What high-risk companies can do to access banking services

As local banks continue to limit their exposure to activities characterized as ‘high-risk’, and certain businesses are left scrambling for alternatives to receive and send payments, electronic money institutions may become a more common feature of the local economic landscape, according to one industry insider.

Electronic money institutions, as defined under the 3rd Schedule to the Financial Institutions Act, are authorised to provide IBAN accounts to clients.

An IBAN account can send and receive money, just like a regular bank account. The only difference is that bank accounts are provided by banks, not electronic money institutions, which, importantly, cannot issue credit.

Holding an account with an electronic money institution therefore gives clients the same functionality as holding a bank account, except that the same institution cannot extend loans.

For companies with other sources of finance, this is not an issue. In fact, since electronic money institutions do not use the fractional reserve system, whereby banks typically only keep a small portion of assets as actual cash available for withdrawal, this eliminates a risk for depositors: there is never a risk that the institution does not hold enough money to honour withdrawal requests.

Money in IBAN accounts is effectively parked there until the depositor uses it, which also means that it does not bear interest, although this is of little concern in a historically low interest environment.

Such services are nothing new. In fact, they are mainstays at expos for industries like gaming, cannabis, or crypto.

One industry insider recently reached out to BusinessNow.mt following coverage of the difficulties businesses are facing in accessing basic banking services.

The individual, who requested to be kept anonymous, works with one of the leading local electronic money institutions, and wants to let businesses know that alternatives exist.

He explains that his company’s IBAN account service is often requested by corporate clients who have either been rejected by traditional banks or who want to avoid the long process of opening a bank account, which has been reported to take as long as six months.

However, electronic money institutions’ services go beyond IBAN accounts.

“Other services we offer include a payment gateway, allowing clients to accept money online using different payment methods, not just by card. We also do custom development and integrations, depending on the client’s payment requirements.”

He adds: “It is also important to keep in mind that when talking about a gaming client, for example, they would be processing millions of euro, so they would have accounts at banks which are friendly to the sector as well as with different financial institutions like ourselves. This helps reduce their risk.”

He claims that the long-term investment of electronic money institutions in such industries means they are highly integrated in the ecosystems of the sectors they serve.

This results in strong relationships and deep understanding of how these industries work and how they are developing, including on things like tech regulation.

This familiarity with their clients’ operations often results in better services, as clients benefit from their service providers’ understanding of the business models at work, including where money is coming from and where it is being spent.

By contrast, traditional banks are more focused on providing financial services to the general population than on serving each and every industry, especially fast-moving and complex industries that are often deemed high-risk.

Cutting out banks does not mean regulation is more lax. Such institutions are subject to strict licensing criteria by the Malta Financial Services Authority (MFSA), and compliance remains central to the regulatory framework they must operate in. The licence may also be passported to the rest of the European Union (EU) and the European Economic Area (EEA).

The industry insider adds that companies like his are increasingly setting their sights on other sectors, with crypto currently a main player, but also cannabis and adult entertainment.

“Many of these share common challenges,” he explains, “although they are also of course unique in other ways.”

As more and more businesses fail to pass the threshold for what constitutes a safe activity for banks, it is safe to say that the services provided by electronic money institutions may become more popular.