The evolving ecosystem of fintech

Last Updated on Thursday, 28 April, 2022 at 9:42 am by Andre Camilleri

George M. Mangion is a partner in PKFMalta, an audit and business advisory firm

Financial technology aims to compete with traditional financial methods in providing funding for projects and developments. In an ever-changing industry, fintech can help Small Island Developing States (Sids) and developing nations explore new economic development opportunities and alternatives.

What would that look like in practice? Are there any examples of such collaboration in Malta? Fintech gives access to funding and democratises financing for Sids, other developing states and eventually for their governments, banks, private companies, start-ups and individuals. Fintech can be split into four area opportunities. These comprise digital lending, payments, blockchain and digital wealth management.

With small and remote economies, exposed to economic and natural shocks, these are highly vulnerable developing countries. They suffer from low economic diversification (some like Malta are highly dependent on tourism, others are subject to fluctuations in the prices of raw materials on which their economies depend), high dependence on remittances, debt stress situations, as well as volatility of private income flows.

Furthermore, such economies make up two thirds of the countries that suffer the highest relative losses – between 1% and 9% of their GDP each year – from natural disasters and are acutely vulnerable to the increasing impacts of climate change. A common problem for the well-being of any island’s economy is usually the limited space of its territory.

With a lack of space and resources to pursue large-scale industrial or agricultural undertakings, it is a great opportunity for those states to utilise fintech by making use of this new way of financing and by becoming a home for fintech operators. Can Malta succeed to join in the revolution? The answer depends a lot on the foresight of banks, the MFSA and the commercial community.

The future of fintech is increasingly specialised and is dependent on technological progress and innovation. Ideally, Malta aims to establish itself as a global thought leader in the innovative economy, focusing its efforts on supporting the “fintech revolution” and establishing a holistic and robust FinTech sector for both start-ups and industry incumbents. At this stage, we associate another subset of fintech which is becoming quite popular in western countries. Welcome the technology styled: Decentralised Finance (DeFi).

This eliminates intermediaries such as brokerages, exchanges or banks by allowing people, merchants and businesses to conduct financial transactions through emerging technology such as smart contracts. DeFi is being designed to use cryptocurrency in its ecosystem. Introducing Open Banking – This is part of the global trend of the economy based on the use of Api (Application Programming Interfaces). An Api is a software interface that lets information be exchanged between two different applications. Apis provide a standard and safe way for applications to work together and share requested information and functionality without the need for user intervention.

Open banking is also called Api banking because it uses fintech to connect banks, fintech and third-party service providers to give them far richer data and greater functionality. Apis can connect data from banks and non-banking institutions, process it and send it to third-party applications. The customers can access these applications to view and manage their financial details in a single interface. Integrating financial data with Apis also gives businesses a clearer picture of their customer’s financial situation and risk profile, which helps them offer more personalised products and services.

With its popularity growing among consumers, Open Banking Payments are expected to grow exponentially by 2024. Will Malta catch up on the banking revolution? One augurs that we do not miss the band wagon as this guarantees better service and reduced costs; so many merchants in the western world are starting to add it to their payment mix.

Open Banking is often talked about in conjunction with the (PSD2) Second Payment Services Directive. This piece of EU payments legislation came into full effect in 2019 and is aimed at improving digital payments capabilities and enabling consumers in the EU to have greater control over their financial data. PSD2 has provided a European-wide regulatory framework that allows third parties safe and secure access to accounts to either gather transaction data or initiate payments on the customer’s behalf (with their permission).

While lots of these potential overlay services and innovations are still in the pipeline from fintechs and other service providers, the most immediate advantage of Open Banking is the ability for consumers to use online banking transfers to pay merchants. PSD2 has acted as a catalyst for this by requiring that all banks allow and support authorised third parties (PISPs) to initiate payments.

Conclusion: in light of the recent criticism of Malta’s banking model which leans towards pro-business rather than pro-people, the idea of decentralised banking should be thrown into the ring to democratise financing and lower the burdens of the hoi polloi.

gmm@pkfmalta.com

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In 1994, the Malta Business Weekly became the first newspaper fully dedicated to business. Today this newspaper is a leader in business and financial news. Together with the launch of the MBW newspaper, the company started organising various business breakfasts to discuss various current issues that were targeting the business community in Malta.