Non Bank “Fintech” Payment Activity in Lithuania’s Centrolink

 

As mentioned in the previous post, the Central Bank of Lithuania (CBOL) allows non bank “fintech” entities holding PI (Payment Institution) or EMI (Electronic Money Institution) license Indirect access to Centrolink.

Access is subject to

1. CBOL approval and

2. the license holder agreeing terms with a Centrolink Direct Participant.

CBOL approval is not automatic. As mentioned in the last post, as of 2019 the CBOL had restricted the activities of 18 of these license holders.

Once approved, a Lithuanian PI or EMI licensee is able to make Euro payments across the SEPA – some 36 countries. Not just the EU (eurozone) but the EU-28 and then beyond!

These licenses also automatically confer the right to offer the licensed services within the EU/EEA without further licensing requirements, including from other countries. Think of it as a “passport”.

The CBOL also requires that local commercial banks inform it whenever they refuse to open an account for a PI or EMI and the reason why. 

This is to ensure that PI and EMI license holders are not denied accounts unless there is a good reason.

Why is this important?

Two reasons.

First, it's hard to conduct business without a bank account.

Second, a local account is needed to access Lithuania's Centrolink.

Most payments in national systems (including transfers to beneficiaries in other countries) are made in “central bank” money so the entity making or receiving a payment must have a settlement account with the local central bank. In this case with CBOL.

Entities like PI or EMI license holders generally would not qualify to hold accounts at a central bank. 

So they would need to have accounts at commercial banks through which they could indirectly access the payment system.

As per Centrolink's operating rules, there are two classes of participants:

• Direct Participants (“DPs”): FIs that have an account with the CBOL and are connected to Centrolink. That means, they are able to directly input payments and receive credits from Centrolink from/to their accounts at the CBOL.

• Indirect Participants (“IDPs”): FIs that do not have an account with the CBOL and are not connected to Centrolink. That means that they must submit their payments to a DP and received credits from the system to their account with the DP. but instead have an account with a Direct Participant. (Paragraph 16 of Operating Rules).

As per the CBOL’s website, there are 19 Direct Participants, including the CBOL. Thus, from the statistics published by the CBOL there would 118 Indirect Participants.

The CBOL has also made Centrolink economically attractive by keeping payment charges low with a reduction as recent as January this year.

You can find the current list of fees at Tab IV Service Fees on the CBOL website.

IDPs no doubt pay fees to the DPs fees for the services provided them.

As demonstrated by the charts below, PI and EMI payment activity through Centrolink dominates that of the commercial bank sector both in number of and euro value of transactions

PI and EMI fintechs are also the overwhelming majority of entities participating in Centrolink. I suspect the difference between the information above and the chart below is due to difference between the dates of the reports, e.g., 2020 versus 2021.

In the next post, we will take a look at the challenges posed to the CBOL and other regulators by this activity.

If you would like more detail on what SEPA is, please see the comment to the first post.