Over the last decade, banking has gone through a digital revolution. Emerging fintechs have transformed the landscape from an old branch-based banking model to one that’s now comfortably digital-first.
Traditional banks face stiff competition from digitally native challenger banks as consumers expect budgeting, saving, lending, investing and international money transfers at their fingertips thanks to innovative fintech products.
Today, access to digital banking as standard is old news. Every major bank now has a digital app.
But, the competition continues to toughen as digital-first neobanks, like Revolut and Monzo, create new innovations and release digital financial products every day. But, what led the banking sector towards the digital financial revolution, and who are the key drivers that have made these innovations possible?
Though most consumers are perhaps unaware, the short answer is: Electronic Money Institutions (EMIs).
What are EMIs?
They look like current accounts and offer the same services as normal banks — which is exactly what makes EMIs a great alternative to traditional financial institutions.
At its core, e-Money is a licencing regime that allows non-banks to deliver payments and financial services — without the need to acquire full-blown banking licenses. With lower barriers to entry, agile market newcomers can develop cutting-edge innovations and legally launch new financial products without the need to overcome additional regulatory hurdles and legacy systems.
Digitally disruptive EMIs are currently riding the wave of EU/EEA regulations designed over the past 10 years to increase competition in banking. As a result, they’re experimenting with and deploying automated technologies, mobile-first approaches, predictive analytics and digital-only banking services that are reshaping the consumer experience.
An early example of this was Monzo, which first launched as an e-Money license holder, offering its customers bank accounts (and later loans, free foreign payments and more) all through its dedicated app. Recent data indicates that the three main reasons why people opened digital-only bank accounts in 2020 were because digital banking is more convenient (41%), digital banks offer better rates (39%) and transactions fees abroad are cheaper (28%).
Some might even say EMIs have spearheaded the innovation that led the digital banking revolution and enabled the fintech revolution, fuelling further innovations that banks have since followed.
How have EMIs led the digital revolution?
Compared to traditional banks, digitally-native e-Money organisations are tech-focused without the burden of legacy challenges. This agility allows EMIs to adapt to emerging trends and integrate new innovations quickly and efficiently.
The development of new capabilities has empowered nimble EMIs to plug the gap in the financial market and provide financial services to underserved customers and communities. For example, PayPal emerged as the first online international money transfer company to fix what was previously a frustrating, expensive and inefficient way of transferring funds that could only be facilitated by a bank.
A sharp responsiveness to consumer needs has allowed e-Money license holders to confidently lead the charge in reimagining financial norms — a positive move that has forced traditional banks to adopt similar approaches.
But, what’s continuing to drive the e-Money boom?
The rise of online banking and mobile-first platforms has taken what was once considered a complex way to manage money and transactions to (almost) mainstream adoption among consumers and businesses. In 2021, EY concluded that three out of four consumers across 27 global markets had used an e-Money or fintech payment service.
COVID has also fuelled the growth in e-Money and digital payment systems. Withdrawals from UK ATMs fell by £37 billion between March 2020 and March 2021, indicating little doubt that consumers (as well as retailers and venues) have become more accustomed to electronic payments in both the online and real world.
The reality is: the future is customer-centric. By prioritising round the clock mobile-first access, information security and privacy, and tech-fuelled customer engagement, e-Money is locked and loaded to digitally disrupt.
EMIs in action: New and future innovations driven by e-Money
Open banking represents a great leap forward from the era of siloed bank accounts with different providers. Now your digital banks, credit providers, insurers and even retailers can deliver all the benefits of interconnected, data-led banking to their customers.
EMIs like Curve are at the forefront of open banking innovation — not only reshaping financial management and visibility with their open banking-powered app, but changing the face of payments too. The game-changing tool allows consumers to see their entire financial life in one dashboard and enables spending from linked debit/credit card accounts via the one Curve card.
And it’s not only accessible in the UK. Open banking functionality means Curve is available in 31 countries across the EEC, able to offer competitive exchange rates and multiple payment options to help customers get the most out of their money wherever they are.
According to Fintech News, trends in foreign exchange will continue to evolve as long as technology advances, showing that digital innovations — like open banking — are key to meeting consumer needs.
With on-demand salary drawdown payments, Hastee is revolutionising the way employees get paid. By enabling access to a portion of their earned pay when they need it, people are no longer forced to wait until payday to access funds.
This revolution, made possible by e-Money, helps people avoid taking out costly payday loans and getting trapped in unmanageable debt. In the UK, the most common amount the average consumer borrows from payday loans companies is £100, but with Hastee employees can spend as they earn — removing the reliance on short-term, quick-fix loans.
Hastee also delivers a range of financial education and management resources to support employees in their financial decisions. Perks, rewards and cashback help workers make their money go further.
And it’s not just employees who benefit from this e-Money innovation. Organisations can integrate Hastee seamlessly into their payroll system without impacting company cash flow, allowing employers to better attract, retain and engage their workforce.
Buffer Secondary Authorisation from Contis
Cryptocurrency is often seen as the new frontier in consumer finance. It’s proven its salt as an investment vehicle, yet is still in its infancy for everyday spending. Many crypto companies and trading platforms have launched debit cards as an ‘off ramp’, giving customers an easy way to spend their digital assets on everyday goods. But since most merchants only accept fiat, users must manually convert their crypto before spending on the card. Until now.
Payments technology innovator, Contis, has developed a system that allows you to spend on a card directly from your crypto wallet, yet the merchant still receives fiat. This Buffer ‘Secondary Authorisation’ technology is revolutionising crypto payments. It’s fully frictionless for the cardholder. The conversion happens at point of sale!
Buffer successfully combines the practicality of fiat currency with the benefits of blockchain — providing a seamless way to spend non-liquid crypto assets on a card. It also applies to other investments, including precious metals, stocks & shares, and more. No need to sell-up and release funds before spending on everyday goods. With Buffer, you can buy a coffee with Bitcoin, a sandwich with gold or a Tesla with your Apple stock.
And this B2B tech innovation created by an EMI has endless potential. Buffer allows access to separate funds by drawing down from another preapproved wallet or account if the primary account runs out, thanks to ‘zero balance’ and ‘secondary authorisation’ technology.
This has enabled consumer brands like Binance, Bitpanda and Hastee Pay to offer groundbreaking card products. But it can also be used for carer cards, company expense cards, insurance payouts and countless other applications that are set to rock the fintech world of consumer and business finance.
e-Money reassurance: Monetary safeguarding and financial security
Reality Check: What’s an e-Money licence?
An e-Money licence issued by the UK’s Financial Conduct Authority (FCA) allows EMIs to offer an ever-evolving range of financial products and services. According to leading accountancy firm BKL, there are clear signs that as the e-Money sector expands, the FCA will continue to step up their scrutiny of institutions and enforcement of regulations.
Current e-Money regulations include:
- Authorisation — To become an EMI, a company must apply and comply with FCA conditions that comprehensively assess the nature, scale and complexity of electronic money activities or payment services.
- Capital Safeguarding — Under e-Money regulations, any money held by an EMI must be safeguarded (backed by money stored in a separate account in trust). There’s no limit on the amount of funds protected through these safeguarding rules, and when an individual wants to make a withdrawal the funds will always be available. This is because an EMI can’t use the money for loans, investments or pass it to creditors — making it a more secure capital storage option.
- Third Parties — An EMI can only provide payment services in the UK through an agent or third party if they’re on the FCA’s register. Where an EMI relies on a third party for the performance of operational functions, it must take every reasonable step to ensure compliance with the FCA’s regulations and the Payment Services Regulations 2009. The point here is that there’s no “open back door” an EMI can use to perform an action or service without regulatory authorisation. An individual’s funds are securely ring-fenced.
Do we really need EMIs?
In short, yes.
Following the Wirecard scandal in 2020, authorities like the European Commission and the FCA introduced new regulations and strengthened requirements across all financial reporting.
Yet still, EMIs face outmoded attitudes towards e-Money. The truth is, EMIs are low-risk (thanks to stringent SCA and KYC procedures), highly regulated, tech-focused and competitive players in today’s financial market.
They’re not only simplifying, diversifying and democratising the sector. They’re combining financial transparency with robust monetary safeguarding and fast-paced innovation. Ultimately, e-Money is a force for good.
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