Bank of Lithuania feasibility study provides assessment of open banking solutions for fintech supervision
The feasibility study carried out by the Bank of Lithuania has shown that one of the key elements in open banking – the account information service – could be used in supervision of electronic money and payment institutions (EMIs and PIs).
“One of the fundamental requirements applied to EMIs and PIs is proper safeguarding of customer funds. Yet, practice shows that not all of them comply with this requirement. Therefore, in order for the fintech sector to gain greater maturity, we are looking for ways to include innovations in the supervision process,” said Rūta Merkevičiūtė, Director of the Financial Services and Market Supervision Department of the Bank of Lithuania.
The Bank of Lithuania aims to ensure that, in response to the increase in EMIs and PIs, their supervision process is as effective as possible. The feasibility study analyses the account information service and its use for supervisory purposes. This service would allow learning in real time what amounts of customer funds and with which credit or other financial institutions are held by EMIs and PIs, without the need to wait for quarterly financial reports to be submitted to the Bank of Lithuania. By combining open banking and smart regulatory technology (RegTech) solutions, the Financial Market Supervision Service could manage supervisory information more effectively and react quicker to inform institutions about any discrepancies identified. It would also encourage the institutions themselves to fully comply with the legal requirement for proper safeguarding of customer funds.
The Bank of Lithuania is currently working on a legal assessment of applying this solution in practice and solving related IT challenges.
The Republic of Lithuania Law on Electronic Money and Electronic Money Institutions and the Law on Payment Institutions specify that these institutions shall properly safeguard their customer funds. This can be achieved in several ways: by separating them from the funds of any natural or legal person other than electronic money holders or payment service users, or by covering these funds by an insurance contract or obtaining a guarantee or a surety bond.
The institutions’ activity reports show that most of them have chosen the method of segregation, thus this is where the Bank of Lithuania now focuses most of its attention. In 2019–2020, sanctions were imposed on ten institutions due to improper safeguarding of customer funds.
Currently, 81 EMIs and 52 PIs operate in Lithuania. This year, the Bank of Lithuania plans to conduct inspections in almost 70 institutions.