For the past years, technology has revolutionised our idea of traditional banking. The fact is that customers continue to move away from traditional banking as we used to know it. The number of physical bank branches is decreasing, just as online and mobile banking is taking over globally.

And, as consumers increasingly prefer to manage their finances via computer and mobile devices, more customers are favouring the so-called Neobanks and Challenger banks: the former being financial institutions that are technology-based, with some offering services that none of the mainstream banking industry as yet offer.

But whilst fintech and bigtech disruptors stand as formidable forces reshaping the landscape of traditional banking, their impact is often understated, with some established segments of the sector seeking to downplay or even question their legitimacy.

Despite these dismissive attitudes, these new players have undeniably altered the expectations and experiences of banking customers, challenging legacy processes and prompting a broader rethink of financial services as we know them.

Leonard Bonello

Dr Leonard Bonello from Ganado Advocates states that the source of any existing undercurrents against neobanks could be the text in the current Banking Act.

“Banking has developed exponentially especially because of the seismic shifts which technology has brought about. ‘Banking’ is no longer the exclusive domain of credit institutions. Today’s payment and electronic money institutions emerged from the traditional banking industry and already offer most of the services we traditionally associate with credit institutions.”

“We constantly speak of “open banking” and “banking as a service” which is being driven primarily by these new kids on the block but unfortunately, Maltese law continues to refer to terms such as the “Banking Act” and “business of banking” interchangeably with “credit institutions.”

“Given that European regulation, typically more accurate, is using the term ‘credit institutions’ rather than ‘banks’, perhaps a good revamp to align our local laws to this new reality is long overdue,” said Dr Bonello.

According to the MFSA, Malta currently has over fifty financial institutions delivering online payment services, a reflection of a banking landscape that is increasingly embracing digitalization.

Camille Pepos MFSA’s Head of FinTech Supervision explains how neobanks already operate within the regulatory framework established for banks. Although they often start as authorised payment institutions or electronic money institutions, they gradually develop their banking products which eventually may lead them to seek authorisation as credit institutions.

“Of course, the MFSA acknowledges that neobanks bring fresh challenges to incumbent banks, such as liquidity management and competition for deposits from these agile newcomers. This calls for robust Liquidity Risk Management frameworks and vigilant monitoring of deposit bases,” said Pepos.

“Neobanks however, also present a wealth of opportunities and whilst embracing them requires a proactive approach to risk management, traditional banks stand to gain invaluable insights from such electronic money institutions if they want to foster agility, customer-centricity, and technological prowess,” he added.

Kirsten Ellul

“Neobanks have also brought a plethora of new technologies and user experiences to customers which has driven legacy banks to upgrade their online services to remain competitive,” adds Kirsten Ellul, Manager Regulation and Oversight Office at the Central Bank of Malta.

“Pricing of certain payment products has also been recalibrated by certain banks to match the pricing of neobanks and to be able to embrace new opportunities brought by European legislation such as the Instant Payments Regulation,” added Ellul.

With terms such as “Open Banking” becoming part of regulatory language does it make sense to retain the use of the word ‘Bank’ as the exclusive domain of credit institutions?

Catherine Galea

According to Catherine Galea, the MFSA’s Head of Banking Supervision, while the term ‘open banking’ lacks formal regulatory designation and therefore, its use does not inherently mislead consumers, there is proposed text for the Financial Information Data Access Regulation colloquially dubbed “Open Finance”.

“Today, regulatory compliance for fintech-oriented banks in Malta follows a framework akin to that of more conventional banks. Therefore, as long as institutions adhere to pertinent regulations like the current Payment Services Directive (PSD2) and others, there are no regulatory objections to employing the term ‘Open Banking’,” she said.

Kirsten Ellul from the Central Bank agrees, noting that while the benefits of ‘Open Banking’ are normally attributed to neobanks and other fintech players, more European banks are taking up the role of third-party payment providers and that with the legislative proposal on FiDA, the term ‘Open Finance’ is set to take over ‘Open Banking’, especially with the additional opportunities created by such legislation.

Ellul notes that the Central Bank’s position on Neobanks is clear: that as licensed financial service providers like traditional banks, they too adhere to obligations to ensure they remain in line with the requirements under the law and therefore, the Central Bank treats neobanks the same as other credit or financial institutions.

With the advent of the Instant Payments Regulation and PSD3/PSR, the Central Bank expects a greater role from neobanks and fintechs at the European and local payments level.

“Instant payments will bring to the table an additional payment product which settles instantly as an alternative to card payments. Currently, in Malta, there is no solution at the point of interaction that settles payments instantly across different banks or financial institutions, other than card payments so it remains to be seen how this vacuum will be filled,” said Ellul.

“Furthermore, in the medium term, another product might be available in the form of a digital representation of the euro, products which will increase the competition and innovation in the payments landscape and hopefully will provide more value-added services to consumers and merchants possibly at a more favourable price.

Are further regulations, guidance or policy positions on the matter expected in the months ahead?

Camille Pepos

“Currently the MFSA is processing over fifty applications that incorporate a fintech component which reflects the increasing opportunities for growth for Malta in this sector. This is why we urge local banks and financial institutions to collaborate more with neobanks,” added Mr. Pepos.

A market driven by digital transformation

Digital intuitive payment solutions are increasingly in demand, driven by consumer expectations for seamless, real-time transactions and over the next five to ten years, these should continue shaping the fintech sector according to Panagiotis Polydoros, Mastercard’s Country Manager for Greece, Cyprus and Malta.

“Partnerships between fintechs and traditional financial institutions will also continue to expand and this collaboration will foster innovation, increase accessibility, and enhance the overall customer experience, solidifying the role of digital payments in everyday transactions.”

Panagiotis Polydoros

Mr Polydoros noted that today, Mastercard works with 80% of fintechs on the CNBC Top 100 list and in Europe with digital powerhouses such as Revolut, Starling, N26 and Monzo.

“Our strategy is to partner and co-innovate with fintechs and digital players to deliver user-centric, seamless, real-time and secure financial experiences with a focus on innovation, agile processes, infrastructure, and architecture to enable a best-in-class user experience for consumers and businesses. This is what we are also doing here in Malta with Moneybase.” 

The Moneybase story

Founded in 2022 as Malta’s first neobank, Moneybase is part of the Calamatta Cuschieri Group and today services over 45,000 personal clients and 500 business clients.

According to Alan Cuschieri, Founder and CEO of Moneybase, some areas of local regulation still do not adequately cater for electronic money institutions.

“For instance, multiple legal references refer to credit institutions simply because they predate PSD” notes Mr Cuschieri.

“With the introduction of PSD2 and upcoming PSD3, the European Union has shown that it is seeking to strengthen neobanks with the aim of facilitating consumer convenience whilst also increasing consumer protection. Today, international and local regulators have acknowledged Fintech as a main pillar of growth and innovation whilst the ecosystem continues to advance at an accelerated pace,” explains Mr. Cuschieri.

He states that with SEPA Instant being mandated across the EU in 2025, consumers and businesses will be able to send and receive funds to and from any EU bank or neobank instantly and within seconds 365 days a year on a 247 basis. This really brings home the advantage of being part of the European Union where harmonised legislation is really benefiting the consumer across a huge market.

Alan Cuschieri

According to Alan Cuschieri, some traditional banks remain driven by higher profit margins and find it hard to rid themselves of legacy processes which results in an undesirable customer experience.

“Neobanks have brought much-needed changes that banks are sometimes unwilling to provide, for instance, today Moneybase opens a business account in 48 hours and provides free SEPA transfers and instant top-up of your account by card at no cost to individuals.”

“The way things are evolving, I believe that neobanks will not necessarily have the desire to become a Credit Institution themselves unless they wish to lend client deposits. Typically, they want to remain agile and technology focused. This is why I see an opportunity for banks and neobanks to collaborate. This could be in the form of strategic partnerships or digitizing of banking products, an opportunity also heightened in the Fintech Study that Mastercard carried out last year.”

“In the coming years, I expect retail consumers to continue to move towards digital banks and neobanks for their daily payment needs, whilst traditional banks to focus on more profitable areas such as lending, B2B and providing services to Fintech’s themselves,” concluded Cuschieri.

This article was first published in The Corporate Times