The Fintech Sector is Entering a New Era

This summer the European Parliament and the Council adopted a new regulation aimed at ensuring that payment institutions (PIs) and electronic money institutions (EMIs) can directly participate in payment systems managed by central banks. In short, starting next spring, all EMIs and PIs will be able to directly connect to payment systems across the European Economic Area and will be directly responsible for fulfilling obligations under payment orders within those systems. Although changes often raise more questions than provide clear benefits, the direct participation of EMIs and PIs in payment systems without commercial bank as intermediary is a very positive sign for the Fintech sector. It signifies that EU authorities are starting to take Fintech companies even more seriously than before.

Under the European Parliament and Council regulation, EU member states must transpose the proposed changes into national law within 12 months. The changes aim not only to ensure that PIs and EMIs can directly participate in payment systems but also stipulate that holding funds at central banks will no longer be an acceptable method of client fund safeguarding for PIs and EMIs if a central bank had previously offered this possibility.

In 2016, the Bank of Lithuania opened its payment system infrastructure (at the time SEPA-MMS, later renamed to CENTROlink) to electronic money and payment institutions, allowing them to securely safeguard client funds in the central bank. Unfortunately, this unique offering from Lithuania will no longer be relevant in eight months. From the perspective of the European Central Bank (ECB), the primary function of national central banks is not to act as a substitute for credit institutions in providing client funds safeguarding services.

Nevertheless, as a representative of the Fintech sector, I cannot help but notice that the changes introduced by the European Parliament and the Council reveal the growing recognition and appreciation of the strong Fintech sector, which includes EMIs and PIs.

For example, in the ECB’s clarifications regarding the ability of PIs and EMIs to directly participate in payment systems, it is stated that these changes aim to level the playing field with banks. This ensures that PIs and EMIs can offer a full range of payment services without depending on banks for payment processing and settlement.

Additionally, it is emphasized that payment service users must clearly understand that EMIs and PIs exist to facilitate the provision of e-money and payment services.

Furthermore, the facilitation of EMI and PI access to central bank-managed payment systems is justified by the potential to improve the efficiency and smooth operation of the retail payments sector, such as providing instant payment services across the eurozone.

In short, after the proposed changes are implemented, Fintech sector companies will have the same access to major payment systems as banks. This change will provide EMIs and PIs with direct access to the Eurosystem's central bank-managed payment systems in the euro area, including the TARGET payment system.

Thus, this is a clear sign of the growing strength of the Fintech sector. While there used to be more skepticism about Fintech's potential, the sector’s increasing efficiency and rising competition have led to its companies being seen as much more equal to banks in terms of capabilities.

It is estimated that in 2023, Lithuanian Fintech companies provided payment services to 27 million clients across the European Union, representing one in ten Europeans. According to a survey of members of the "Fintech Hub LT" association, which unites licensed financial technology companies in Lithuania, there is an increasing number of profitable electronic money and payment institutions in the country each year.

According to the Bank of Lithuania, income from licensed activities of the EMI and PI sector grew by more than a fifth in the first half of 2024, with the amount of payment transactions increasing even faster. The sector’s income from licensed activities amounted to €275.1 million in the first half of 2024, growing by 22% year on year. The amount of payment transactions rose by 37% to almost €132 billion. The majority of the sector’s operating income and turnover is generated by 10 largest institutions (8% of the sector’s companies). They earned nearly €178 million in income from licensed activities (65% of the market) and generated €90 billion in turnover (70% of the market) in the first half of the year.