Five trends motivating you to start a payment services business in Latvia

This blog looks at five trends motivating people to obtain an operating licence from Latvijas Banka and start a payment services business in Latvia.

The volume of payment services is growing

The volume of payments in the FinTech sector is growing, with the total amount of payments made by payment and e-money institutions that have received an operating licence in Latvia increasing in 2022 (Chart 1).

Chart 1. Volume of payments made by payment and e-money institutions

The volume of payments has increased both because of the increase in the cost of services (e.g. utility payments) and because more and more customers choose to use FinTech companies for payment services rather than the traditional channels – banks.

The range of services is evolving and companies are investing

Payment services companies in Latvia are diversifying and offering services that are easier to use and more accessible – both by adding payment channels, such as card issuance, and by extending their network. As a result, the population of Latvia, including people living more remote to urban centres, have easier access to a wider network of payment service providers, and have more opportunities to choose the right service for them, weighing up accessibility (physical points of sale or digital channels), price and other factors.

One of the objectives of the overall European Union (EU) policy in support of FinTech is also to make modern financial services accessible to those who currently lack sufficient access to quality financial services.

This is also in line with the increasingly common abbreviation ESG (environmental, social, governance) or environmental, social responsibility and corporate governance guidelines. There are a number of payment and electronic money institutions in Latvia that base their work on the “S” or social responsibility principles – fundamental human rights (access to financial services) and equality.

Payments are the backbone of financial services and are necessary for everyone. We are pleased to see that the number of payment service providers is growing and that existing participants are investing in development. Payment service providers develop more convenient payments by introducing new services, investing in expanding their service basket, improving the quality and accessibility of existing services. One example is Latvijas Pasts, which has just started issuing payment cards – both plastic cards and cards on a mobile app. This shows that customers are demanding increasingly modern access to their funds and are ready to embrace technologies.

Developing a convenient mobile app is self-evident, as shown by the Latvian FinTech market participants – apps are also developed by companies that previously focused on providing payments to customers who primarily prefer cash for making payments. These customer groups also become increasingly familiar with smartphones and use them, requiring that their payment service provider also offers services on this device.

New services are added to the market

New players join the FinTech sector. The modern approach to product development is to quickly develop a niche product in order to offer solutions to a specific problem to a well identified customer base. Adapting, improving and extending the capabilities of a product can then take place in parallel with the operation of the business. Spotting such niches, problems and solutions is exciting but also challenging at the same time, especially as people adapt and accept circumstances. But using the technology at our service is the foundation of innovation. A good example is Jool Pay, a newcomer to the Latvian payments market, which will solve the problem of how to leave a tip when you don't have cash on hand.

Payments are a profitable business

The financial indicators of the payments and e-money institutions sector show a downward trend in revenues (Chart 2). Although these FinTech companies face cost increases like other businesses – supplier costs are rising, salaries of employees need to be increased – the main reason for the decrease in revenues reflected in the data is the change in accounting principles in a number of companies. They internally assessed their accounting principles and regulatory requirements and made adjustments to accurately reflect the range of services regulated by the Law on Payment Services and Electronic Money and thus the attributable costs. The historical data are not modified by adjustments to the accounting methodology within the company and therefore the revenue dynamics show a negative trend over the years. These changes in accounting methodology have been made in consultation with the supervisory authority.

In summary, although the overall revenue dynamics of payment and e-money institutions is following a downward trend due to the above circumstances, FinTech companies in Latvia are profitable businesses and are able to find new profit niches.

Chart 2. E-money and payment institutions' revenues generated from the provision of services

Supervision focuses particularly on customer security

One of the main supervision priorities for FinTech companies operating in the payments sector is liquidity. As part of the concern for the safety of service recipients' money, FinTech regulation obliges payment service providers to maintain 100% liquid assets that are not subject to any other claims related to the service provider's business activities.

Latvijas Banka, as the FinTech sector supervisor, pays close attention to the coverage and management of customer funds. Good and safe management of customer funds at each FinTech company ensures customer confidence in both the sector as a whole and the quality of the services provided by the companies – timely and accurate execution of payments. In the Latvian payments sector, customer cash sufficiency is fully ensured – payments and customer balances with service providers are in line with regulation (Chart 3).

Latvia is an appropriate place to start a payment business

Latvia has the right environment and great potential to launch a FinTech payments business – there are opportunities to both innovate in specific niches and develop traditional payment services to a new level. Business volumes and stable, positive business returns show that the local market – both individuals and businesses – is ready to embrace newer and more advanced payment solutions. More importantly, a licence issued by Latvijas Banka allows a financial market participant to operate and provide services in all EU countries.

A number of support mechanisms are available for companies that intend to offer innovative payment solutions.

• Companies providing only innovative services in the field of electronic payments have to pay a reduced fee for the examination and supervision of the documents required for obtaining a licence or registration.
• Latvijas Banka offers advice at the Innovation Hub. Experts will answer questions about the compliance of the proposed service or business model with the licensing requirements, assist in the pre-licensing phase with the formulation of the idea and provide support in the preparation and review of documents. You can apply for a consultation with experts of Latvijas Banka by filling in the application form or by sending an e-mail to fintech@bank.lv.
• Entrepreneurs considering obtaining a licence to operate a payment or e-money institution will find useful information on the types of payment services and the requirements for obtaining a licence or registration at fintechlatvia.eu. To help you decide which authorisation of Latvijas Banka you need for your planned payment services or e-money business, we encourage you to explore the comparison of service providers and requirements. To ensure that the application for an operating licence is well prepared and that Latvijas Banka's processing of the application is smooth and efficient, we invite you to read Latvijas Banka's guidance on the preparation of the application.