International research company Celent has published a report, commissioned by ClearBank, showing that €35 billion of customer deposits are now held by e-money institutions. E-money institutions (EMI) started to emerge after September 2020, when the Electronic Money Directive (EMD) was adopted with the goal of creating “a 'narrow bank’ type that would have a smaller capital requirement and whose activities would be confined to the issuing of e-money.”
All of us have likely used (or are currently using) an e-money-powered solution, either from a fintech or a non-financial brand. What is important to know about e-money institutions is that they are not banks, and thus, they cannot lend or pay interest on deposits (but there are workarounds in some cases). In order to protect customer funds, every single EMI needs to have a safeguarding account with an ‘actual’ bank. This can be a pure infrastructure bank or any other high-street bank. In addition to safeguarding funds, the bank often provides other services, such as access to banking or payment rails, to the EMI as well.
It is quite clear that EMIs have been an important driver of fintech and embedded finance in the past few years, but there are also many challenges to the model. The most obvious ones are the narrow scope of issuing e-money and not being able to lend money, which is often the most important way for a bank to make revenue. Additionally, the involvement of a bank behind the EMI can cause friction as well. I am not indicating that the concept of EMI is doomed, but there are benefits (and challenges) working with banks directly. EMIs have often been the clear choice in the past for the product launches; will this change now?
