Latvia has been making huge strides towards improving financial inclusion within the country. Financial literacy programmes and other strategies have been undertaken, but the uptake of card solutions have been slow. What can be done to bring more of the population into the sector?
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.
In terms of transaction volume, the share of payment cards in the industry grew from 16.4% in 2011 to 27.8% in 2015.
Payment cards are primarily used to make in-store payments, indicating that consumers are increasingly moving towards cashless transactions.
This is also evident from the fact that the number of card transactions at POS terminals stood at 215.2 million in 2015 – almost four times the number of transactions at ATMs.
To facilitate non-cash transactions and improve the card payment infrastructure, card participants are focusing on reducing the number of ATMs and increasing the number of POS terminals.
This concentrated effort to optimise ATM networks led to a decline in the number of ATMs between 2011 and 2015, from 1,207 in 2011 to 1,058 in 2015.
In contrast, the number of POS terminals installed increased at a 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%.
Inclusion programmes increase uptake
Financial literacy programmes 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 efforts to improve financial literacy. SEB has set up a school where children are provided information about finance, taxes and budget calculation.
In line with improving financial literacy, Latvia has aligned with international organisations such as Child & Youth Finance International and the OECD International Network for Financial Education
The increased focus on financial inclusion has led to a rise in bank accounts. According to the Bank of Latvia, a total of 3.4m payment accounts were opened in the country 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, where the figure was 77.9%.
Improvements in the labour market
Despite improvements in consumer purchasing power, credit cards were slow to take off in Latvia, largely as a result of 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 were $281.3m (253m) less year-on-year in the second quarter of 2015.
In contrast, consumer disposable income continues to grow with constant improvement in labour market – the unemployment rate decreased in the last five years, 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 this time, from $15.5bn (11.2bn) in 2011 to $17.3bn (15.6bn) in 2015.
Improved consumer purchasing power, coupled with declining household financial liability, is expected to encourage consumer spending on luxury products. This, in turn, will lead to increased use of credit cards and personal loans.
Focus on improving payment infrastructure
The number of POS terminals recorded a CAGR of 5.8%, increasing from 24,716 in 2011 to 30,973 in 2015. In addition, POS terminal penetration per 100,000 inhabitants increased from 1,200 in 2011 to 1,568.2 in 2015.
With the increased number of POS terminal installations at retail outlets, the country’s potential of card-based payments is also expected to grow.
To focus on improving the ATM network, the consumer transaction technology providers NCR and Swedbank entered into a partnership in May 2014, allowing NCR to provide the bank with new ATM software in the Baltic region.
This partnership also enables NCR to upgrade more than 150 of Swedbank’s older NCR ATMs. The growing customer demand for modern banking services and the expansion of traditional infrastructures make financial and banking services more accessible to consumers.
Debit cards continue to dominate
Debit cards remain the preferred choice of Latvian consumers over pay later cards. In terms of transaction value, debit cards accounted for 76.4% of the overall payment cards market in 2015.
Debit cards are one of the most widely used modes of retail payment, and are offered as a complementary product with current and savings accounts.
Swedbank offers the Salary Account which can be used by account holders to receive income such as salary, pension and allowances. Account holders are also offered the Classic Debit card with the Salary Account.
The debit card market recorded positive growth between 2011 and 2015, in terms of both transaction volume and value, although there was a decline in the total number of cards in circulation.
Financial literacy programmes play a key role in driving the growth of the Latvian debit card market, as the government and central bank, has taken initiatives to bring the wider population into the formal banking system.
The increased focus on financial inclusion led to a rise in bank accounts. According to the Bank of Latvia, 3.4 million customer payment accounts were opened in 2015.
Furthermore, 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%) – according to the World Bank.