Fintech

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The latest buzzword which seems to have taken the financial services sector by storm seems to be Fintech. The Fintech industry is a multifaceted industry, but what exactly does it encompass? What is a Fintech firm?

A Fintech firm can be described as a firm which focuses on a specific area of the financial services industry, improves the process via data analytics using big data and then offers the innovative financial product to a global audience via the internet. The Fintech industry is widely broad in scope; it encompasses a variety of market players which are releasing revolutionary new technologies in order to compete with established market players such as retail banks and insurance companies.It includes peer-to-peer lending via crowdfunding platforms, money transfer solutions, virtual currency operators, online securities intermediaries and online wealth management services.

The Fintech Industry in Malta

Malta has gained a solid reputation for being a prime European financial services hub for funds and fund managers, but less known is the fact that simultaneously, the jurisdiction is also steadily growing as a European hub for financial services technology (Fintech) companies. Thus, Fintech may very well become a new niche for Malta. One particular area which has established itself most prominently in Malta is the payment services sector which encompasses businesses such as payment account providers, card acquirers and other businesses that seek in one way or another to make the payment process faster, cheaper and better.

Payment Services

Following the implementation of the Payment Services Directive (PSD 1) and soon the PSD 2 which will succeed the PSD 1, the number of Payment Service Providers (PSPs) licensed in Malta has risen significantly over the last few years. Bearing in mind the success of the thriving i-Gaming and e-Commerce industries, Malta has become a leading jurisdiction for the set-up of Payment Service Providers. Before being granted authorisation to act as Payment Service Providers, the Malta Financial Services Authority (MFSA) carries out a thorough review process of the applicant in order to ensure they satisfy a ‘fitness and properness’ test and ensures they adhere to a certain high standard  of professionalism. Once licensed, a PSP will have an automatic right to service clients within the EU, and a number of other benefits including an EU passport, effective corporate and personal tax rates, highly-qualified personal persons benefits, and minimal to no restrictions on activities.

At Chetcuti Cauchi we have assisted a number of payment services operators with their local set up procedure. Our dedicated financial services regulatory team provides assistance to prospective PSPs looking to set up shop in Malta and Cyprus with the preparation of all application documents, managing correspondence with the local regulator, advising on regulator, tax and corporate matters and also providing useful and practical knowledge about the jurisdiction and introductions.

Electronic Money Institutions

With its state-of-the-art telecoms infrastructure, as well as over 250 i-gaming companies established in Malta requiring payment services and e-wallet institutions, Malta has already attracted a number of Electronic Money Institutions which have either established operations in Malta or passported to Malta from other EU Member States. Substantive investments in IT and telecoms, as well as the relative infrastructure have spurred the growth of Malta into one of the most ideal locations for e-commerce activities. Malta’s licence for e-Money institutions offers the opportunity to start operations with a lower capital requirement when compared to a full banking licence. This gives Malta an edge over competing jurisdictions, making it a truly attractive license.

Similarly to Payment Service operators, prospective Electronic Money Institutions need to undergo a ‘fit and proper’ test whereby the shareholders, directors and senior staff members must demonstrate solvency, competence and integrity in all their dealings. 

At Chetcuti Cauchi we assist prospective EMIs by compiling and preparing all applications documents, managing correspondence with the local regulator and also by offering advice on regulation, tax and corporate matters. Through our 'on the ground' knowledge, we can truly guide the client with respect to conducting businesses within Malta and Cyprus.

Crowdfunding

Another Fintech area which is gradually becoming more popular in Malta is crowdfunding. Crowdfunding is the process by which capital is raised for the development of a product or the carrying out of an endeavour through a typically large group of small backers, the so-called ‘crowd’, typically via a web platform (a crowdfunding platform) which gives entrepreneurs the chance to promote their business on a highly public platform. Crowdfunding is rather flexible and allows for a number of business models. There are 4 major models which are typically recognised:

  1. Donation based: people give money to activities or products they want to support
  2. Rewards based: people give money to receive a reward, service or product, for instance, a limited edition version of the video-game they are backing
  3. Loan based: people lend money to individuals or businesses in the expectation of a return in the form of interest and capital repayments
  4. Investment/Equity based: people invest directly in new or established businesses by acquiring shares or debt securities, or units in a collective investment scheme.

With regards to crowdfunding, it seems that there is a lacuna in the Maltese legislative framework as there is no specific piece of legislation which adequately addresses the specific concerns of the sector.

Fintech regulatory aspect in Malta and internationally

While the Fintech industry seems to be progressively blossoming in the Maltese financial services sector, some argue that time is of the essence in such a fast paced industry, thus the Maltese regulator should seize the opportunity and develop a sound regulatory framework that attracts more Fintech companies to Malta.

Internationally, we have seen a number of jurisdictions which have realised that the business models behind these Fintech companies has lured a number of investors in view of their commercialisation potential to their shores. The Fintech market is rapidly expanding in the EU and the US, but the latter has proved to be the most popular jurisdiction for Fintech companies to date.

Unsurprisingly, both EU and US legislators trail behind the dynamic world of the financial sector. Fintech business models are still not on the regulators’ rulebook, however there are significant efforts and plans being made to regulate such enterprises. The EU Commission published a green paper on December 2015 regarding retail financial services, which was viewed as an attempt by the EU to take a more holistic view of the Fintech sector. Through this paper, the EU commission makes an effort to explore how Fintech companies can address cross-border take-up of financial services and financial inclusion.

The UK has taken a very pro-active approach and has collaborated with operators in order to allow Fintech firms to set up in a UK-regulated environment. It has made plans to launch a number of interesting initiatives which will grant Fintech start-ups the opportunity to test innovative financial products and business models in the market.

In the light of the above, with a world of possibilities opening up and a number of entrepreneurs and investors seeking the most advantageous jurisdictions where to set up shop, one may note that there is much that could be done by Maltese and Cypriot legislators to attract more Fintech companies and investors to their shores. This could potentially turn the budding Maltese and Cypriot Fintech industries into prime European hubs for Fintech companies.



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Key Contacts

Dr Maria Chetcuti Cauchi

Senior Partner

+356 22056412

Dr Silvana Zammit

Partner

+356 22056123