Banking in Malta is being reinvigorated by an influx of electronic money issuers, payment service providers, fintech firms and what is claimed to be the world’s first proper regulatory regime for blockchain-enabled services, writes Michael Imeson.

Bank of Valletta

Traditionally mature and slow growing, Malta’s banking sector has recently witnessed the rapid expansion of fintech-oriented electronic money issuers and payment service providers.

The country’s two biggest banks, Bank of Valletta (BoV) and HSBC Bank Malta, each have a share of about 40% of the market. At the end of June 2018, there were 25 licensed banks in total, down from 27 at the end of 2016, according to the Malta Financial Services Authority (MFSA). However, an additional 48 financial institutions are licensed to issue electronic money or provide payment services, as of the end of June 2018, up from 42 at the end of 2016.

New kids on the block

Two of the most prominent examples of the new breed of fintechs with Maltese connections providing financial services direct to customers are Credorax and Ixaris. In 2007, US technology firm Credorax set up a merchant acquisition bank specialising in international e-commerce to provide credit and debit card processing to retailers. It now has more than 200 staff around the world, including in Malta, the UK, Israel, Japan and China. Licensed by the MFSA, Credorax is a fully fledged commercial bank licensed to operate throughout the EU.

Ixaris is a provider of various payment services – such as online bank transfers – and pre-paid virtual cards, which have no physical properties but exist only on computers and mobile devices. Set up in 2003 by Maltese citizen Alex Mifsud – then Ixaris chief executive and now chief strategy officer – the firm is regulated by the UK’s Financial Conduct Authority and has offices in London and Malta.

Ixaris’s pre-paid virtual Entropay cards are Visa cards issued by the BoV, which has issued nearly 9 million. They are mainly used by online gamblers who do not want to use ordinary cards, but are also used for computer gaming and regular commercial transactions. International online gambling (or “i-gaming” as the Malta Gaming Authority prefers to call it) is big business on the island.

The PSD2 push

Joseph Cuschieri, who became MFSA chief executive in April 2018, says the EU’s Payment Services Directive 2 (PSD2) has encouraged the growth in electronic money and payment services providers. “Furthermore, we have seen significant strides in financial innovation, complemented by the European Commission’s issuance of its FinTech Action Plan and the European Central Bank’s guidance on the licensing of fintech credit institutions,” he says.

Claudine Cassar, technology consulting lead for Deloitte Malta, says most fintech start-ups in Malta focus on e-wallets and payments platforms. “They have a lot of clients in gaming, and a strong ecosystem between the two is developing,” she says. Many of these firms partner with established banks, Ixaris being a case in point with its BoV link.

“Local banks are also taking the initiative and coming up with their own fintech solutions in house,” says Ms Cassar. “Bank of Valletta has a strong in-house team which developed the BoV Mobile Pay app. It was very innovative at the time and is popular with young people.”

‘Blockchain Island’

In June, Malta’s parliament passed three acts that the government claims make it the first country in the world to create a legal framework for blockchain and cryptocurrencies, as Malta positions itself as ‘Blockchain Island’. “We are now awaiting draft regulations from the MFSA and by the end of September they should be in place,” says Kenneth Farrugia, chairman of promotional body FinanceMalta. “The level of interest we have had in blockchain and virtual financial assets from operators in the US, Europe and Asia has been astounding.”

The hope is that banks, payment service providers and other financial services firms will use Malta as a kind of regulatory sandbox to develop these technologies. One of the key architects of the laws is Silvio Schembri, parliamentary secretary responsible for financial services, digital economy and innovation. “The proposed regulatory framework will offer legal certainty to a space that is currently unregulated,” he says. “The three acts – the Malta Digital Innovation Authority Act, the Innovation Technological Arrangements Act and the Virtual Financial Asset Act – are based on three main principles: market stability, market integrity and consumer protection.”

Saxo Bank, a Danish investment bank, provides a white-label version of its trading platform to BoV, which the Maltese bank’s customers use to buy and sell securities on the financial markets. Christopher Dembik, Saxo’s head of macroeconomic analysis, visits the island several times a year to meet BoV’s investment clients.

“When I meet investors, the first thing they tell me about is Malta’s low taxation,” says Mr Dembik. “The Maltese have developed a financial and banking ecosystem that works well. It’s a financial centre that not everyone knows about. It is the first country to implement regulation on blockchain and cryptocurrencies and I’m impressed that the government is moving so fast.”

Middle east influence

BNF Bank used to be the Maltese subsidiary of Portugal’s Banif Bank. Acquired by the Qatari conglomerate Al Faisal in 2016, it was rebranded and changed its name in October 2017. Al Faisal holds 91.1% of the shares, the rest is being held equally by four Maltese shareholders.

“We are overwhelmingly a domestic bank,” says BNF chief executive Michael Collis. “We are a classic commercial bank, taking deposits from retail and corporate clients in Malta and lending those funds back out to the Maltese market to retail and corporate customers.”

Mr Collis, who was previously chief executive of Al Faisal International for Investment, and instrumental in the bank’s acquisition, says financial services is a relatively new departure for the Qatari company. “We saw Malta as a good place to make an acquisition. It’s in the EU, has a highly regulated environment and is well positioned geographically. The bank was the right size for us and already well established in this market,” he says. “We have inherited solid foundations from Banif – a good branch network and a good staff complement – but we have some work to do on the technology side to allow us to expand further.”

Some of that expansion will be into investment banking and asset management, using Malta as a base to market services throughout the EU. Mr Collis estimates that HSBC and BoV collectively have 80% to 85% of the domestic market, slightly down on the 90% they held not long ago. The third and fourth biggest institutions respectively are MeDirect and APS Bank, with BNF and Lombard vying for fifth place. “We have about 4% of the market in certain products, maybe a little less in others,” says Mr Collis.

HSBC here to stay?

There was press speculation in April that HSBC might pull out of Malta as part of a review of its global operations, following the appointment of group chief executive John Flint two months earlier. HSBC Bank Malta’s official response then was: “We do not comment on rumour or speculation.” Andrew Beane, HSBC’s Malta chief executive, says the position is still the same.

“Sometimes when there’s a change of leadership in large organisations there is speculation as to the direction in which the overall company will move,” says Mr Beane. “HSBC in Malta is a publicly listed company [70% owned by HSBC and 30% by 10,000 local individuals] and if there was market-sensitive information that the board was in possession of, we would have had to make a stock market announcement, and we haven’t.

“What I would encourage people to look to are the actions we are taking here,” he adds. “That includes investments in new corporate banking centres, new digital technology and on growth and value. There’s more of that to come, not less.”

HSBC has been in Malta for 19 years, Mr Beane notes, adding that one of the attributes of the country, which people do not always appreciate, is its location on the main trade route from China to Europe, via the Suez Canal. “The freeport here is one of the top 10 in the Mediterranean,” he says. “Lufthansa does a lot of aircraft maintenance here. EasyJet and Ryanair have bases here. It is the links to international trade and capital that are most interesting to us strategically.”

Reputational damage

Malta did take a hit to its reputation when in 2017, Daphne Caruana Galizia, a Maltese journalist investigating political corruption and alleged money laundering by Maltese private bank Pilatus Bank, was murdered. This year, the bank’s assets were frozen by the MFSA after its Iranian owner and chairman was charged by the US authorities with fraud, money laundering and sanctions violations. The MFSA now controls the bank and is in the process of closing it down.

However, FinanceMalta’s Mr Farrugia says the Pilatus Bank affair has to be viewed in perspective. “We are like any other jurisdiction. Sometimes we have bad apples. Operators can turn rogue, as they have done in other countries such as Luxembourg, the UK and Ireland,” he says. “Irrespective of how robust your legal and regulatory framework is, these things can happen. The MFSA acted swiftly once the information came out.”  


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