Electronic money and payment institutions: growing number of market participants, rising income and stronger supervision
In addition to becoming a driving force of the Lithuanian fintech sector, electronic money and payment institutions create expectations to boost market competition. Aiming at the sustainable development of the sector, the Bank of Lithuania has been strengthening the anti-money laundering and counter terrorist financing (AML/CTF) and capital requirements set for such institutions.
“Having rapidly expanded over the two last years, the sector is further expected to show a growth spurt in 2019. The need for services provided by such institutions is reflected by not only the growing number of market participants, particularly electronic money institutions, but their income as well. However, on the other side, we also closely monitor their compliance with the set requirements,” said Rūta Merkevičiūtė, Head of the Electronic Money and Payment Institution Supervision Division of the Bank of Lithuania.
Currently, 107 electronic money and payment institutions that account for about a tenth of the country’s payments market carry out their activities in Lithuania. Although their market shares are fairly equal, certain different tendencies can be distinguished: while the share of payment institutions has been growing steadily, that of electronic money institutions has been rising in leaps and bounds – by almost 20 new entrants each year over 2017 and 2018. Last year, Lithuania was ranked first in continental Europe in terms of licensed electronic money institutions. In 2019, the Bank of Lithuania has already granted nearly 10 licences in each financial field and received almost 40 applications for electronic money institution and 6 applications for payment institution licences.
In the first quarter of 2019, electronic money and payment institutions earned more than €12 million in income (compared to 9.2 million a year ago). In 2018, they earned €41 million (1.3 times more than in 2017), 70% of which was generated by electronic money institutions and the remaining 30% – by payment institutions. Almost half of this amount was earned by 3 market participants. As regards income from licensed activities, 10 largest institutions generated 75% of the sector’s total income. In view of the fact that the sector is still evolving, some institutions tend not to earn income from licensed activities in their first year of operation – in 2018, the number of such institutions stood at 32 out of 95 market participants.
In line with its supervisory mandate, the Bank of Lithuania focuses on the following aspects: financial institutions’ compliance with the AML, own funds and customer funds protection requirements (which have to be held separately from the institution’s own funds, usually in another credit institution). Violations which are subject to various sanctions are most commonly registered in these particular fields – in the period from 2014 to June 2019, the Bank of Lithuania revoked one licence, removed the manager of one institution, suspended the voting rights of one shareholder, imposed 7 fines and issued 13 warnings. 2 more licences were revoked due to the fact that the institutions failed to commence their activities.
Internal control systems used by electronic money or payment institutions must function properly from the very first day they start their activities, while the human and financial resources must be focused not only on business development and growth, but on adequate risk control as well. The Bank of Lithuania will further concentrate on the fields of AML and protection of customer and own funds, and plans to start conducting inspections in this respect. Electronic money institutions will also be monitored for their compliance with the open banking (application programming interfaces) and strong customer authentication requirements. Moreover, the Bank of Lithuania is considering the possibility to launch examinations to the managers of electronic money and payment institutions (both the licensed ones and those applying for a licence) to test their ability to properly manage a certain financial market participant.
This year, the number of reports to be submitted by electronic money and payment institutions has also increased. For example, since July 2019, they are required to submit to the Bank of Lithuania quarterly reports for supervision of the implementation of AML/CTF measures as well as information on the provision of their services and restrictions, including statistics on fraud attempts.
The Bank of Lithuania has noticed that some institutions tend to ensure their compliance with the own funds requirements only after the reporting date and has drawn their attention to the fact that the minimum amount of their own funds must correspond to that set out in legal acts. 6 institutions increased their authorised or reserve capital, or covered incurred losses to meet their own funds requirement after 31 December 2018. The licence of an electronic money institution that was inactive for more than 12 months and failed to comply with the own funds requirements was revoked.
Payment institutions can perform money remittances, payment transactions, provide payment initiation, account information, cash deposit or withdrawal services, conduct direct debit or credit transfers and currency exchange operations. Electronic money institutions can offer the same services as payment institutions and issue electronic money – prepaid funds held in electronic devices which can be used to pay for goods and services.
Seeking to encourage competition and fintech development, the Bank of Lithuania provides eligible electronic money and payment institutions with access to its payment system CENTROlink which offers the widest range of SEPA services in the Nordic-Baltic region. Once members of the CENTROlink system, institutions can provide direct debit services and make instant payments 24/7/365.