Bank of Lithuania’s licence revocation causes fintech disruptions

In addition to highlighting the increased regulatory scrutiny, the Bank of Lithuania ‘s decision to revoke PayrNet’s license over violations of money laundering, terrorist financing, and international sanctions has also raised concerns about potential disruptions to e-money services and card issuance within the fintech sector.

In 2020, the Bank authorized PayrNet, a division of banking as a service provider Railsr, to issue electronic money and offer specific payment services through the issuance of an electronic money institution licence. But due to worries that the payment company was “grossly and systematically violating the Law on the Prevention of Money Laundering and Terrorist Financing,” it forbade the company in February 2023 from forging commercial ties with new customers.

According to an inquiry, PayrNet is bankrupt because it owes more money than it has. Over €7 million in expenses for other businesses in the institution’s group last year that it was unable to recoup had a detrimental impact on its financial status.

Now, the Bank of Lithuania plans to file for bankruptcy against PayrNet and investigate any potential legal violations.

Inadequate internal controls, poor adherence to due diligence procedures, and a failure to adequately monitor client transactions were also factors in the removal of PayrNet’s license. Furthermore, it alleges that PayrNet engaged in unlawful activity and failed to protect client assets.

Waking up call

The license decision, according to Ivo Gueorgueiv, co-founder and executive chairman at Paynetics, a European provider of embedded finance and digital banking, highlights the significance of properly operating regulated e-money providers in the fintech industry, urging companies to prioritize compliance and provide strong and dependable payment platforms.

In the effort to appease end users, compliance has occasionally taken a back seat, he said, calling it a “patchy and turbulent time for fintech.” A booming but still developing business has been put under pressure by the global financial and economic crises, the conflict between Russia and Ukraine, skyrocketing borrowing rates, and new restrictions.

“Platforms need solid foundations at their core to withstand storms. Businesses with a solid business strategy—one that makes money and is perceived by customers as essential rather than merely a “nice to have”—are more likely to survive over time. The license suspension should serve as a reminder for fintech companies to make sure their payment platforms are reliable, strong, and most crucially, compliant.

Regulatory vigilance

Gueorgueiv’s warning is in line with those expressed by Nikolay Denisenko, a Revolut alumnus and co-founder of Swiss neo-digital bank Brighty App. According to Denisenko, the turmoil surrounding Railsr has had a significant negative impact on the BaaS providers and BIN sponsors, as well as the crypto fintech companies partnering with them.

“As the market watched issues related to Railsr and treated with caution to any crypto fintechs, we are among the many who are facing rejections and delays while building Brighty App,” said Denisenko.

The fintech industry has a lot to prove to authorities since the crypto sector powers it. In the immediate term, the industry may have greater repercussions due to fears of bankruptcy, the rise of privacy tokens, and overall efforts to evade AML regulations.

PayrNet’s license being revoked may not have ended the financial industry, but it has forced Lithuanian regulators and those in the larger European Union to focus more attention on startups.

Effect on customers

Due to actions taken by the Bank of Lithuania, PayrNet is no longer free to use funds designated for its operations and is now required to restore monies to its customers within a predetermined time frame.

However, the business is aware of its present client obligations and actively works to keep client cash separate and secure in designated accounts.

Customers that have money in PayrNet must get in touch with the business directly to start the refund procedure.The business will deposit the refunded money into the client’s designated account, which the client must have with a credit, electronic funds transfer, or other payment institution.

Customers of Wirex, a multi-currency cryptocurrency payment app and a PayrNet card issuing service client, have been warned via email that debit card services may be interrupted as a result of PayrNet’s licensing concerns. The debit card service for consumers in the EEA was interrupted, it was stated, due to issues with our current card partner. None of the other services are impacted.

Resonance effect

A fintech product consultant named Jas Shah issues a warning that following the licence removal, fintechs dependent on PayrNet’s services may suffer major difficulties and potential consequences.

PayrNet is used by numerous well-known UK fintech companies. They will experience problems as a result of this, and there may be repercussions. Although safeguarding, a legal requirement that ensures EMIs keep funds separate, should protect all balances, it means that customers will likely need to designate an account for those funds to move to, and the fintechs using PayrNet won’t be able to provide any of their regulated e-money services until they find a different provider.

There are many more people that use them for e-money services in addition to card issuance, however PayrNet has begun informing their fintech clients and Wirex has already sent a statement to their customers.

Shah claims that switching providers is “not as easy as changing the fuse on a plug.”

Before any technology is changed to accommodate the new provider and connect to the new services endpoints, there is typically a drawn-out due diligence procedure and contract negotiations. As a result, fintech companies using PayrNet for e-money services and card issuance will have to temporarily stop accepting new clients because they won’t be regulated organizations anymore and won’t have access to the service that is the foundation of their offering.

“They’ll advise customers to use alternative services while the outage lasts, leading them to the products of rivals. They are frequently unlikely to win back these clients since, in many circumstances, especially when they provide SME finance management and accounting services, they will have lost the client’s trust and confidence. Unfortunately, I don’t believe any fintech affected by this will recover from losing these clients.