The iGaming industry as well as the e-Commerce industry have significantly increased the need of payment gateways in Malta. The Maltese authorities have proactively responded to this change and now Malta become a destination of choice for the setting up of Payment Institutions (PI). Malta has developed an advanced telecommunications infrastructure and offers a highly skilled multilingual workforce making it a supreme destination to the setting up of customer care centres.
PIs are regulated by the Financial Institutions Act, 1994. In 2017, the European Union (EU) had published the Payment Services Directive 2 (PSD2) (Directive 2015/2366/EU) to be transposed by Member States, including Malta, into their laws and thereby repealing Payment Services Directive 1 (PSD 1). The transposition deadline for its implementation was set to 13 January 2018. The new directive builds on the previous directive and is designed to increase consumer protection, make payments safer and enhance innovation and competition. The regulatory and supervisory requirements for PIs are less rigid than those required for other credit or financial institutions.
As at February 2018, 38 companies held an active PI licence issued by the Malta Financial Services Authority (MFSA) which is equivalent to an increase of 36% over the number of active licenses in December 2016. Additionally, there are currently over 350 EU/EEA PIs exercising the freedom to provide services in Malta which have also been increasing year on year.
Unlike credit institutions, financial institutions cannot fund their activities through the taking of deposits or other repayable funds from the public.
Activities of PIs
PIs may engage in the following activities which are laid down in the Second Schedule to the Financial Institutions Act:
- Services enabling cash to be placed on a payment account as well as all the operations required for operating a payment account;
- Services enabling cash withdrawals from a payment account as well as all the operations required for operating a payment account;
- Execution of payment transactions, including transfers of funds on a payment account with the user’s payment service provider or with another payment service provider for the execution of direct debits, including one-off direct debits, the execution of payment transactions through a payment card or a similar device and for the execution of credit transfers, including standing orders;
- Execution of payment transactions where the funds are covered by a credit line for a payment service user to execute of direct debits, including one-off direct debits, execute the payment transactions through a payment card or a similar device and execute credit transfers, including standing orders;
- Issuing and/or acquiring of payment instruments;
- Money remittance;
- Execution of payment transactions where the consent of the payer to a payment transaction is transmitted by means of any telecommunication, digital or IT device and the payment is made to the telecommunication, IT system or network operator, acting solely as an intermediary on behalf of the payment service user and the supplier of the goods and services.
PIs may also carry out the following additional activities:
- The provision of operational and closely related ancillary services such as ensuring execution of payment transactions, foreign exchange services strictly in relation to payment services, safekeeping activities, and storage and processing of data;
- The operation of payment systems;
- Certain business activities other than the provision of payment services;
- When payment institutions engage in the provision of payment services, they may only hold payment accounts used exclusively for transactions, and
- Payment institutions may grant credit related to certain payment services referred to in (4), (5) or (7) above only if further requirements* are met.
* The further requirements are:
- the credit is ancillary and granted exclusively in connection with the execution of a transaction; and
- notwithstanding national rules on providing credit by credit cards, the credit granted in connection with a payment and executed with the act shall be repaid within a short period which shall in no case exceed twelve months; and
- such credit is not granted from the funds received or held for the purpose of executing a payment transaction; and
- the own funds of the payment institution are at all times, to the satisfaction of the supervisory authority, appropriate in view of the overall amount of credit granted.
Licensing of PIs in Malta
The law lays down the following statutory minimum requirements which must be satisfied and fulfilled before granting a license to a company:
- Its’ initial share capital is in accordance with the principles established by the law (see below);
- There are at least two individuals who will effectively direct the business of the financial institution in Malta, that is, “the four eyes” principle;
- All qualifying shareholders, controllers and all persons who will effectively direct the business of the institution are suitable persons to ensure its prudent management;
- The authority is satisfied that the financial institution has sound and prudent management, and has robust governance arrangement;
- The authority is satisfied that there are no close links between that company and another person/s which through any law, regulation, administrative provision or in any manner prevent the company from exercising effective supervision of the company under the provisions of the Financial Institutions Act.
PIs are required that at the time of authorisation have initial capital as follows:
|Activity provided by PI||Minimum initial capital requirement|
|From (1) to (5) above||€125,000|
In applying for a PIs license with the MFSA, the following documents must be submitted:
- Form 1 as annexed to Financial Institutions Rule 01 – Application for Authority to Set up a Financial Institution Operating in or from Malta;
- Form 2 as annexed to Financial Institutions Rule 01 – Questionnaire for Qualifying Shareholders other than Individuals;
- In terms of Financial Institutions Rule 01 – Personal Questionnaire for individuals who are or propose to be Directors, Controllers or Managers;
- A programme of operations setting out in particular the type of activities to be undertaken;
- Proposed level of initial capital;
- A business plan including the structure, organisation, management systems, governance arrangements and internal control systems of the institution and a forecast budget calculation for the first three financial years;
- A description of the procedure in place to monitor, handle and follow up a security incident and security related customer complaints, including incidents reporting mechanism;
- A description of the process in place to file, monitor, track or restrict access to sensitive payment data;
- A description of business continuity arrangements;
- A description of the principles and definitions applied for the collection of statistical data on performance, transactions and fraud;
- A security policy document;
- A description of the internal control mechanisms;
- A description of structural organisation;
- Audited financial statements for the last three years, if available;
- The identity of statutory auditors and audit firms;
- The applicant’s legal status;
- The address of the applicant’s head office;
- A description of the measures taken for safeguarding payment service users’ funds.
The authority will determine an application for a licence within three months of receipt of the formal complete application and will determine whether to grant a licence without conditions, a licence subject to certain conditions, or refuse the application for a licence.
A typical credit card payment process
The following are the parties to the payment process when using a credit card:
|Cardholder||A consumer who uses a credit card to purchase goods and services.|
|Merchant||A provider of goods and services who accepts credit card payments.|
|Payment service provider||A payment gateway which is responsible to acquire data authorisation and encryption.|
|Acquiring bank||The bank which holds the merchant’s bank account.|
|Credit card brand network||This includes brands such as VISA, Mastercard and American Express, amongst others, whose networks are used to facilitate interactions between issuers and acquirers when authorising and settling transactions.|
|Issuing bank||The bank which issued a credit card to the consumer on behalf of card networks.|
The payment goes through the following stages:
Authorisation of a transaction
- The cardholder uses a credit card to settle a purchasing transaction.
- A merchant’s POS system / e-commerce website contacts the PSP who, depending on the card brand used, contacts the designated acquirer for transaction authorisation.
- The acquirer sends the payment details to the card association.
- The latter then sends the payment details to the issuing bank for authorisation.
Authentication of a transaction
- The issuing bank receives the request for payment authorisation from the credit card network and validates the data received including the credit card number and CVV number, confirms availability of funds and matches the billing address of the credit card and payment files received.
- The issuing bank approves or declines the payment transaction.
- The response is sent back to the merchant through the same channels i.e. through the credit card network, then to the acquiring bank, PSP and finally to the merchant.
- For successful transactions, the issuing bank blocks the purchase amount on the cardholder’s account.
The authorisation and authentication process takes between two and three seconds.
Clearing and settlement
- The merchant sends the approved authorisations on a daily basis in one batch to the PSP.
- The latter directs information in batches to the credit card networks for settlement who in turn sends each of the approved transactions to the relevant issuing banks.
- The issuing bank transfers the funds to the credit card network and the payment goes through the same channels with each party deducting a charge until the merchant’s account is credited by the acquiring bank.
- Eventually the cardholder settles the bill with the issuing bank.
The settlement process can take anywhere from 24 hours up to 3 days.
Passporting rights for PIs
Through the implementation of the European Passport Rights for Credit Institutions Regulations, a financial institution licenced or holding equivalent authorisation in another Member State or EEA State as a payment institution, may provide the activities for which it has been authorised either through the establishment of a branch or the freedom to provide services, including by engaging an agent. The law prescribes the communication requirements for PIs that would like to passport the provision of services in Malta.
An application fee of €3,500 is also required upon submission of the aforementioned application. Financial institutions licensed under the Act must also pay an annual supervision fee of 0.02% of its total assets as reported at the end of the year immediately before the year in which the fee is payable. This must not be less than €2,500.
Financial Institutions are subject to the general rules of taxation in Malta. Shareholders may avail themselves from the full imputation tax system and therefore when in receipt of dividends they are entitled to a tax credit which is equal to the tax paid by the distributing company on the profits out of which the dividends are paid. Shareholders may also be entitled to tax refunds upon the distribution of taxed profits. Moreover, Malta has a wide network of double taxation agreements in place. Other benefits emanating from the Maltese tax system include the ‘participation exemption’ on profits derived from participating equity holdings and no capital gains on transfer of shares in a non-property company held by non-resident shareholders. For further details on the Maltese taxation system, please refer to Corporate Taxation.