EMI and PI sector: income grew by a fifth, market and liquidity risk assumed by institutions increased
Income from licensing activities of electronic money (EMI) and payment institutions (PI) in the fintech sector rose during the third quarter of 2023, while the amount of payment transactions decreased. Ten companies accounted for 70% of the sector’s income. Institutions are investing more and more client funds in securities, which poses additional market and liquidity risks.
“Fintech institutions are successfully competing with other sectors in terms of payment services, and their income is growing. We continue to actively engage in a dialogue with the market and have started to provide regular advice to new market entrants. To achieve the maturity of the sector, little attention is still given to governance, internal control and risk management. While institutions face challenges to meet the own funds requirements, they are willing to take on additional risks by investing more client funds in securities. These risks must be managed,” says Denas Jonas Gadeikis, Head of the Payment and Electronic Money Institutions Supervision Division of the Bank of Lithuania.
At the end of the third quarter of 2023, 127 institutions (83 EMIs and 44 PIs) operated in the sector in Lithuania. At the end of this period, their operating income amounted to €353 million and was more than one fifth higher than in the same period last year (€289 million). The income of the ten largest EMIs and PIs amounted to €239 million, or around 70% of the total income from licensing activities. As many as 65 institutions (more than half of those in the sector) received an income of less than €5 million from licensing activities.
The amount of payment transactions decreased by 6.2% at the end of the third quarter of 2023 (from €110 billion to €103 billion). The ten largest EMIs and PIs (almost a tenth of the sector’s institutions) generated nearly 70% (over €71 billion) of the total turnover of the sector in terms of the amount of payment transactions. 29 EMIs and PIs (almost a quarter of the institutions in the sector) recorded a turnover below €50 million.
In the third quarter of 2023, the capital adequacy ratio was not met by 2 institutions, while another 10 institutions were only slightly above the minimum threshold. The Bank of Lithuania recalls that the own funds requirements must be complied with on a permanent basis and recommends the formation of a safe reserve that exceeds the minimum requirements.
In 2023, the Bank of Lithuania issued 3 new licences, changed 1 limited licence to the one of unlimited activity and expanded 1 licence. 10 licences were revoked either at the request of the institutions themselves or as an enforcement measure for serious breaches of legislation.
To assess the compliance of EMIs and PIs with the requirements related to money laundering and fraud risk management, own funds requirements and the requirements for the safeguarding of customer funds, as well as the implementation of internal audit and internal control procedures, in the third quarter of 2023, the Bank of Lithuania carried out 1 individual inspection, 1 in-depth analysis, imposed 6 enforcement measures, held 25 targeted meetings with financial market participants and sent out 27 practice improvement notices.
According to the requirements for the safeguarding of client funds, EMIs and PIs must keep these funds in separate accounts opened with central banks, credit institutions of European Union (EU) countries (commercial banks or credit unions) or invest in safe, liquid and low-risk assets (e.g. short-term government debt securities). As a result of an increase in interest rates, a significant change was observed in the period under review compared to the previous year: the share of clients’ funds held with central banks fell by more than a quarter (from €1.35 billion to €722 million) year on year, whereas deposits held on current accounts opened with EU credit institutions increased by 4% (from €429 million to €452 million) and investments in safe or liquid assets almost tripled (€232 million to €609 million). The Bank of Lithuania warns 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, institutions should cover the resulting difference in value with their capital and could face liquidity challenges.
In order to enhance the maturity of the sector, the Bank of Lithuania has started to hold meetings with recently established market participants. The aim is to discuss the challenges in the first 6 months after the granting of the licence and follow-up plans. A consultation event was held for all EMIs and PIs where prudential topics were discussed: how to properly organise the governance of institutions and delegate control functions to third parties, aspects of activities through intermediaries/e-money distributors, and the empty shell factor. To promote the strengthening of the governance of the sector, the Bank of Lithuania sent a Dear CEO letter to the heads of EMIs and PIs, highlighting the principles of good governance practices of EMIs and PIs and their importance in the activities of institutions and reminding that the manager is responsible for providing accurate and correct data to the Bank of Lithuania.
Information on the annual and quarterly key performance indicators and indicators of compliance with prudential requirements of EMIs and PIs can be found here.