Fintech Looks to shake up Malta's Banking Sector

Malta’s banking system remains well-capitalised, liquid and profitable; however, banks’ risk appetite has become ever more conservative, which means the island is increasingly turning to fintech players for the next stages of growth.

Malta has one of Europe’s healthiest and most profitable banking sectors, yet, concerns that the country is not doing enough to keep the sector free from crime, coupled with the fact that some market segments of the island’s finance centre remain underserved, mean Malta’s banking sector is in need of adjustment. The island’s ever-growing economy has exposed the need to expand the scope of banking services, especially to serve smaller corporate clients. However, increasing the number of banks is a tough challenge as the global banking sector has retreated into consolidation mode due to heightened capital requirements and rising compliance costs, which have affected banks’ risk appetite. The good news though is that fintech companies and neobanks have Malta on their radar, and the Malta Financial Services Authority (MFSA) expects to welcome new entrants to Malta’s financial scene in the near future. 


Domestic Banking Operations 

Malta’s banking sector, home to no less than 24 banks, comprises institutions focused on the local market and a large number of banks offering specialist services or supporting operations abroad. The domestic market is dominated by two major banks: Bank of Valletta (BOV) and HSBC that maintain an extensive branch network on the island. Competing head-to-head with the big banks are smaller local institutions that include APS Bank, Lombard Bank, BNF Bank and MeDirect. Domestic banks follow a conservative and traditional banking model, which has largely insulated them from global financial upheavals. Bank funding depends on retail de- posits rather than wholesale borrowing. Foreign banks such as Sparkasse, FIMBank, FCM Bank, IIG Bank, MFC Merchant Bank, NBG Bank and AgriBank have also sought to carve out a niche for themselves in the local market, offering corporate banking and deposit accounts in addition to their international business. 


International Banking 

International banking institutions have long been calling Malta home. Some of the longest established international banks in Malta are branches of Turkey’s Akbank and Australia’s CommBank. More banks discovered the country as a platform for business when Malta joined the EU in 2004, offering banks regulated in Malta EU passporting opportunities and access to the EU market. Today, banks originating from the UK, Turkey, Qatar, the US, Czech Republic, Finland, Bahrain, Ireland, Greece and Holland have operations in Malta. Those banks have no or little interaction with the Maltese economy. They do not take local deposits, but rather focus on business with non-residents or intragroup transactions supporting their parent bank or concentrate their activities on areas such as trade and project finance, syndicated loans and investment banking. In fact, many of them hold executive responsibility for specialised areas of their group’s global operations. 


Tightening Oversight 

Malta’s banks maintain substantial liquidity, adequate capital and prudent lending policies. All regulatory capital ratios are above the minimum levels required. At the end of 2018, the tier 1 ratio stood at 21.4%, whereas the EU average was 14.7%. Banking legislation is founded on EU legislation and is compliant with the Basel Core Principles. The supervision of the island’s largest banks falls under the remit of the European Central Bank (ECB), while the Malta Financial Services Authority is in charge of the supervision of all other institutions. While many of Malta’s banks are operating successfully, there were three banks that courted controversy and saw their banking licences revoked: Nemea Bank due to compliance failures, while Satabank and Pilatus Bank are facing money laundering allegations. These cases presented a serious risk to Malta’s reputation, and the island’s authorities have, since then, embarked on a thorough overhaul of their supervisory capabilities. The MFSA, the Malta’s Financial Intelligence Analysis Unit, as well as the Economic Crimes Unit have invested heavily in human resources and technology, as well as revamping their processes and procedures to strengthen Malta’s capabilities to fight financial crime.
The effective implementation of Anti-Money Laundering/Combating the Financing of Terrorism (AML/CFT) framework is viewed as crucial for banks to retain their correspondent banking relationships. As part of a global de-risking exercise, correspondent banks are increasingly cutting their ties with respondent banks in smaller countries, including Malta. 


Market Opportunities 

While Malta’s banking sector has grown significantly in recent years, Malta’s expanding economy, coupled with an influx of foreign talent and companies, has led to a growing demand for banks that support the niches that Malta’s finance sector has built up – such as private banking, wealth management and investment services. The island offers remarkable growth opportunities for banks that are ready to seize a share of this business. The biggest opportunity lies in custody businesses, where the limited number of custody banks affects the growth of the fund industry. The island is also a land of opportunity for credit institutions looking for an EU-compliant, yet flexible, domicile that provides access to the EU market and the neighbouring countries of North Africa. The emerging economies of the region need infrastructure development, offering opportunities in the area of project finance. 

At a time when digital solution providers challenge traditional banking models like never before, Malta’s banking sector has caught the attention of fintech entrepreneurs and payment companies, who have established operations on the island offering their solutions in Malta and abroad. They have nurtured a new financial cluster that is only set to grow in the coming years; the MFSA is optimistic that by the end of 2020 three new fintech-type banks will be operating on the island. Hopes are high that these banks will be very specialised institutions that can understand and cater for business that does not fit the model and risk appetite of the more traditional institutions, for instance in sectors such as blockchain, cryptocurrency and gaming. 


Banking as a Service 

The past two years have not been easy for Malta’s banking sector, which had to deal with a number of reputational and operational challenges. However, risks have been identified and addressed. The global banking regulatory landscape has changed, and with it, banks’ risk appetite. While these developments have required banks to rethink their business, an even greater change is currently underway: Banking-as-a-service is fast emerging as a concept, whereby banks adopt a platform-based business model, which allows fintech companies to plug in their services and products, such as a payment gateway or a current account. Many believe that this trend will grow in importance in the coming years, and Malta’s fast-growing digital sector positions the island as the ideal hub for investors, start-ups and established fintech companies wanting to make inroads in the banking sphere. 



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