Cash remains a predominant payment instrument, accounting for 52.7% of Latvia’s transaction volume. However, payment cards have gained popularity over the last decade and consumers are increasingly embracing cashless transactions
The share of payment cards within transaction volumes in the industry grew from 16.4% in 2011 to 27.8% in 2015. Payment cards in Latvia are mostly used to make in-store payments, indicating that consumers are moving towards cashless transactions. This is also evident from the fact that the number of card transactions at POS terminals stood at 215.2 Mn in 2015 – almost four times the number of transactions at ATMs.
To facilitate non-cash transactions and improve card payment infrastructure, card participants are focusing on reducing the number of ATMs and increasing the number of POS terminals. This concentrated effort to optimize ATM networks led to a decline in the number of ATMs during the review period, from 1,207 in 2011 to 1,058 in 2015. In contrast, the number of POS terminals installed increased at a review-period CAGR of 5.80%, from 24,716 in 2011 to 30,973 in 2015, encouraging more card-based transactions. Latvia recorded the highest growth in terms of transaction volume in 2014, the year it joined the eurozone, with 21.0%.
Financial inclusion programs to increase uptake of electronic payments
Financial literacy programs play a key role in driving the growth of the debit card market in Latvia, as the Latvian government and central bank have taken initiatives to bring the wider population into the formal banking system. The Financial and Capital Market Commission (FCMC), Ministry of Education and Science, National Centre for Education, the BA School of Business and Finance, the Consumer Rights Protection Centre, the Association of Commercial Banks of Latvia and the Latvian Insurers Association collectively formulated the National Strategy for Financial Literacy 2014–2020, to create awareness regarding the benefits of financial products and services. The strategy is also supported by the Ministry of Finance and the Ministry of Economics.
The Bank of Latvia also introduced financial education websites such as www.naudasskola.lv and www.manapensija.lv to promote awareness of financial services including investments, deposits, borrowings, settlements and insurance. SEB, Swedbank and Nordea Bank are also concentrating their efforts to improve financial literacy. The focus on financial inclusion led to a rise in bank accounts. According to the Bank of Latvia, 3.4 Mn payment accounts were opened in 2015. According to the World Bank, the percentage of the population aged 15 or above with a bank account reached 90.2% in Latvia in 2014 – higher than its Baltic peer Lithuania (77.9%).
Improvement in labor market and declining household financial liability to drive credit card growth
Despite improvements in consumer purchasing power, credit cards were slow to take off in Latvia, due to the debt-conscious nature of consumers and the prevailing use of cash. In terms of transaction value, the credit cards market accounted for only 11.5% of the cards and payments industry in 2015.
Household financial liabilities in Latvia decreased by US$281.3 Mn (EUR253 Mn) year-on-year during the second quarter of 2015. In contrast, consumer disposable income continues to grow with constant improvement in labor market – the unemployment rate decreased during the review period, from 16.2% in 2011 to 10.2% in 2015. During the first six months of 2015, the average gross wage increased by 6.6% year-on-year – the highest growth rate in the Baltic region. Growing wages led to an increase in consumer spending. Real household consumption increased during the review period, from US$15.5 Bn (EUR11.2 Bn) in 2011 to US$17.3 Bn (EUR15.6 Bn) in 2015.
Improved consumer purchasing power, coupled with declining household financial liability, is expected to encourage consumer spending on luxury products, which in turn will drive the use of credit cards and personal loans.