Payment radar

Aigars Freimanis, Director, SIA Latvijas Fakti

Research data suggests rising popularity in the use of non-cash payments. In February, non-cash payments accounted for 77% of all transactions conducted in Latvia within one week, while cash payments constituted a mere 23%. 

Respondents with higher education and higher income use non-cash payment options more actively. Even with relatively lower income levels, respondents aged 15 to 24 years actively embrace the new payment technologies. While not too rapidly, payments with both contactless cards and mobile phones are steadily increasing. Interestingly, contactless card payments are popular with both young people and pensioners. Meanwhile, smart phone payments are mostly utilised by young people, whereas pension-aged respondents are much more reserved towards this option. Pensioners' reservations may be attributed to the types of smart phones they own. These phones are often older models, changed less frequently, and therefore have limited technological capabilities.

People in Latvia are very satisfied with the ATM withdrawal possibilities, and their view has remained almost constant throughout the last four years.

Most people in Latvia are aware of crypto assets: 94 % of respondents gave this answer in February. Despite the high level of recognition, a mere 7% of respondents have ever purchased a crypto asset.

Zita Zariņa, Member of the Council, Latvijas Banka

Guaranteeing access to cash has been high on Latvijas Banka's agenda for several years. In autumn 2021, Latvijas Banka, the Finance Latvia Association and several banks with the widest network of ATMs and branches (Swedbank AS, AS SEB banka, Latvian branch of Luminor Bank AS and AS Citadele banka) signed a Memorandum of Cooperation agreeing to implement measures required to ensure access to cash for Latvia's population. This has helped to prevent rapid downsizing of the ATM network and its regional coverage, significantly facilitating the population's opportunities to use cash.

Since the end of 2013, banks have reduced the number of their branches by 91.5 %. According to the data at the disposal of Latvijas Banka, the number of customer service points declined from 319 at the end of 2013 to 77 in May 2023. Under these circumstances, ATMs have become the primary means of accessing cash.

At the moment of signing the Memorandum, there were 902 ATMs in Latvia (894 ATMs were maintained by the signatories of the Memorandum). Over two years, their number decreased by 1.7 %, and in mid-November 2023, there were 887 ATMs in Latvia (882 of them were maintained by the signatories of the Memorandum). The updated Memorandum projects that the number of ATMs maintained by its signatories will fall by 3.3 % (to 853) in the first half of 2024. This is mainly related to the request of one market participant (in response to the requirements of its external service provider and the pressure from rising costs) to optimise the ATM coverage.

Since the signing of the Memorandum, the practical significance of cash has turned out to be far greater than it seemed a few years ago. Russia's attack on Ukraine highlighted the particular importance of cash in crisis situations as well as the need for developing off-line solutions for non-cash payments.

The finance industry participants have shown their good will with regard to ensuring access to cash and have continuously reaffirmed their commitment to cooperation with Latvijas Banka within the framework of the voluntary Memorandum. While being a manifestation of good will, the Memorandum is not legally binding, and any changes to the requirements or validity extensions require the consent of all parties. In order to enshrine this aspect, which is significant to all citizens and businesses alike, at the statutory level, Latvijas Banka has drafted amendments to the Credit Institution Law and has submitted them to the Ministry of Finance.

The intention is to supplement the Credit Institution Law with an article outlining specific criteria (for example, that the bank provides payment account-related services) to identify the credit institutions which are significant in the context of ensuring access to cash in Latvia and which would be obliged to ensure the compliance of the cash withdrawal services provided to their customers with certain requirements.

Under the current market conditions, four largest banks in terms of the number of customer payment accounts and holdings of domestic household deposits (Swedbank AS, AS SEB banka, AS Citadele banka and Latvian branch of Luminor Bank AS) are to be recognised as significant credit institutions in Latvia. They are also critical financial service providers.

To tackle shortcomings, the Credit Institution Law will establish the following requirements:

• requirements for ATMs, the primary instrument for providing cash withdrawal services;
• geographical accessibility requirements for cash withdrawal services;
• the minimum number of ATMs providing cash withdrawal services to customers;
• the minimum uptime and availability time for ATMs;
• the minimum limit for free-of-charge cash withdrawal services to be provided by a credit institution;
• administrative sanctions for non-compliance with the cash withdrawal service requirements.

If the proposed amendments are approved by the Parliament, the cash withdrawal requirements applicable to significant credit institutions will take effect on 1 January 2025.

We sincerely hope that the relevant institutions and the Parliament will support the amendments. The role of cash payments, alongside with non-cash payments, remains very important: for example, about 1/4 of all payments and transfers are still made in cash (according to the Spring 2024 Payment Radar, the ratio of cash to non-cash payments is 23 % to 77 %). Cash is also a significant economic security element in various crises.

Over the recent years, we have been successful in stabilising access to cash, as also confirmed by the data from a sociological survey conducted by SIA Latvijas Fakti. As in February 2024, 84 % of Latvia's population were satisfied with the cash withdrawal opportunities from their accounts, while 10 % expressed dissatisfaction. The level of satisfaction with access to cash has remained broadly unchanged, with just insignificant fluctuations, since summer 2020 when this question was first covered by the sociological survey.

Up to now, Latvijas Banka has worked to provide people with a choice between different types of money, each having its advantages, and it will continue to do so in the future.

Aleksandrs Antiņš, Head of the Cash Technology Division of the Cash Department of Latvijas Banka

The European Central Bank (ECB) has published the latest euro area statistics on the number of euro counterfeits detected in 2023. It reveals that the number of euro counterfeits remains low: 16 counterfeits per million genuine banknotes in circulation.

There is a minor increase in comparison with 2022 (13 counterfeits per million genuine banknotes in circulation) and 2021 (12 counterfeits per million genuine banknotes in circulation). Although the number of counterfeits remains low, this minor rise suggests that the Eurosystem (the ECB and the national central banks of the euro area) should not fall into complacency and should make preparations for the introduction of the third series banknotes in a foreseeable future, which would make the lives of counterfeiters even more complicated. And such preparations began in 2023 when, taking into account the opinion of euro area citizens, the Governing Council of the ECB named "European culture" and "Rivers and birds" as the possible themes for future euro banknotes. The ECB will decide on the final designs, and when to produce and issue the new banknotes, in 2026.

Overall, some 467 000 counterfeit euro banknotes were withdrawn from circulation in the euro area in 2023 (roughly 376 000 counterfeit banknotes in 2022), and more than 70% of the counterfeits were 20 and 50 euro denominations. 97.2% of the counterfeits were found in euro area countries, while 1.9% were detected in other EU Member States and 0.9% in other parts of the world.

Most counterfeits were of a poor quality; therefore, they could be easily detected by using the "feel, look and tilt" method. A detailed description of the security features and design elements of the euro banknotes.

In 2023, 1248 counterfeit banknotes and coins were detected in circulation in Latvia, including 655 and 593 counterfeit banknotes and coins respectively.

Last year, the total number of counterfeits grew by 40% as compared to 2022. In 2022, 889 counterfeit banknotes and coins were detected in circulation, including 433 and 456 counterfeit banknotes and coins respectively. Regardless of the insignificant rise in the number of counterfeits, which can be inter alia explained by a larger number of banknotes and coins in circulation (an increase of roughly 5% in the euro area as a whole), Latvia remains one of the best-performing euro area countries in terms of money security.

2 euro coins were the most counterfeited denominations in Latvia (43.6% of all counterfeits), followed by 50 euro banknotes (18%) and 20 euro banknotes (17%). As to the quality of counterfeits, mostly poor-quality reproductions prevail.

The advanced security of the euro banknotes and coins is highly appreciated by Latvia's population. A survey conducted by SIA Latvijas Fakti in February 2024 shows that 61% of the respondents consider euro to be a secure and hard-to-counterfeit currency, while 13% believe in the opposite. In February 2023, 45% of the respondents claimed that euro was a secure currency, while 29% thought the opposite.

Euro is, indeed, a secure currency, and the population is well acquainted with its security features and design elements. The focus on the security of money has traditionally been strong in Latvia, and, since the euro changeover, it is customary for shops to continue using cash authentication devices. At the same time, there is no room for complacency, especially because counterfeiters most often target children and elderly citizens, the most vulnerable members of society. Every case when a counterfeit banknote or coin has still ended up in somebody's wallet is a real financial loss to the crime's victim.

Emīls Dārziņš, Modern Payments Expert, Latvijas Banka

Over the most recent years, fighting the abuse of dominance by technology giants has become an increasingly more prominent issue. It is no secret that the world of technology is dominated by a small number of huge companies willing to maintain their positions, which quite often means that those positions are used to keep new players out of the market.

Legislators all over the world have paid considerable attention to this issue in an effort to address the monopolistic problems of the market and strengthen competition. The European Union (EU) is to be considered a leader in this area. The European Commission (EC) launched official investigations into technology giants like Microsoft, Meta Platforms (owner of Facebook, Instagram social networks), Google and Amazon in recent years. These investigations have resulted in record-high fines relating to both anti-competitive practices and violations of data privacy and protection rules.

This time, the EC's spotlight has fallen on Apple. Apple is often accused of having an ecosystem which is largely closed to outside market players and of being unwilling to share access to its technologies and standards. Why is that important? Let's look at it from the perspective of applications on Apple smart devices. Apple allows users of its smart devices to install new applications only via its in-house App Store. At the same time, for app developers to put their applications on App Store, they have to agree to a set of criteria imposed by Apple. One of the criteria that has caused headaches for developers previously is that all in-app purchases on an Apple smart device had to be made by only using the Apple Store payment system – Apple Pay. As a result, Apple charged a certain commission on each purchase, and alternative payment methods were not allowed. Currently, Apple has opened the door for developers to allow other payment options but Apple would still maintain a certain commission for every such purchase. This way, Apple is involved in every process that takes place in the system it has developed. Such an approach is definitely not unique to the Apple ecosystem, but it is one of the examples how technology companies use their strong market positions to their advantage.

The EC's attention has been drawn to Apple's payment technology or the Apple Pay functionality. It is based on the Near Field Communication technology (NFC). Many people make payments via Apple Pay every day, but only a few realise that it is not that simple for a payment service provider to get into the Apple Pay ecosystem. Linking a payment service provider's payment card to Apple Pay involves additional costs to the provider which are charged on every transaction, like in the above-mentioned example with apps. Apple has long chosen to deny third-party access to the NFC technology embedded in its smart devices; therefore, the only way to make payments by an Apple device is by using Apple Pay. Payment service providers in Europe have widely criticised Apple for its restrictive policy, seeing it as a significant obstacle to the development of new solutions in this field.

The EC launched an official investigation on 16 June 2020 to evaluate whether Apple's practices are compliant with the EU's competition rules. On 2 May 2022, the EC informed Apple of its preliminary view that Apple's dominant position in markets for digital wallets and denying third-party access to its NFC technology restricts competition, leading to less innovation and less choice of services for consumers. Currently, the investigation is still ongoing, but if the EC's preliminary conclusions are confirmed, it will be a violation of Article 102 of the Treaty on the Functioning of the EU prohibiting abuse of a dominant position within a market.

As a result of the pressure from the EC's investigation and criticism from EU market players, at the beginning of the year, Apple submitted a proposal to the EC to open access to its NFC technology to third parties. The technology giant has offered five commitment areas in order to promote the development of new solutions on Apple devices, based on its NFC technology.

Among other things, Apple offers to allow third-party mobile wallets and payment service providers to access the NFC technology indirectly through a set of Application Programming Interfaces (APIs), without having to use Apple Pay or Apple Wallet and the so-called secure element built into Apple smart devices. This means that third parties would be able to offer payments to their customers on Apple smart devices by using the Host Card Emulation (HCE), a technology emulating a physical NFC payment card at a software level. The Apple Pay solution uses a combination of both those technologies. In addition to that, Apple offers to allow third-party service providers to use their biometric authentication solutions (FaceID and TouchID), which people are already quite familiar with. Moreover, the users would be able to select third-party solutions as their default preferred payment application if willing to do so.

Historically, Apple has also been accused of insufficient transparency with regard to providing access to its in-house App Store. Therefore, Apple's commitment to develop clear, transparent, and non-discriminatory eligibility criteria for third party access to its payment technologies is also a positive development. This would mean that, in cases when Apple denies access to developers, a neutral and independent dispute resolution mechanism allowing to assess the validity of the denial would be used.

Apple's proposal would apply to service providers across the European Economic Area (EEA) and all users that have registered their AppleID accounts in the EEA countries, but the privilege would not be extended to non-EEA companies. This suggests that specifically the actions taken by the EC served as an important incentive for Apple to take this step.

The concessions proposed by Apple are, of course, positive news, but at the same time there are also some reservations. Currently, the commitments offered by the company do not cover other aspects related to the use of the NFC technologies and their potential to improve people's daily lives. For example, one of them relates to loyalty programme applications. At present, there are no plans to grant them access to the NFC technology. What does this mean in everyday life? Android users will still be able to authorise their loyalty cards by swiping the loyalty card stored virtually on their phone at a POS terminal using the NFC technology, while the users of Apple's smart devices will have to open the loyalty app and use a QR code before making a payment. A small thing, but a bit of a nuisance.

On 19 January 2024, the EC invited all the interested parties to provide comments and proposals on the commitments offered by Apple. Currently, the EC is reviewing the feedback and the final outcome is yet unknown, but there is a strong hope that access to Apple's NFC technologies will be soon granted to a wider range of companies.

If the EC approves Apple's commitments, their implementation would be monitored by a monitoring trustee. If Apple does not honour its commitments, the EC will be entitled to impose a fine of up to 10% of the company's worldwide turnover, without having to prove an infringement of the EU antitrust rules.

Historical experience shows that the EC has been successful in achieving a favourable outcome for Europeans even against major global companies like Apple, as companies are unwilling to pay huge fines or lose business in the attractive European market.

Reinis Vecbaštiks, Modern Payments Expert, Latvijas Banka

The year 2024 brought positive news from the world of crypto-assets. On 10 January, the US Securities and Exchange Commission approved 11 exchange-traded funds (ETFs) tied to Bitcoin (BTC), the most popular crypto-asset.

ETFs are investment funds that are listed on exchanges, and they can contain several asset classes, for example, stocks, bonds, currency instruments, commodities, etc. The inclusion of crypto-assets in ETFs and their trading on traditional exchanges will provide opportunities for more people to invest in BTC. Until now, acquiring crypto-assets was relatively complicated. It could be done on specialised exchanges or using special digital wallets. BTC ETFs trade the shares of the fund managed by licensed managers that are well-known to a wider range of investors, for example, BlackRock, one of the largest US investment firms. When investing in a BTC ETF, the investor does not directly purchase and hold BTC, but uses the services of a BTC ETF manager of his choice. The complexity of acquiring and holding crypto-assets has so far been a significant barrier discouraging a large number of potential investors, both individual and institutional, from investing in crypto-assets.

The crypto-asset world awaited the approval of BTC ETFs with a large dose of enthusiasm, hoping that this would draw more private and institutional investors to BTC, thereby increasing its value. From 15 January 2023 when BlackRock first announced its intention to create a BTC ETF until the January 2024 decision, BTC appreciated by 96%, primarily on account of the expected approval of the BTC ETFs.

But what is the direct effect of the BTC ETFs on the market price of BTC? The answer is more complicated than it may initially seem. BTC ETFs have both pros and cons. The main assumption is that access to BTC funds on conventional investment platforms provides significant convenience to the potential investors and helps to avoid a number of risks associated with direct holding of crypto-assets (in digital wallets). Purchasing ETFs also enables investors to diversify their investment portfolios. An ETF may simultaneously contain various assets, for example, BTC and tech or other sector stocks. Such diversification mitigates investment risks, as depreciation of one asset may be offset by appreciation of another asset included in the fund.

At the same time, every investor must be aware of the remaining risks. Currently, no additional investor protection mechanisms with regard to BTC have been provided in the US. It should also be noted that the BTC ETFs track the value of BTC, which is highly volatile. Given the weak regulation of crypto-assets, the value of a BTC ETF depends on various external shocks in the crypto-asset world, including the adoption of new regulation or individual problems in major crypto-asset exchanges (such as the relatively recent collapse of the FTX cryptocurrency exchange).

It is virtually impossible to predict the price movements of BTC or any other asset with a high degree of accuracy. Right after the US Securities and Exchange Commission's decision to approve the launch of BTC ETFs, contrary to expectations, BTC depreciated by 14.5% in a 12-day period, soon followed by a rally to an all-time high of over 70 000 US dollars in March 2024.

The upward movement of the BTC's value could also be associated with the halving of the BTC mining rewards expected this year. Halving is embedded in the BTC's algorithm and is scheduled to occur roughly every four years. As a result, the reward of BTC miners for each new block mined is halved, thereby reducing the number of new BTCs entering circulation. BTC is a fixed supply asset limited to a maximum of 21 million coins (currently, there are about 19.65 million BTC in circulation). Halving will reduce the flow of new BTC into the blockchain circulation and the BTC inflation rate. Under standard economic assumptions, given a lower supply and an unchanged demand, BTC could appreciate.

However, it is important to remember that the crypto-asset market is particularly unpredictable in terms of value fluctuations. It involves a high degree of speculation, and the lack of regulatory oversight exposes investors to a considerably higher risk compared to investing in traditional assets.

Current developments in the crypto-asset world suggest that, given the close interconnectedness in this market, significant value fluctuations could be expected not just in the case of BTC, but for other crypto-assets as well. Anyone willing to invest in crypto-assets should be aware of the inherent risks and various external factors with a potential effect on the value of those assets.

The above developments are also felt in Latvia. According to a February 2024 survey by SIA Latvijas Fakti, 94% of Latvia's population have heard of crypto-assets (a year-on-year increase of 9 percentage points). The number of people with experience in holding crypto-assets has also grown from 4% to 7% over a year.