registration has been rejected then I apologise for the hassle that you have experienced, but we will keep you updated on when the rules are changed.
The most important voices in all of this though of course are from e-residents themselves. The e-Residency community is incredibly supportive to each other and that is part of the reason for why the programme is investing in a new community platform to make it easier for them to connect, conduct business, promote their companies and help each other, such as by reviewing banking services. We want to keep hearing from you and what you need to grow your companies so we can provide that feedback to everyone and anyone that can make a positive difference.
Please leave us a comment below to share your experience with banking and what you would like to see changed.