A Modern Banking System in Malta

Banking in a New Era

Mr. Steve Muscat Azzopardi | 28 Mar 2019

Modern Banking System in Malta

I recently watched the original Mary Poppins movie, released in 1964 by Walt Disney. If you have not seen this, it is set in London in 1910, with a central character Mr. Banks, a very proper banker. Pounds and pennies are counted by hand and then counted again. Sacks of coins are carefully stored in deep, secure vaults.

Banking has come a long way since then, and with more banking taking place online and a corresponding reduction in physical contact with banks, it is fair to say that the modern bank is as good as the technology it deploys. The bank’s market penetration will then depend on how well it is able to serve clients’ evolving needs, pre-empt changes and deliver them as and when required.

Another aspect to this element of modern banking is that the personal relationship with a bank was the basis of banking in the past while now accountholders simply deal with an online system most of the time. The personal relationship remains the basis of private banking, available to those with a higher level of resources.

Brick and mortar banks carry a legacy of technology, clients, physical location and business models that often leave the bank ill-equipped to change in response to client demands, let alone to be ahead of the innovation curve. Clients are no longer willing to take only what is on offer but expect to be able to craft the services they receive to their individual situation, their requirements and unique preferences. Clients expect a minimum level of service from their banking partners, including as a starting point of honesty and integrity in all dealings, transparency and clarity in fee structures, security and confidentiality. These stand apart from operational matters such as permanent availability and access to accounts and support, operability in multi-currencies and time zones as well as rapid processing and settlement time.

Legal framework in the EU

The banking sector in the EU is regulated by a host of EU directives aimed at ensuring that banks play their part in providing market integrity and consumer protection. Some of these apply directly to banking institutions in the EU without requiring transposition, while other directives are transposed into the national laws of each member state.

In Malta, the main regulating law is the Banking Act (Cap. 371) supplemented by a long list of additional regulations and rules. The legal framework provides a comprehensive range of options to those wishing to operate in the banking sector, in complete conformity with EU requirements. 

Credit Institutions in the Modern Banking System in Malta

A key differentiating factor is whether the bank provides or holds itself out to provide credit facilities: doing so entails the highest order of regulation and governance requirements. The largest credit institutions are deemed to be so critical to the fabric of the national and EU economies that they are regulated not only by the local financial services authority and Central Bank, but also directly by the European Central Bank (ECB). 

Malta has three ‘significant’ banks directly regulated by the ECB, namely HSBC, the Bank of Valletta and MEdirect with another bank expected to join the ranks in the near future. Some twenty other banks are regulated locally by the Malta Financial Services Authority (MFSA) and the Malta Central Bank, although the ECB remains the overall authority and can grant or withdraw a bank licence.

Credit institutions in the EU are also required to contribute to the Depositor Compensation Scheme. This is a form of safety net that guarantees deposits of up to €100,000 per account holder per bank, in the event of bank insolvency.

A license application for a credit institution would be deemed as more sound if at least part of the proposed entity is to be owned by an existing and licensed credit or financial institution, although soundness and stability may be demonstrated through other means. The minimum share capital is of €5 million, although in practice applicants normally commit not less than €10 million. Banks are also required to fulfil certain technical provisions to ensure sufficient liquidity, capital adequacy and other key indicators used by the ECB as part of its prudential supervision of the sector.

Digital Banking

Whereas physical banks use technology to offer their services, a number of innovative firms have built the entire business on technology, offering bank or payment services entirely online and through mobile apps. This marriage of financial services and technology is known as financial technology, or fintech for short. Revolut is one such Fintech firm that has made huge strides to grow from a UK-based start up in 2015 to provide services across the EU with global plans for 2019. Paypal is an online payment or transfer service that has long been the de facto payment provider for websites and commands a 60% market share. Stripe, it’s closest competitor, is closer to 20%.

The provision of such digital account services - but not credit or loans - is possible under the Electronic Money Institution (EMI) licence that permits holders to issue electronic money, offer e-wallets, provide accounts with unique IBANs, effect payments and in general all services (again, except credit) that individuals or companies need to operate a current account.

EMIs are not required to contribute to the Depositor Compensation Scheme but in turn, deposits with such institutions do not benefit from the security this scheme offers. The minimum share capital requirement for EMIs is €350,000 with an own funds requirement calculated on the average outstanding electronic money and other risk factors.

Payment Services

The Payment Institutions license, also issued under the Financial Institutions Act, permits licence holders to offer or facilitate payments but not to hold client funds. Payment Services Providers (PSP) for instance are one of the cogwheels in the e-commerce process of charging customer credit cards or e-wallets and passing the funds to the seller’s account. These are used primarily as payment gateways for online commerce, mobile and contactless transactions. The modern banking system in Malta has seen significant growth in the number of PSPs licensed over the last few years, and, alongside the thriving i-Gaming and e-Commerce industry, the Island has become the destination of choice for the set-up of Payment Services Providers. 

Minimum capital for Malta Payment Institutions licence varies from €20,000 to €125,000 depending on activities, and as with EMIs offers instant passporting rights across the EU.

Card Issuers

Another service permitted by the Payment Institutions licence is the issuance of cards, permitting a wide range of uses from personal, family and business. Such card issuers normally also offer credit cards through one of the main global providers. The MFSA has issued licences for several card issuers, both to be used locally as well as passported across the EU. 

The Epitome of the Modern Banking System in Malta: Cryptocurrency

Cryptocurrencies are digital tokens of value issued on a type of IT platform known as a blockchain or Distributed Ledger Technology (DLT). In the context of banking services, cryptocurrencies may be issued as simply tokenised electronic money also known as “stablecoins”. These are characterised by being issued or redeemed at a given value, say €1, that eliminates the coins’ intrinsic volatility.

Other cryptocurrencies may be used more widely as a means of payment, meaning that sellers accept such cryptocurrencies in the same way that they accept cash or credit card payment. Bitcoin Cash and Ripple are two of the most widely accepted coins for such purposes. Key benefits of cryptocurrencies include security, transparency, far lower transfer charges than traditional means and instant settlement (as opposed to up to 3 days for SWIFT transfers).

A Legacy of Success

In 2018 Malta launched a ground-breaking legislative framework surrounding the issue, use and exchange of cryptocurrencies as well as the innovative technology they are built on. This has attracted to the island several operators in this field, that are the latest achievement in a long period of success for the modern banking system in Malta. Over the last several decades Malta has attracted a significant number of foreign investors in sectors ranging from manufacturing and engineering to maritime and aviation, Pharma/Life Sciences, Telecomms, Financial Services, remote Gaming and now blockchain-based companies.

The Opportunity - The Modern Banking System in Malta

Malta is now home to tens of thousands of companies, and a population approaching 500,000 that are underserved by the existing banking options. Entities licenced in the EU as Credit Institutions, Financial Institutions under MiFID II, EMIs or Payment Institutions may passport their services across the 27 EU states or a combined depositor base of an estimated € 33 trillion; €400 billion in transfers per year and e-commerce transactions worth some €600 billion in 2018, double the 2013 value.

A Winning Strategy

There is a natural tendency to look at the different licences mentioned above as competing forces, such that EMIs are seen as challengers to banks, while cryptocurrencies are viewed as upstarts that threaten banks, EMIs and PSPs.

Astute professionals in the converging industries of banking, financial services and technology are seeing the potential in different models that offer all services. This may be done as a group with different entities operating under separate licences, or niche providers collaborating to offer the gamut of banking, investment and payment services. N26 based in Germany, for instance, started off as an EMI and operates as a digital bank, then obtained a bank licence in order to offer a more complete range of services to clients.

Multiple Providers

In a world that has unfortunately witnessed a number of key institution failures over the course of time, it is prudent for individuals and entities to maintain relationships with more than one banking service provider. The reliance on technology may be the banking system’s greatest challenge: a technical failure or cyberattack could take a provider offline, leaving account holders unable to transact or access their funds. 

Different institutions may serve diverse needs, for instance EMIs may be far more agile at serving corporate current accounts or may have a higher risk tolerance than traditional counterparts. Meanwhile an investment bank or portfolio manager is better equipped to manage company reserves or to manage Private Wealth.

Headed by Dr. Natasha Cachia, the Financial Services team at Chetcuti Cauchi Advocates advise international clients and institutions on the EU regulatory landscape and guide them through matters of licensing such as applying for new licences or acquiring existing licence-holders through merger and/or acquisition. The team also handle general liaison with regulatory bodies and advise and support clients on their ongoing risk-management, governance and compliance obligations.

Steve Muscat Azzopardi, Senior Manager at Chetcuti Cauchi Advocates heads the Bank Relationship Unit, a team of professionals dedicated to opening and maintaining client relationships at banks and financial institutions. The team have a successful track record in delicate and complex matters such as claiming funds from defunct banks or rehabilitating bank relationships.


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Key Contacts

Mr Steve Muscat Azzopardi

Senior Manager, Corporate & Fintech

+356 22056438

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