The Bank of Lithuania’s decision to revoke PayrNet‘s licence due to violations involving money laundering, terrorist financing and international sanctions has not only highlighted an intensifying regulatory scrutiny but has also sparked concerns about potential disruptions to e-money services and card issuing within the fintech industry.
The Bank granted an electronic money institution licence to PayrNet – a subsidiary of banking as a service provider Railsr – in 2020, authorising it to issue electronic money and provide certain payment services. But in February 2023, it stopped the payment company from establishing business relationships with new clients amid concerns it was “grossly and systematically violating the Law on the Prevention of Money Laundering and Terrorist Financing”.
An investigation found that PayrNet owes more money than it possesses, making it insolvent. Last year, the institution incurred over €7million in expenses for other companies in its group, which it couldn’t recover and negatively affected its financial position.
The Bank of Lithuania now intends to initiate bankruptcy proceedings against PayrNet and seeks to assess potential criminal offences.
It also removed PayrNet’s licence because of inadequate internal controls, poor compliance with due diligence procedures, and a failure to properly monitor client transactions. Additionally, it says PayrNet failed to safeguard client funds and engaged in unauthorised activities.
Ivo Gueorgueiv, co-founder and executive chairman at Paynetics – a European provider of embedded finance and digital banking – says the licence decision emphasises the importance of properly functioning regulated e-money providers in the fintech industry, urging businesses to prioritise compliance and offer robust and reliable payment platforms.
“It is a patchy and turbulent time for fintech, as compliance has at times taken a back seat in the rush to please end users,” he commented. “Global financial and economic crises, the conflict between Russia and Ukraine, spiking interest rates and new regulations have strained a booming but still nascent industry.
“Platforms must have the core foundations to weather the storm. Businesses with a sound business model, which generates profit and is seen as necessary and not just a ‘nice to have’ in the eyes of the consumer have longevity. The licence revoke should be a wake-up call for fintechs to ensure they offer a robust, reliable and most importantly, compliant payment platform.”
Gueorgueiv’s wake-up call resonates with concerns raised by Nikolay Denisenko, a Revolut alumnus and co-founder of Swiss neo-digital bank Brighty App, who says the turbulence around Railsr has deeply affected the BaaS providers and BIN sponsors, and consequently, the crypto fintech companies partnering with them.
“While building Brighty App, we are among the many who are facing rejections and delays as the market oversaw problems connected to Railsr and treated with caution to any crypto fintechs,” said Denisenko.
“Because the fintech world is fueled by crypto subsector, it has a lot to prove to regulators. Fears of bankruptcy, a proliferation of privacy tokens, and general attempts to circumvent AML rules may lead to more fallout in the industry in the short term.
“The revoking of the PayrNet licence may not have doomed the fintech world, but it has pushed regulators in Lithuania and the broader Europe Union to beam their radar on startups, hence attracting more scrutiny.”
Impact on clients
The Bank of Lithuania’s actions have restricted PayrNet’s ability to freely use funds allocated to its activities, compelling the company to return funds to its clients within a set time limit.
However, the company has acknowledged its current liabilities to clients and actively ensures the separation and safeguarding of client funds in dedicated accounts.
Clients who have funds in PayrNet must directly contact the company to initiate a refund process.The company will transfer the refunded funds to the account specified by the client, which the client should hold with a credit or other electronic money or payment institution.
Wirex, a multi-currency crypto payment app and a PayrNet card issuing service client, has emailed its customers to warn of disruption to debit card services due to PayrNet’s licencing issues. It wrote “our current card partner has experienced problems and this is causing an interruption in the debit card service for EEA customers. All other services are unaffected”.
Jas Shah, a fintech product consultant, warns that fintechs reliant on PayrNet’s services may face significant challenges and potential repercussions following the licence removal.
“Several prominent UK fintechs use PayrNet. This is going to cause issues for them and potentially a ripple effect. Although all balances should be protected under safeguarding, a regulatory requirement that ensures EMIs keep funds segregated, it means consumers will probably have to nominate an account for those funds to move to and the fintechs using PayrNet will be unable to offer any of their regulated e-money services until they find another provider.
“PayrNet has started notifying their fintech clients and Wirex has already issued a statement to their customers, but there are many more using them for e-money services as well as card issuing.”
However, switching providers isn’t “as simple as changing the fuse on a plug”, says Shah.
“There’s usually a lengthy due diligence process and contract negotiations before any technology is modified to adapt to the new provider and connect to the new services endpoints. This means that for a period, fintechs using PayrNet for e-money services and card issuing will have to stop taking on new customers as they’ll no longer be regulated entities and won’t have the service that sits at the core of their product.
“They’ll suggest using alternative services while the outage is ongoing, driving them to competitors’ offerings. In many cases, especially where they offer SME finance management and accounting services, they’re not likely to get these customers back because trust and reliability will be lost from the customer’s perspective. Unfortunately, I don’t think every fintech impacted will bounce back from losing these customers.”