Recently, the FCMC has accomplished a market overview regarding the types of financial innovations used by Latvian market participants. Market players from banking, insurance, payment institutions, electronic money institutions, investment companies, pension funds and Fintechs shared their experience regarding the technologies they use in daily activities.
44 companies of 125 are using at least one innovative technology, while 15 companies have established dedicated innovation teams, who are working on the development and implementation of new technologies in their business. In fact, only 14 participants plan to start using innovative technology in future, while 65 are not planning to change anything in their innovative architecture.
Looking at today's innovative landscape, not only on European level, but in a global context, the highest trend of usage of technologies is observed in such areas as robo-advisory, artificial intelligence, machine learning, API, DLT technologies, cloud computing services, contactless payments, smart contracts, big data, biometrics and IoT. Observing the landscape of financial sector in Latvia through given research, the FCMC was focusing exactly on these innovation areas.
According to our observation the majority, 27% of market participants who responded, are using API technology in their daily work. For the last years, API technology is considered as a standard solution that is easy to implement, is user-friendly and easily adaptable by developers in order to arrange the connection between different applications.
In Latvia, API technologies are widely used in the financial sector by banks, insurance companies, investment firms, payment institutions. Most common usage of API in banking is related to open banking while insurance companies use the API for information exchange between insurance agents or to ensure operation of insurance calculators. Also, API technology is used by Fintech companies billing modern IT infrastructure on the "lego principle", or using micro-services architecture that allows to transfer data, payments or other information in seconds.
Contactless payments represented 19% among other technologies that are used by 17 market players. Contactless payments have been used in the Latvian market for more than 3 years already and allow customers to pay for products and services in the easiest and fastest way in retail points of sale without entering the payment card's PIN code. Each year more and more customers are choosing contactless payments in everyday life; about 61% of customers according to statistics. According to respondents' comments, contactless solution makes customers more satisfied with banking services.
Another two technologies that are widely used in Latvia are biometrics (16%) used by 16 respondents and cloud computing services (15%) used by 14 respondents. Today, biometrics is one of the most secure authentication tools that ensures access to specific applications like mobile banking using face recognition or fingerprint. Biometrics technology gives the possibilities not only being authorized by mobile application, but also approve the payments. At the same time, cloud computing services are used by payment institutions, electronic money institutions and licensed investment firms. Cloud computing services enable users to use data from different devices and access points through the Internet. According to respondent data, this technology has been used already from one to three years and is applicable for data storage, project management within organisation. Cloud computing services are ensured by third party providers. Among the benefits mentioned by respondents are the convenience for remote work and cost benefit for business in terms or maintenance of IT infrastructure.
The data volume in the provision of financial services is increasing dramatically year by year. It covers both, structured and unstructured data used for daily business performance to provide services to customers or ensure the reporting. Of all the respondents, 6% (five participants) use big data technologies in the insurance and pension areas.
Artificial intelligence and machine learning technologies have a huge potential to transform financial services and bring product and data quality on the next level. Globally, an artificial intelligence application in finance and high demand for customization of services create huge room and opportunities. In Latvia, artificial intelligence is used in the banking an insurance sector and is adapted by 6 institutions, while machine learning technology is used only by 1 market player, an electronic money institution.
Globally, artificial intelligence application in finance helps to detect fraud activities, to automate specific tasks, to improve customer scoring models in lending and provide advisory services in personal finance and wealth management business. Robo-advisory is another game changer not only in the financial sector, but also in service-organisation as such. More and more companies and governmental institutions are implementing chart-bots to make customer service friendly and more available for customers at any time. According to our research in the field of financial sector, only 5 market players are currently providing robo-advisory services.
Among the obstacles that create barriers in adoption of financial technologies are the lack of specialists' qualification and limited IT resources.
To support the development of innovations in the financial sector, the FCMC has established two supporting instruments for existing and potential market players: Innovation Hub and Regulatory Sandbox.
The Innovation Hub is a special contact-point for FinTech, Startups and other players to ask questions and receive guidance directly from the FCMC experts regarding innovative financial products, services or business models under development, licensing, requirements, supervision and regulations (including PSP, AML, IT security, crowdfunding, crypto, etc.). In the first half of 2021, about 20 companies from different financial market segments received professional guidelines and consultations from the Innovation Hub's experts. IT security and cyber-risks in adopting the financial innovations are included in the advisory scope.
The Regulatory Sandbox is created for those companies that are developing new innovative services where regulation is unclear. The Regulatory Sandbox is a place where existing or potential financial market participants whose activities require a licence from the FCMC (licence for operations or permission) may test their innovative financial products, services or business models in accordance with a specific testing plan agreed with the FCMC before the product or service is launched for retail customers. Several countries across the European Union have established their Regulatory Sandboxes to facilitate innovation in the financial sector. It gives the opportunity to Fintechs, newcomers and existing financial institutions to adopt innovative solutions and services. Innovations and technologies are developing faster than the regulatory framework, thus the Sandbox ensures a transparent and clear regulatory path for such new services and application of new technologies.
In June 2021, the first participant of FCMC's Regulatory Sandbox completed the tests of financial solution that would be used in banking to automate transaction monitoring in the AML area. Any financial service provider can apply for the Sandbox testing by meeting the innovation criteria. If a participation is accepted by the FCMC, the regulator together with an applicant agree on a special test plan in a regulatory environment. It takes from three to six months for an applicant to complete the agreed test and provide a report on test result and risk assignment. If the test is successful, the FCMC removes operational restrictions (if any) and the applicant is entitled to provide chosen financial services in full according to the regulatory enactments. If applicant's business model is subject to specific licence or permission, the applicant has an opportunity to apply for a licence during the testing process, not waiting for test results accomplishments.
If you have a business idea and are not familiar with the regulatory framework you are welcome to apply for free consultation with an FCMC expert in the Innovation Hub. It doesn't matter at what stage of growth the company is, you can get free consultation in our Innovation Hub at any time.