Environment conducive to innovation and fintech development: Latvijas Banka’s initiatives

Much has been done for the development of Latvia's fintech sector in 2023. Already at the beginning of the year, the government approved the development strategy for Latvia's fintech sector, defining Latvia's vision for fintech and the steps to be taken.

As part of the sector's ecosystem, Latvijas Banka has carried out several strategic tasks this year, thus making large strides in improving the fintech environment.

To promote the fintech development, we prepared a plan of action, taking into consideration the recommendations on the necessary action to improve the fintech environment which we received during our dialogue with the fintech companies and the commercial banking sector. We understand our responsibility to implement the Fintech strategy recommendation to create a financial market infrastructure that is conductive to innovation, and so we will offer the providers of non-bank payment and crypto-asset services the opportunity to open an account with Latvijas Banka for the segregation of customer funds. Moreover, non-bank service providers will also be given the possibility to become participants of the Electronic Clearing System (EKS) of Latvijas Banka.

Account with Latvijas Banka for the segregation of customer funds

In November 2023, the Council of Latvijas Banka approved a development initiative enabling payment institutions, e-money institutions and, in future, also crypto-asset service providers to ensure secure segregation of their customer funds at Latvijas Banka. The main goal of the service is to protect the customer funds held by payment and e-money institutions and, at a later stage, also those held by crypto-asset service providers. Payment service providers whose customer funds exceed 100 000 euro will be able to manage their financial risks more securely as they will be guaranteed compensation from the Deposit Guarantee Fund. The segregation of customer funds is a key requirement for the licencing of payment and e-money institutions, and of crypto-asset service providers.

An account with Latvijas Banka for the segregation of customer funds will be available to the payment and e-money institutions licenced within the single market of the European Economic Area (EEA) and to the crypto-asset service providers licenced according to the requirements laid down in the EU Markets in Crypto-Assets Regulation (MiCAR). Latvijas Banka will only accept the funds of payment and e-money institutions' customers from accounts held by those institutions with payment service providers that operate in the SEPA area or in the EU or EEA countries.

Latvijas Banka has agreed with the Ministry of Finance on the national regulatory changes required to implement the initiative.

This development initiative of Latvijas Banka is truly significant for payment and e-services institutions. The survey of the financial sector participants conducted by Latvijas Banka this year revealed that almost half of the surveyed fintech companies have opened their accounts with foreign banks or payment service providers. The surveyed fintech companies pointed out that it is difficult to open a settlement account with a Latvian bank and that there are high commissions. We also hear such complaints at the Innovation Hub as we consult the potential market participants. Furthermore, the supervision process of the existing fintech market participants also reveals difficulties in the cooperation with banks.

The situation is similar with crypto-asset service providers. The meeting of the fintech sector representatives organised by Latvijas Banka this summer focussed on the introduction of the MiCa regulation in Latvia. The regulation sets out the obligation for crypto-asset service providers to ensure the segregation of customer funds – a crypto-asset service provider has the right to hold its customer funds with a credit institution or the central bank if the latter provides for such a possibility. Having assessed the market development opportunities and the availability of the financial services to fintech companies, Latvijas Banka has decided that, after the entry into force of the national regulation, it will provide an opportunity for crypto-asset service providers to open an account with the central bank to ensure the segregation of customer funds.

Direct participation in the EKS also for non-bank payment service providers

To promote the development of payment services, Latvijas Banka will offer non-bank payment service providers an opportunity to become direct participants in the EKS, thereby ensuring that the payment service providers are reachable and able to send payments via the SEPA.

Direct participation in the EKS will be open to payment and e-money institutions, as well as credit unions, thereby ensuring a level playing field for all payment service providers in Latvia. At the moment, participation in the EKS is already available to credit institutions and the Treasury.

It should be noted that an EU-level agreement on the regulation of instant payments was reached in November this year. Among other things, the agreement includes amendments to Directive 98/26/EC of the European Parliament and of the Council on settlement finality in payment and securities settlement systems (SFD) and Directive (EU) 2015/2366 of the European Parliament and of the Council on payment services in the internal market (PSD2). Latvijas Banka has agreed with the Ministry of Finance on the required national regulatory changes even before the deadline for implementing the EU's legislative package.

The new services will be made available next summer

Latvijas Banka is planning to roll out both new services – the opportunity provided to licenced payment and e-money institutions, as well as licenced crypto-asset service providers, to open an account with Latvijas Banka for the segregation of customer funds, and the opportunity given to non-bank payment service providers to participate in the EKS – in June 2024 if the national regulatory changes will be approved by then.

Multifaceted support to the financial sector innovation

A well-developed financial market is one of Latvijas Banka's priorities. Latvijas Banka has removed several obstacles to innovation development over the past two years by reducing the administrative burden and making improvements to the licencing process, establishing risk-based supervision of all fintech segments and raising the sector's awareness of risk management with regard to money laundering and sanctions.

Latvijas Banka organises seminars for the representatives of the non-bank sector, taking account of the sector-specific risks, their management and the identified issues, and it will continue to organise such seminars in the future. Among other things, Latvijas Banka offers a three-way cooperation model between the FinTech companies, credit institutions and Latvijas Banka for innovative fintech business models so as to promote the fintech companies' understanding of how to apply the regulatory requirements and ensure the compliance of their innovative services with those requirements.

Latvijas Banka also continues to expand the capacity of the Innovation Hub and that of the Regulatory Sandbox, and provides support in solving various issues.

Latvijas Banka's work is bearing fruit as several market participants such as investment platforms and payment institutions have been licenced over the past few years. As soon as the MiCA regulation takes effect and the required national regulation is adopted, we expect new supervised companies, including those operating within the crypto-asset sphere, to join the fintech sector.

The progress achieved so far motivates Latvian entrepreneurs to receive their EEA operating licence in Latvia, and it can potentially sway the financial specialists who have been building their careers or businesses abroad into returning to Latvia. With the emergence and growth of innovative fintech companies, new well-paid jobs are created both in the financial sector and the related services sectors.

Innovation is a key precondition for Latvijas Banka in order to achieve the vision defined for Latvia's Fintech strategy: "Latvia as a financial technology centre of European Union significance where fintech companies promote innovation and competition in the financial sector by developing significant, secure and internationally scalable business models."

We will continue our efforts in 2024 to make sure that Latvia becomes increasingly more visible on the European fintech map.

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