Lithuania Fintech Sector Is Booming, But Regulator Issues Warning Over Liquidity

January 10, 2024
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Lithuania’s e-money and payments sector is continuing to flourish; however, the central bank has urged institutions to be cautious in how they safeguard client funds.

Lithuania’s e-money and payments sector is continuing to flourish; however, the central bank has urged institutions to be cautious in how they safeguard client funds. 

Income from licensing activities of e-money and payment institutions in the fintech sector rose during the third quarter of 2023, while the amount of payment transactions decreased, the Bank of Lithuania said in a new report. 

“Fintech institutions are successfully competing with other sectors in terms of payment services, and their income is growing,” said Denas Jonas Gadeikis, head of the payment and e-money institutions supervision at Bank of Lithuania. “We continue to actively engage in a dialogue with the market and have started to provide regular advice to new market entrants.”

The central bank said that ten companies accounted for 70 percent of the sector’s income. The largest of these companies is Paysera, which accounts for 14 percent of the e-money and payment market’s turnover. 

Nuvei and ConnectPay meanwhile account for 12 percent each of market turnover. 

Income from licensed activities came to €353m at the end of Q3 2023, up by 21 percent year-on-year. This is impressive, considering a dip in licences for both payment and e-money institutions since Q3 2022. 

In addition, in Q3 2021, income came to €334m. However, some €170m of that came from Revolut, which was by far the biggest institution in the sector and has since received a banking licence. 

Safeguarding risks

It has also been noted that institutions are investing more and more client funds in securities.

This, the regulator said, is posing additional market and liquidity risks.

The Bank of Lithuania said that this is a result of an increase in interest rates, and that the share of clients’ funds held with central banks fell by more than a quarter, from €1.35bn to €722m, year-on-year. 

Meanwhile, deposits held on current accounts opened with EU credit institutions increased by 4 percent, from €429m to €452m, and investments in safe or liquid assets almost tripled from €232m to €609m during the same period. 

The central bank has warned that although the latter method may boost the income of institutions due to higher interest rates (and, consequently, securities yields), this also poses additional market and liquidity risks. 

If, for example, the value of securities decreases and the need to repay clients increases, the Bank of Lithuania notes that institutions should cover the resulting difference in value with their capital and could face liquidity challenges.

Another tough enforcement year ahead?

In 2024, the Lithuanian authorities will likely continue their focus on governance. This was evident throughout 2023 and before that as well. 

“To achieve the maturity of the sector, little attention is still given to governance, internal control and risk management,” said Gadeikis. 

Some sources have previously told Vixio that the shift in focus resulted from regulators at more established EU countries pressuring the small Baltic state to take a tougher stance. 

There has also been a shift in leadership at the board of the central bank, which may have jolted it into taking a tougher stance on the thriving fintech sector.

Lithuania’s biggest players have been among those receiving fines in recent years. For example, Paysera was fined €100,000 in September 2022 over non-compliance, and Nuvei was censured last year over money laundering violations. 

Plenty of other fines were issued throughout the year over issues such as safeguarding, non-compliance with sanctions rules and poor operational resilience. 

This no-nonsense approach is being noticed as well by potential investors, said Alexandre Pinot, co-founder of AMLYZE, an AML consultancy in Vilnius. 

“For new investors, this is definitely something that plays negatively into selecting Lithuania as a country to set up shop in,” he said.

However, Pinot suggested that the “long-term strategy is asking the market whether risk is under control”. 

“We don't want to end up like Malta or Cyprus where it is known law enforcement is weak,” he said. “No one wants to be on the Financial Action Task Force greylist, so things like AML risks do need to be under control."

Pinot, however, highlighted that the rapport between the regulator and payments institutions is not as good as it could be. 

“We could reach a better relationship with this, instead of imposing fines that can kill companies,” he said. “The feeling of many in the fintech community is that Lithuania wants to show to Europe and the world that it is very severe rather than create something more sustainable.” 

This, Pinot explained, is complicated for many. “The bottom line is everybody is in agreement on strategy but many insiders in the fintech community question the way of getting there."

Expectations on governance and maturity 

The central bank published a "Dear CEO" letter targeting payment and e-money firms governance in November last year. 

Issues covered included risk management, transparency and sustainability. 

Among the expectations set out, the central bank said that institutions should ensure that their supervisor is informed on a timely basis about significant changes in the company. 

"There is a reasonable expectation of heightened regulatory scrutiny in general in 2024,” said Marius Galdikas, CEO of ConnectPay. 

Galdikas explained that events like the collapse of the Silicon Valley Bank and the Railsr incident shook the financial industry in 2023 by “highlighting how even seemingly strong companies are susceptible to market forces beyond their control, like rising interest rates and falling investments”. 

“These incidents spurred some regulatory changes expected for the coming year, including heightened reporting requirements and closer supervision of risk management practices,” he said. 

“Fintech companies should expect to conduct thorough internal reviews to identify and address potential vulnerabilities and fortify their compliance measures,” Galdikas advised. 

The fintech CEO continued that a key part of this process should be clear and open communication with regulatory bodies, stakeholders and the public, to emphasise the steps taken to enhance security and compliance. 

“Such transparency will help foster a culture of compliance within the financial sector, which will be crucial to maintaining both a successful industry and consumer trust."

Pinot summarised that despite tough oversight, Lithuania “is still a great place to be regulated in Europe”.

“We have the capacity to have direct access to the SEPA payment system in Lithuania, which is a rather unique feature within the EU,” he said. “This comes with higher requirements but, practically, means fintech firms have direct access to the central bank. In terms of customer experience, this is amazing."

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