Bankruptcy: New Regulation means new opportunities!
The paradigm shift from Banking to the Fintech era has produced a new dynamic mix of players. These new players are disrupting the Banking scene and together with certain new legislation in the field of payments (such as Payment Services Directive 2 – PSD2) have produced an emergence of new services and products which are creating a more competitive and technologically-driven market in the world of payments. Who are these new players and what are these new products and services driven by technology and innovation?
PSD2, Open Banking and new third party service providers are entering the market in order to provide faster, more practical, payment solutions but within a secure transparent environment. Third parties such as Payment Initiator Service Providers, Account Information Service Providers are now also emerging. The resultant effect of PSD2 includes:
The larger resultant effect is that an increasing number of non-traditional banks are able to provide a much wider range of banking services which are being created to suit customers’ needs and demands. Fintech companies usually offer: faster, more practical and more user-friendly payment solutions!
What are E-Money Institutions (EMI) and Payment Institutions (PI) and is there a difference?
Over time, more and more people have shown an interest in obtaining a licence to be an Authorised Payment Institution (API) and E-Money Institution (EMI) in order to provide specialised payment services or cater for specific markets. An important first step for persons interested in entering the market is first determining what services they would like to offer, then decide on what licence they should obtain. Although EMIs and PIs are similar there are a number of differences.
Firstly, I will list the activities which an Authorised Payment Institution is allowed to do. The main activities include the following:
- Services enabling cash to be placed in a payment account as well as the operations for operating a payment account; (Share capital €125k)
- Services enabling withdrawals from a payment account as well as the operations required for operating a payment account; (Share capital €125k)
- Execution of payment transactions, including transfer of funds on a payment account with the user’s payment service provider or another service provider which could execute debit and credit payment transactions; (Share capital €125k)
- Issuing and/or acquiring payment instruments; (share capital: €125k)
- Money Remittance; (Share capital: €20k)
- Execution of payment transactions where the consent of the payer to a payment transaction is transmitted by means of any telecommunications, IT or digital network or system acting solely as an intermediary on behalf of the payment service user and the supplier of the goods. (Share capital: €50k)
The Difference between Authorised Payment Institutions (API) and Electronic Money Institutions (EMIs), put simply, is that E-Money Institutions, in addition to the above- mentioned list of Payment Services that an API may conduct, can also issue electronic money or digital currency.
For clarity’s sake the Electronic Money EU Directive defines ‘Electronic money’ 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 electronic money issuer".
Another difference between an API and EMI licence is that for the majority of the activities for obtaining an API the minimum share capital needed is €125,000 whereas the capital requirement for an EMI is €350,000.
There is also the possibility of applying for a small EMI or small API if for example you provide evidence that your trading activities do not exceed €5 million or €3 million euros respectively. A small EMI will also have a smaller capital requirement (€50k), however, this will also be subject to other criteria such as maximum storage of €250 in relation to e-money storing services.
Side Note: These Financial Institutions (EMIs and PIs) are different from Credit Institutions (Traditional Banks). It is far more onerous to obtain a credit institution licence, requiring a higher share capital and certain additional ongoing requirements. Financial Institutions (EMIs and PIs) cannot collect and reinvest funds from the public. Actually, these PSPs may usually only be allowed to re-invest clients’ funds into low risk investments. Furthermore these financial institutions also have limited lending powers. Therefore, traditional banks as we know them are still the main source of people’s lending/ mortgage activities.
The Beauty of Passporting?
Firstly, passporting means exercising the right for a registered EU or EEA firm to do business in any other EU/EEA state by a simple notification procedure and without further authorisation. Therefore, once a licence is obtained in Malta, it can then be passported to other EU/EEA member state countries thereby allowing such firms to extend their business arms and increase revenues without any additional lengthy costly cross-border processes.
Malta has been reported as one of the best countries to apply for any of the above explained financial institution licences. Although certain licensing criteria such as local directorships and local presence apply there are numerous benefits of setting up in Malta such as: advantageous tax treatment (resulting in 5% corporate tax rate with the right structures in place), English-speaking easy going regulator, over 300 gaming companies and 300 days of sunshine.
Licensing Requirements include: Incorporating a new entity, Due diligence (fit and proper tests) of Directors and Key officials (such as Compliance Officer and MLRO), filling in application form, meeting with regulator, and a business plan.
Is Cryptocurrencies a form of Electronic Money?
Bitcoin and other E-money currencies also exist in digital form, however, cryptocurrencies such as Bitcoin although being a virtual currency just like E-Money as we know and see on our E-wallet accounts are not issued and controlled by central banks. Bitcoin, for example, is a virtual currency that has no fiat (legal tender) counterpart and is sent directly peer to peer without the bank as an intermediary needed to approve and facilitate the transaction. Although Bitcoin and other cryptocurrencies have their advantages (such as transactions being instant and sent directly peer-to-peer, doing away with the bank as a middle man) at this stage many cryptos are still highly volatile thereby not the best store of value. If you also wish to know more about cryptocurrency and blockchain related services and licences we also provide Virtual Financial Assets (VFA) services and advice.
 The introduction of PISPs allows a service provider to initiate a payment order at the request of the consumer with respect to a payment account held at another payment service provider thereby reducing the costs for merchants. By using an API, any authorised PISP can get instant access to all available payment initiation APIs in any EU bank. One API can amazingly integrate thousands of Bank connections, the outcome of which is faster payments and also that consumers can pay from the account of their choice in a simple convenient manner.
 AISP are service providers authorised to consensually access and retrieve account data held by banks and financial institutions. The banks are legally obliged to comply with these requests. This open banking framework enables years of transaction history data to be retrieved by service providers who wish to retrieve such data to povide services related to for example money management tools and loan applications.
 APIS are contributing to a new Era of ‘Open Banking’. Open banking is a system that provides a user with a network of financial institutions’ data through the use of application programming interfaces (APIs). Since January 2018, the EU made it obligatory to share banking clients’ financial data through open APIs when requested by Third Parties. (Example of use cases: Credit data research, gathering data, loan interest management services and more)
 Due to customer trust in banks declining an opportunity has arisen for Challenger Banks to step in. These qualify as Fintech participants because besides focusing on customer demands they are driven by innovative technologies. These new specialised banks have a larger return on equity compared to large traditional banks, have lower operational costs and also allow s greater degree of flexibility when it comes to lending. Example of types of Challenger Banks are: Medium Sized Banks who also use digital channels, Digital only banks (eg Starling) which pride themselves on exceptional user experiences and innovative technology platforms, and specialist banks which focus on having more call centres then actual physical presence and also focus on specific niche markets for example lending services for the buy to let market.
 If companies do not want to lose clients, they need to realise that they need to answer to the market demands. Mobile payments from a registered device are exempt from the PSD2 regulation which provide a great opportunity to new fintech companies competing with larger institutions. Notably 78% of payments in China are made with mobile payments – this shows where consumer markets have arrived at. Simplicity really is key!
 PSD2 defines a ‘payment account’ as an “account held by one or more payment service users, which is used to conduct payment transactions.” It may include savings and current accounts or accounts that combine savings with mortgage and payment facilities, so long as the account is being used to make payments.
 Payment instruments are instruments which are non-cash and enable the transfer of funds such as e-money and cards.