The Baltics Effect: The impact of the Baltics regulatory environment on the payments industry

The Baltic States—Estonia, Latvia, and Lithuania—are appealing to numerous Payment Initiation Service (PIS) providers because they serve as an entry point to the entire Single Euro Payments Area (SEPA). Traditionally, Lithuania has been the preferred European Union regulator for acquiring licences. However, it has recently adopted a stricter stance, revoking several licences and imposing larger fines on providers for non-compliance. In contrast, the Central Bank of Latvia is now offering SEPA access to payment institutions, a role previously held exclusively by the Bank of Lithuania. Latvia is actively seeking to attract cryptocurrency companies and is becoming increasingly friendly to fintech initiatives. Meanwhile, Estonia maintains its typically cautious approach, predominantly granting licences to domestically founded fintech firms.

Impact of PSD3 and Instant Payments Regulation on the Crypto Landscape

The upcoming PSD3 and instant payments regulations are set to significantly transform the cryptocurrency environment. Moreover, the introduction of the MiCA regulation, which is designed to regulate crypto-assets, their service providers, and issuers in the European Union to enhance consumer protection and establish clear industry standards, is expected to increase their acceptability among regulators. The Bank of Lithuania, which has traditionally maintained a cautious stance towards cryptocurrency companies, might become more accommodating, potentially leading to a rise in acceptance of cryptocurrency companies by payment service providers. Additionally, with the implementation of PSD3, numerous marketplaces will have to reevaluate their payment processing strategies, possibly requiring them to obtain a payment institution licence or partner with entities that already possess such licences.

Key Market Trends in Payment Services

The payment landscape is rapidly evolving, with a surge in Payment Initiation Service (PIS) adoption in e-commerce and growing demand for consumer-friendly interfaces like Apple and Google Pay. Traditional card payments are on the decline, while Buy Now, Pay Later (BNPL) services are experiencing increased demand. Recurring payments and secure card data storage remain crucial, particularly for insurance providers and large enterprises seeking to optimise revenue amidst ongoing innovation and technological advancements. Additionally, the maturation of PIS is fostering increased trust among major players in the market.

Groundbreaking Technologies and Challenges in the Payments Industry

Recent acquisitions, including LHV Group's purchase of Everypay in Estonia and the acquisition of Estonian company Makecommerce by Baltic regional bank Luminor, as well as Citadele's active commercialisation of its Klix solution, introduce a mix of challenges and opportunities within the financial sector. The payments industry in the Baltics is primarily challenged by the task of identifying service providers that align with merchants' needs and tackling the less-than-ideal integration of Payment Initiation/Open Banking APIs. These issues can cause errors and technical obstacles that disrupt payment processes and decrease conversion rates.

New Horizons: Identifying Opportunities for Growth & Innovation

Conversely, significant opportunities for growth and innovation abound in the payments industry, particularly for providers like Montonio. Deeper integration with banks to enhance conversion rates, prioritising quality over quantity in bank coverage, and leveraging evolving consumer behavior trends present avenues for innovation and market expansion.

Shifting Consumer Behaviors Towards Mobile Payment Solutions

Consumer behaviors regarding payment methods in the Baltics have undergone significant changes, particularly with the rise of mobile shopping. While banklink payments have traditionally been popular for online shopping, there has been a noticeable increase in demand for Apple Pay and Google Pay. This shift is driven by the convenience offered by mobile payment methods, aligning with the growing trend of mobile shopping. However, merchants in the region face challenges with expensive card payments, including those made through Apple Pay and Google Pay. Consequently, some merchants are hesitant to promote card payments and may explore options to pass on card payment fees to end-users, although the implementation of such strategies remains uncertain amidst regulatory considerations.

Future of Payments in the Baltics

The outlook for the payments industry in the Baltics over the next 5-10 years is expected to be characterised by continued evolution and innovation driven by technological advancements, changing consumer preferences, and regulatory developments, such as:

• Technological Advancements: The payments industry is likely to witness further advancements in technology, including the adoption of blockchain, artificial intelligence, and biometric authentication. These technologies will enhance security, streamline processes, and enable new payment methods and solutions.

• Changing Consumer Preferences: Consumer preferences are expected to continue shifting towards digital and mobile payment solutions. This trend will be fueled by the growing use of smartphones, increasing internet penetration, and the convenience offered by mobile payments.

• Regulatory Developments: Regulatory frameworks governing the payments industry are likely to evolve to accommodate innovations such as cryptocurrencies, open banking, and digital wallets. This may involve the introduction of new regulations or updates to existing ones to ensure consumer protection, data security, and interoperability.

• Fintech Disruption: The payments landscape in the Baltics may see increased competition from fintech startups offering innovative payment solutions and services. Traditional financial institutions may face pressure to adapt and collaborate with fintech companies to remain competitive.

• Cross-Border Payments: With the Baltics being part of the European Union and Eurozone, cross-border payments are expected to become more seamless and cost-effective, benefiting businesses and consumers alike.

Overall, the payments industry in the Baltics is poised for growth and transformation over the next decade, driven by technological innovation, changing consumer behavior, regulatory changes, and increased competition from fintech disruptors.