Malta E-Money Institutions: Introduction
Malta has recently experienced a surge in the number of e-money institutions looking to set-up their operations within its shores. This article is intended to provide an introduction to the regulatory regime applicable to this growing industry sector as well as to analyze the reasons for the increasingly frequent choice of Malta as a domicile for such businesses.
As defined by the third schedule of the Financial Institutions Act (the ‘Act’), an electronic money institution (an ‘EMI’) is a financial institution that has been licensed in accordance with the Act and authorised to issue electronic money. Further to this, electronic 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’.
Note that this publication is focused on 'e-money' (i.e. electronically stored fiat currencies) as opposed to 'virtual currencies' (i.e. non-fiat currencies such as Bitcoin and Linder dollars). For more information on virtual currencies please follow the link at the end of this article.
Server Based E-money vs Card Based E-money
It should be noted that the definition speaks of 'electronically, including mangnetically' stored monetary value. This hints at the 'technology agnostic' character that the definition is aiming for. In fact, broadly speaking, e-money can be of two types, namely:
- Card or device based e-money. Card/device based e-money is what spurred regulatory development in the area at first but nowadays server based e-money is more common. Card / device based e-money allows individuals to use a portable card / electronic device as an e-wallet as an alternative to using physical cash for small transactions.
- Server based e-money. In server based e-money the money is stored remotely at a server which can usually be accessed and managed by users.
EMIs vs Payment Service Providers
One area where there has historically been some uncertainty is the dividing line between e-money institutions and payment services providers. With much of the transactional 'heavy lifting' happenning behind the technological scenes, it can be difficult to visualize the dividing line between the two types of activity.
The key distinguishing factor between EMIs and payment services providers is the element of a 'claim on the issuer'. A typical e-money transaction therefore involves the following steps:
- Consumer purchases e-money from the EMI, money being subsequently loaded on the account / physical device
- The consumer selects products from a merchant
- The merchant initiates a request to the EMI, requesting payment for the amount of the purchase request (thus making the claim on the issuer referred to in the definition)
- The EMI settles the request, after all internal checks are satisfied
In simple terms, in an e-money transaction it is the merchant who 'pulls out' the moneys from the EMI. This is different to a payment account wherein no such intervention from the merchant is required.
EMIs in Malta: Permitted Activities
As detailed above, a Licensed EMI may engage in other activities aside from issuing electronic money, such as payment services which are regulated under Second Schedule of the same Act. Such activities include;
- Services enabling cash to be placed on a payment account as well as all the operations required for operating a payment account
- Services enabling cash withdrawals from a payment account as well as all the operations required for operating a payment account
- Execution of payment transactions, including transfers of funds on payment account with the user’s payment service provider or with another payment service provider
- Execution of direct debits, including one-off direct debits
- Execution of payment transactions through a payment card or similar device
- Execution of credit transfers, including standing orders;
- Execution of payment transactions where the funds are covered by a credit line for a payment service user:
- execution of direct debits, including one-off direct debits
- execution of payment transactions through a payment card or similar device
- execution of credit transfers, including standing orders
- Issuing and/or acquiring of payment instruments;
- Money remittance
- Execution of payment transactions where the consent of the payer to a payment transaction is transmitted by means of any telecommunication, digital or IT device and the payment is made to the telecommunication, IT system or network operator, acting solely as an intermediary on behalf of the payment service user and the supplier of the goods and services.
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Main Regulatory requirements of a Malta E-Money Institution
An EMI applying to the MFSA for a license in Malta is required to go through an application process. The Main regulatory requirements for an EMI are as follows;
- A Minimum initial share capital requirement of €350,000, or a minimum in accordance with one the own funds calculations as laid down in article 5 of the Directive (methods A,B,C and D), whichever is the higher. The share capital of the Licensed EMI must never fall below this minimum threshold and therefore the MFSA requests for EMI’s to initially hold an adequate buffer over and the above minimum to ensure that the EMI does not fall within breach of the requirement.
- Here, it is important to note that any EMI which will only issue electronic money, and therefore will not be providing payment services as described above, must calculate its own funds in line with Method D. Any EMI which will provide payment services in conjunction with the issuing of electronic money, must calculate its own funds in line with Method A, B and C.
- The licensed Institution must have at least two Directors. Such persons must be of good repute and have sufficient knowledge and experience to perform their duties in the opinion of the MFSA. In order for the MFSA to form such an opinion, such persons, along with any key persons within the Institution and any qualifying shareholders (holding 10% of shares or more), will be subject to certain due diligence procedures as prescribed by the MFSA.
- The Institution must show that it has adequate local presence in Malta in order to undertake the licensable activities in and from Malta. The Institution may also employ personnel outside of Malta, as long as this does not outnumber, and therefore undermine, the local branch. EMIs may outsource services to institutions locally and internationally, however, all outsourced services are subject to MFSA approval.
EMI Licensing Process: Setting up an EMI in Malta
Any application for an EMI license must be submitted to the MFSA, who will begin the process of reviewing the relevant documentation. Such documentation includes;
- A detailed Business Plan
- Incorporation Documents of the Institution
- Personal Questionnaires, and their relevant accompanying due diligence documentation, of any proposed Directors, Shareholders and key individuals
- Financial Projections for the first three years of business operations
- Own Funds Calculations
- Internet and Electronic Banking Questionnaire
- An Application form
Once the MFSA is satisfied with the above documents, and other relevant documentation as may be requested, the license will be issued to the Institution. The Licensed EMI would then hold the right to passport their services to other EU jurisdictions. The remote passporting of services may be conducted immediately after the license is issued, however, the establishment of a branch would usually be authorised after the EMI has been in operation for around 6 months – 1 year and has maintained a good repute.
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E-money Institutions: Why Malta?
The same factors that have driven the growth of the rest of the financial services sector in Malta are at work here, namely:
- An accessible and open minded regulator
- Sound technological infrastructure
- Access to a wide network of tax treaties, and potentially advantageous tax treatment
- Well educated, English speaking workforce
- The opportunity to provide an EU wide service through passporting
In the context of EMIs Malta is also interesting because it provides operators in the sector with proximity to two industries that may be of interest, namely the i-gaming and digital gaming industries that have an important presence in Malta.
