Malta has over the past decade become synonymous with a stable financial centre, having weathered the challenges posed by both the global financial crisis and also the EU sovereign debt crisis. With Malta’s cutting edge IT infrastructure and with successive Governments investing heavily in an e-society, Malta is now turning its attention towards investors wanting to establish Malta as a base for the set-up of payment and electronic money institutions in Europe.
Europe, E-Money & Payment Institutions
Whilst electronic money is a novel term for many over-30 year olds, its inception already dates back nearly two decades. In fact, the European Central Bank first lobbied for legislation to allow banks to issue e-money in 1994. The EU Commission was also keen on e-money relatively early as it considered payments as a field with new and quickly evolving technology in which Europe might take a lead. In particular, the Commission saw e-money as an essential tool to foster e-commerce by making cross-border payments cheaper. However, the first attempt of a pan-European passport (Directive 2000/46/EC) was misguided as e-money institutions were too closely linked with banks. E-money institutions needed to have the space to allow smaller and more efficient set-ups to enter the fray.
Whilst the Directive paved the way for the establishment of EMIs, it was generally felt that the Directive did not go far enough and was not adequate to suit the needs and expectations of the industry. In its review of Directive 2000/46/EC, the Commission highlighted the need to revise the Directive since it was felt that some of its provisions had hindered the creation of a true single market for e-money services. The Directive was not perceived to be flexible enough for non-bank entities. For this reason, Directive 2009/110/EC of the European Parliament and of the Council of 16 September 2009 on the taking up, pursuit and prudential supervision of the business of electronic money institutions (the “E-Money Directive”) came into being. The objective of the E-Money Directive was to remove barriers to market entry, facilitating the taking up and pursuit of the business of electronic money issuance and to review the rules to which electronic money institutions are subject so as to ensure a level playing field for all.
The Financial Institutions Act of Malta now caters for both this novel type of European EMIs, as well as for the European payment institution under the EC Payment Services Directive, which is also meant to carve out the supply of certain services from the European banking monopoly. Both an EMI and a payment institution set up under Malta’s Financial Institutions Act benefit from the favourable passporting regime of such licensable activities across the entire European Union and European Economic Area in line with the EU’s objective of creating a single internal market for services.
The impact of E-money on daily transactions
The most popular use of e-money in day-to-day operations happens in the form of:
a) electronic money held either on a payment device in the electronic money holder’s possession, and
b) electronic money stored remotely at a server and managed by the electronic money holder through a specific account for electronic money.
Pre-paid cards are a typical example of electronic money held on a payment device in the holder’s possession and have become very popular especially for travellers and as gifts. Paypal, Moneybookers and Google Payments on the other hand are amongst the most well known of the electronic money issuers who store clients balance in a server which can be managed by the wallet holder. E-Money issuers of this kind have grown in popularity for a number of reasons. First of all, there is a strong privacy element. Many individuals are reluctant to buy online due to security issues and identity thefts as each purchase typically involves the disclosure of card details to the particular merchant. When using e-money issuers, there is no need to disclose your card details to the merchant from whom you are acquiring who will only know that a customer paid using an e-money issuer without knowing the client’s details. Furthermore, holders of e-money wallets are not exposed to the credit risk of the e-money issuer in the same way that a depositor is exposed to the credit risk of a bank. The EU Directives provide that the EMI has to safeguard and segregate the funds representing e-money issued. Furthermore, each EMI is liable for any shortfall. These principles are further enshrined in Maltese law by virtue of the Financial Institutions Act (Safeguarding of Funds) Regulations, Subsidiary Legislation 376.04.
It is important to note that not all issuers of pre-paid cards or account holders require an EMI licence. Loyalty cards or accounts which may be used exclusively with the issuer itself or within a limited network do not qualify as the issuance of e-money and as a result do not require an EMI licence. Typical examples are store credits purchased in card form. Such cards may be simply utilised within a particular store or chain of stores and therefore do not have a universal acceptance.
Given the strong technological element within the industry, the EMI licence is slowly diluting its previously absolute link with the banking industry and becoming popular with players in various other industries and markets. Nowadays there is a trend for major players in other industries to see potential in setting up an e-money institution, particularly entities in the telecoms, technology, transport and retail business.
Interest in EMI licensing is growing especially in the technology and telecommunication industries, since they already possess strong infrastructural set-ups which are typically required to set-up an EMI. With the ever-growing use of computers and phones in daily payment transactions, it should come as no surprise that the synergies between telecoms and technology entities and e-money institutions continue to grow.
The E-Money industry is a hybrid between the traditional banking and payments sector and the technological aspect bringing ease of access to a number of consumers around the globe and as a result facilitating e-commerce. Malta can therefore reap the benefits of being a fully-fledged financial services jurisdiction that can rely on a strong banking tradition and a knowledgeable, efficient and hands-on regulator, whilst also having a reliable IT infrastructure which has grown considerably over the past years to satisfy the needs of various IT-driven industries in Malta.
Malta can also offer:
- a cost-effective Eurozone jurisdiction in which a number of multi-national corporations have already set up shop
- a stable political environment and a strong industrial relations record
- a robust yet flexible legal and regulatory framework, with legislation published in English
- a solid company law legislation, largely modelled on the UK Companies Act 1985 and the Insolvency Act of 1986
- a high standard of education and highly qualified English-speaking specialist professionals from all fields, and
- attractive tax rates for highly qualified persons who relocate to Malta, as well as other tax incentives.
With the key ingredients for the success of an e-industry in place, Malta is positioning itself as a key jurisdiction for a platform for e-money operators within which to develop and operate within Europe over the coming years.
This article has been published in the April 2013 edition of Insight, the online journal of FinanceMalta and can be read on the FinanceMalta website by clicking here.