The future of financial services in Latvia: a vision for innovation, connectivity, and purpose-driven growth

Latvia stands at the threshold of significant transformation, where digital innovation and regulatory evolution converge to create new opportunities for businesses and consumers.

Latvia's financial sector has already demonstrated its adaptability, remaining resilient and stable during the Covid-19 pandemic, a period that tested economies worldwide. Notably, Latvia's fintech sector showcased exceptional resilience during this time, as digital solutions and innovative business models were mostly already in place to ensure continuous financial services for consumers.

Today, we have the opportunity to look forward and focus on inclusive, connected, and a future-ready financial ecosystem by implementing the European Digital strategy and helping local fintechs grow.

A more connected and inclusive financial ecosystem

Financial services in Latvia are striving for greater connectivity and integration. This is achieved by fostering deeper collaboration between fintechs and traditional banks, for example, integrating fiat currencies with crypto-assets, and encouraging the implementation of platforms with a business model to connect financial services with customers.

By enabling fintechs and traditional banks to collaborate within the same ecosystem, it is possible to combine the stability and trust of established institutions with the agility and innovation of startups. This creates a more dynamic ecosystem that benefits consumers through better services, competitive pricing, and more tailored products.

The integration of digital assets and fiat currencies may unlock new opportunities for customers, allowing transactions between traditional and emerging financial ecosystems. Stablecoins and the upcoming digital euro will play a significant role in this evolution, offering secure, efficient, and transparent digital payment options that can improve cross-border transactions.

Imagine a Latvian retailer accepting payments in euros, stablecoins, and the digital euro through a single payment gateway. Stablecoins could offer faster, lower-cost international transactions, while the digital euro would provide a safe and regulated digital currency option for everyday use. This hybrid payment model would enhance customer convenience and expand the retailer's market reach.

Building a forward-thinking Fintech strategy

At the end of 2024, Latvijas Banka initiated the coordination process for developing a comprehensive Fintech strategy for Latvia centred around four key pillars:

• international outreach,
• global promotion of Latvia's fintech sector,
• regulatory and infrastructure development,
• access to capital and talents.

The strategy aims to attract international fintech companies and investors to stimulate economic growth and ensure an environment for local companies to scale and expand across the European Union (EU).

While objectives and KPIs are under development, it is already clear that the strategy may create high-value jobs by nurturing domestic talents and attracting global professionals to Latvia's financial ecosystem. Additionally, the strategy introduces targeted measures to attract international investors and accessibility to funding programs for fintech companies. To advance these objectives, Latvijas Banka commenced cooperation with other government institutions and industry representatives.

Artificial intelligence (AI) in financial services

AI is rapidly transforming financial services, and Latvia is a sample of integrating this technology into the financial ecosystem. The EU AI Act has already come into effect, providing a clear and responsible regulatory framework that fosters safe, transparent, and ethical AI usage. This regulation requires that AI systems used in financial services meet the highest standards of reliability, security, and fairness.

The Latvian financial sector has embraced AI technologies with remarkable momentum. According to the latest data of Latvijas Banka, the number of market participants in Latvia utilizing AI in their operations has more than doubled, rising from 14 in 2023 to 34 in 2024. This reflects a growing recognition of AI's potential to drive efficiency, productivity, and customer-centric innovation.

For instance, AI-powered risk assessment tools can be employed in Latvian insurance companies to analyse vast amounts of customer data, with the result being to offer personalized insurance products based on individual risk profiles or streamline claims processing. Customers can benefit from faster services and more accurate pricing, while the companies may reduce operational costs. There is significant potential for insurtech services in Latvia. Currently, the market lacks active insurtech companies, presenting a valuable opportunity for innovation in the insurance sector. Growing digital adoption and a demand for user-friendly financial services can modernize the whole industry.

Looking ahead, the use of AI in financial services will continue to expand, especially as companies adapt to the demands of the Open Finance framework. AI will be crucial in analysing complex data sets, detecting fraud, and automating compliance processes. However, this growth must be accompanied by strong governance, transparency, and ethical practices to maintain consumer trust and market integrity.

Managing cybersecurity risks in a digital financial ecosystem

As Latvia’s financial system becomes more interconnected and digitally advanced, cybersecurity emerges as one of the most pressing challenges. The increasing adoption of cloud services (according to Latvijas Bank's research, 14 market participants in 2021 to 46 participants in 2024), AI, and digital payment systems all expand the attack surface for cybercriminals.

Recognizing these risks, Latvijas Banka is fully committed to strengthening the financial sector's cybersecurity defences by implementing the Digital Operational Resilience Act (DORA). Starting from 2025, DORA became active across the European Union and provides requirements how financial institutions manage operational and cybersecurity risks.

DORA establishes a comprehensive framework to enhance the digital resilience of financial entities by setting clear standards in four critical areas:

• third-party service provider risk management particularly in areas such as cloud computing and IT services to prevent overreliance on a single provider;
• incident reporting to improve the sector's ability to respond to cyber threats;
• penetration testing;
• IT governance.

By embedding digital resilience into the core of the financial sector, we can pursue innovation without compromising stability and security.

A purpose-driven future for Latvia's financial sector

The future of Latvia's financial services is rooted in connectivity, innovation, and a commitment to delivering a purpose-driven value to society. We may focus on a more interconnected ecosystem – where fintechs and banks collaborate, where fiat and crypto coexist, and where stablecoins, the digital euro, AI-driven services, and cloud technologies expand the digital finance area. Such a financial system can facilitate economic growth and societal well-being.

Crowdfunding and digital lending services

Another example of innovation in Latvian financial services lies in crowdfunding and digital lending services. These present a transformative opportunity, at least partly, to overcome the current slow business lending currently seen in the market. By leveraging online platforms, loan applications and disbursements can be streamlined, offering faster, more efficient services. Automated decision-making powered by AI can reduce approval times from days to minutes, while alternative credit scoring methods enable access to credit for small and medium-sized enterprises. Crowdfunding service providers (currently 3 in Latvia) connect lenders directly with borrowers, bypassing traditional banking systems. A public-private collaboration, such as expanding guarantee programs for these types of loans, could further strengthen this ecosystem ensuring broader financial inclusion and a customer-centric financial landscape in Latvia.

Innovation-driven payment services initiatives

At Latvijas Banka, we are dedicated to guiding the transformation of payment services by implementing the Payment Service Regulation and running innovative initiatives. One of the latest is granting access to non-banking payment service providers to the central bank payment systems.

Latvia supports innovative and purpose-driven payment models by offering reduced fees for innovative payment service providers. If it is planned to provide an innovative service, the fee for examining documents submitted for the authorisation or registration of a payment institution or e-money institution is 450 euro and the supervision fee for the first three years of operation is 1000 euro per year.

Latvia shall continue to develop financial services, creating lasting value for our people and our economy.

Summarising

Latvia's financial sector shall continue a transformative journey, driven by innovation, connectivity, and a commitment to purpose-driven development. We strive for a future-ready, resilient financial ecosystem and are witnessing the convergence of digital transformation and regulatory evolution, creating new opportunities for businesses and consumers.

The collaboration between fintechs and traditional banks, alongside the integration of digital assets and AI, fosters a more dynamic, inclusive ecosystem with benefits for the economy, while DORA bolsters cybersecurity measures.

The new Latvian Fintech strategy will help attract investments, nurture local talent, and ensure a robust financial environment. We are working to create an interconnected financial system that is not only innovative but also rooted in responsible governance.