Recent months have seen a notable increase in enquiries and overall interest in Malta as a preferred European domicile of choice for e-money institutions (EMIs).
The contributing factors to the exponential growth of Malta’s e-money industry are much the same as those underpinning the growth and success of Malta’s financial services sector in general. These include:
- An accessible and innovative, yet prudent, regulator;
- The jurisdiction’s solid reputation as a stable Eurozone economy;
- A highly competitive, cost-effective and tax-efficient jurisdiction (with access to a wide network of tax treaties);
- The opportunity to target an EU-wide market through ‘passporting’;
- A sound technological infrastructure;
- Presence of international financial services providers and a skilled English-speaking work force with considerable experience and knowledge in the sector;
- Use of the English language in official communications, forms and documentation as well as in drafting financial services legislation, regulations and guidelines.
In our experience, Malta’s e-money industry has also benefitted from the jurisdiction’s status as a centre of excellence for remote and digital gaming operations, affording EMI promoters a convenient proximity to these e-commerce sectors.
This rapid development of our e-Commerce industry coupled with Malta’s sophisticated IT infrastructure has effectively driven the creation of a niche e-Money market leading to increased interest to use Malta as a base for financial institutions providing electronic money and payment services globally.
An innovative shift to lighter regulatory regime
This rapid development of our e-Commerce industry has effectively driven the creation of a niche e-Money market leading to increased interest to use Malta as a base for financial institutions providing electronic money and payment services globally
Malta was the first of its EU peers to launch a solid regime for standalone e-Money Institutions. Legislative amendments enacted in April 2011 brought the regulation of EMIs in Malta, previously regulated under the Banking Act, within the remit of the Financial Institutions Act. This effectively afforded Maltese EMIs a lighter regulatory touch and, of course, led to a much more attractive regime for operators looking to establish EMI operations.
The legislative shift is widely acknowledged to have triggered the sector’s growth and has had far-reaching regulatory and financial implications on today’s EMI regime including, inter alia, a reduction of initial capital requirement from €1m to €350,000; an extension of the definition of “electronic money” and the scope of activities carried on by EMIs; and the introduction of safeguarding requirements and redemption rules designed to bolster consumer protection.
The shift of EMIs out of the scope of the Banking Act was widely welcomed by practitioners and operators alike, not least due to the consensus that the issuance of electronic money does not constitute a deposit-taking activity in terms banking legislation, in view of its specific character as an electronic surrogate for coins and banknotes, which is to be used for making payments, usually of limited amount and not as a means of saving.
The Financial Institutions Act defines an “EMI” as “a financial institution that has been licensed in accordance with this Act and authorised to issue electronic money or that holds an equivalent authorisation in another country in terms of the Electronic Money Directive to issue electronic money”.
In turn, “electronic money” or “e-money” is defined as “electronically, including magnetically, stored monetary value as represented by a claim on the issuer which is issued on receipt of funds for the purpose of making payment transactions … and which is accepted by a natural or legal person other than the financial institutions that issued the electronic money”.
The enhanced definition lends a degree of clarity and technical neutrality in that it covers all situations where a payment service provider issues a pre-paid stored value in exchange for funds, which can be used for payment purposes because it is accepted by third person/s as payment.
The enhanced definition lends a degree of clarity and technical neutrality in that it covers all situations where a payment service provider issues a pre-paid stored value in exchange for funds
Notably, the Financial Institutions Act definition of e-money includes ‘magnetically stored monetary value’, which also covers payment cards and computer hard drives, meaning that ‘electronic money’ qualifies as such whether it is held on a payment device in the electronic money holder’s possession or stored remotely at a server and managed by the electronic money holder through a specific account for electronic money and could potentially also cover payment by mobile phone.
Accordingly, e-money can be broadly categorised into two types, namely:
- Card or device based e-money – allowing individuals to use a portable card/ electronic device as an e-wallet as opposed to using physical cash for small transactions. Card/device based e-money is widely recognized as having spurred regulatory development in the industry, however server based e-money has ostensibly come to be more common in recent years; and
- Server based e-money – e-money is stored remotely at a server which can usually be accessed and managed by users.
The ‘wide’ definition assigned to e-money is geared towards eliminating any unnecessary restrictions on the vast range of electronic money products available in today’s market and also those product/s which could be developed in the future, thereby effectively fostering what is arguably this generation’s most notable achievement and a key legacy for future generations, technological innovation.
In addition to the issuing of e-money, EMIs may also undertake the following activities:
- Provision of payment services in terms of the licensable activities applicable to PSPs;
- Granting of credit related to payment services listed under certain PSP activities, Provided that any such credit shall not be granted from the funds received in exchange of electronic money and held in accordance with the prescribed safeguarding requirements;;
- Operational services and closely related ancillary services in respect of the issuing of electronic money or the provision of payment services;
- The operation of payment systems;
- Certain business activities other than the issuance of electronic money;
- EMIs may issue debit cards (such as a chip device) but may not issue credit cards since such institutions are not permitted to undertake lending or other bank related activities;
- EMIs based in Malta are allowed to outsource services subject to the MFSA’s evaluation on their own merits.
E-money needs to be redeemable to preserve the confidence of the electronic money holder. Accordingly, the Act provides that an EMI must ensure that, at any moment, upon request by the electronic money holder, it is in a position to redeem the monetary value of the electronic money held, at par value and without delay. When redemption is requested before the termination of the contract, the electronic money holder may request redemption of the e-money in whole or in part.
Derogation from the general rule that redemption should be granted free of charge is allowable only when certain conditions subsist and any fee imposed by the EMI must be proportionate and cost-based.
Moreover, the prescribed safeguarding provisions require EMIs to appropriately safeguard funds which have been received in exchange for duly issued e-money which must (i) be deposited in a segregated bank account in a credit institution; (ii) invested in secure, liquid low-risk assets; or (iii) be covered by an insurance policy or comparable guarantee from an insurance company or credit institution, payable in the event that the financial institution is unable to meet its financial obligations.
“Secure, low-risk assets” include, inter alia, certain debt securities for which the specific risk capital charge is no higher than 1.6% and units in an undertaking for collective investment in transferrable securities (UCITS) which invests solely in the said secure, low-risk assets.
The MFSA is empowered to grant authorisation to an applicant for registration/ recognition as a ‘small electronic money issuer’ thereby waiving the application of all or part of the provisions relating to general prudential requirements, initial capital, own funds and safeguarding requirements, as set out in the Financial Institutions Act and in the applicable MFSA Rules, subject to the satisfaction of various conditions.
Once the relative Malta licence is obtained, the EMI, to the exclusion of a small electronic money issuer, would benefit from the right to passport such licence into the EU Member State countries by following some basic procedures of notification. This would enable the EMI to provide its services (i.e. to issue electronic money) within the relevant Member State/s and/or EEA State/s either through the establishment of a branch or remotely, under the freedom to provide services.
EMIs vs Payment Service Providers (PSPs)
The dividing line between EMIs and PSPs is one which has often been blurred, not least due to the fact that the key transactional sequences are typically manifested behind the technological veil. This has led, and still leads, to some uncertainty in definitively compartmentalising the two types of activity.
The key factor distinguishing EMIs is the element of a ‘claim on the issuer‘. Accordingly, an e-money transaction would typically comprise the following sequence of transactions:
- An end-user or consumer purchases e-money from the licensed EMI- in turn money is loaded on the user’s account or physical device;
- The end-user selects products from a merchant;
- The merchant proceeds to initiate a request to the EMI for payment of the amount corresponding to the purchase price, thereby making a ‘claim on the issuer’ in terms of the aforementioned definition;
- The EMI will then proceed to settle the merchant request, subject of course to satisfaction of all relative internal checks and procedures of the EMI.
Essentially, an e-money transaction presupposes the ‘withdrawal’ of funds/ moneys from the EMI by the merchant whilst in the case of a ‘payment account’ no such merchant intervention is required.
Summary Regulatory requirements of a Malta E-Money Institution
The main conditions for launching an EMI operation in Malta are as follows;
- Satisfactory completion of the relative MFSA application process, broadly comprising the submission of a business plan (including financial projections) and the due diligence exercises on directors, senior managers and shareholders of the proposed EMI;
- Minimum initial capital of €350,000 – The licensed EMI is obliged to ensure that its own funds do not fall below this threshold;
- At least two individuals must effectively direct the business of the EMI in Malta. Such persons must be of sufficiently good repute and have sufficient experience and competence to perform their assigned roles and duties;
- All qualifying shareholders, directors, controllers and all persons who will effectively direct the business of the institution must be ‘fit and proper’;
- The EMI must maintain adequate local presence and infrastructure in order to undertake the licensable activities in and from Malta. EMIs may outsource services locally and internationally, however all outsourced services are subject to MFSA approval.
Malta is ostensibly well-positioned to establish itself as a top EU jurisdiction for e-money operators with a leading role to play in this space over the course of the coming years
The technology and telecommunication industries (which boast the inherently solid infrastructure set-ups typically required for an EMI) are showing considerable interest in EMI licensing and with the increasing use of phones and computers in daily payment transactions, it is clear that important strategic synergies between tech entities and e-money institutions will continue to grow. As such, Malta is ostensibly well-positioned to establish itself as a top EU jurisdiction for e-money operators with a leading role to play in this space over the course of the coming years.