E-money takes centre stage: 8 trends fueling EMIs growth in banking

Uldis Tēraudkalns, CEO of Nexpay

We’ve come a long way since Electronic Money Institutions (EMIs) first appeared in the 2000s. 20 years ago, there was concern about where this e-money trend was taking banking. But time has proved the doubters wrong. According to a KPMG report, in Europe (not counting the UK) between 2017 and 2021, 852 firms were granted authorisation as EMIs as well as Payment Institutions (PIs) or Account Information Service Providers (AISPs). That has made it a busy marketplace and indicates that EMIs are now well and truly part of the banking mainstream. 

Long-term trends in banking are working to the advantage of EMIs and are likely to strengthen their appeal to businesses and consumers over the next decade. Regardless of how robust the current EMI position and advantages may be, it's essential for us in this market to discern emerging trends to seize opportunities.

8 powerful trends that favour EMIs

The wider environment looks set to increase the appeal of EMIs over the years to the end of the decade and beyond. Several powerful and long-term dynamics are at work that play to their strengths and are likely to enhance their value propositions to users: 

• The search for value

Cost of living increases and an economic turndown have combined to exert pressure on consumers and businesses alike. Both are seeking value across all aspects of their activities, including banking services. Banks' costs are escalating as regulatory requirements increase. Anti-money laundering (AML), know your customer (KYC) and counter-terrorism financing (CTF) precautions impose costs that have to be passed on to customers. Many conventional banks are still failing to address the value equation, leaving them vulnerable to competition from lower-cost players, including EMIs, leveraging the cost advantages of digital technologies.

• Disenchantment with banks

A spate of failures in 2023 showed that banks are not inherently safe, and that deposit guarantee schemes have their limits. In search of additional profits to cover regulatory costs and loss-making core services, banks have been putting depositors’ money at risk in areas where margins and risks are higher, such as derivatives, cryptocurrencies and subprime mortgages, with greater exposure to adverse market fluctuations, credit defaults and fines. There is a growing realisation that business users would be better off with a stripped-back, low-cost, transactional form of banking, where the institution is licensed and protected by a credible central bank, ensuring the ultimate guarantee of deposits. In Lithuania, for example, where Nexpay is located, the central bank provides EMI licensing backed by the ECB, which is about as secure as it gets. 

• Decline in cash usage and growth in electronic transactions

According to The 2023 McKinsey Global Payments Report | McKinsey, cash usage declined by nearly 4% globally in 2022 while, over the past five years, the growth of electronic transactions has been nearly triple the overall growth in payments revenue.1 The surge in electronic transactions signifies a shift in consumer behaviour towards digital payments, which directly benefits EMIs.

• Digital technologies shaping customer behaviours

One reason for the growth in digital payments is that digital technologies such as eWallets and contactless cards and smartphones are rapidly becoming preferred methods of payments. This trend, accelerated by COVID-19, favours EMIs as they are at the forefront of providing these digital payment solutions.

• The drive for financial inclusion

Financial inclusion remains a policy priority for central banks and governments. EMIs can contribute here by serving underbanked and unbanked populations with simplified account setup, reduced transaction costs, and easy access through mobile devices. EMIs that focus on financial inclusion are likely to gain a competitive edge and further strengthen their value proposition.

• Regulatory opportunities created by Open Banking

Open Banking is encouraging new market entrants to develop innovative and convenient payment experiences. EMIs, with their flexible and agile nature, can leverage this opportunity to offer unique solutions and gain a competitive edge.

• Stamping out financial crime

Regulators are growing increasingly serious about addressing issues such as money laundering, fraud and the financing of terrorism. EMIs, with their digital-first approach and absence of manual processes, are well-positioned to address these regulatory hot spots. As electronic transactions continue to grow, we can expect them to invest more in enhancing their transaction processing capabilities. This is likely to lead to advances in technology and security measures to handle the increased volume and protect against fraud.

• Developments in instant payments and digital wallets 

Currently, digital payment capabilities remain relatively fragmented on separate platforms. However, open APIs and technology infrastructure ready for interoperability point towards simpler integration and seamless connections to enable embedded finance and reconciliation. EMIs product development expertise suits the rapid iteration of new services and the likely outcome is the emergence of a broad suite of payments services integrated in one platform. 

Navigating future challenges

The future for EMIs seems bright, given these trends, but market players should not forget the risks and constraints that are possible. While e-money have undoubtedly made significant strides in the financial industry, there are 3 most important considerations to keep in mind:

Regulations are growing increasingly stringent as EMIs expand their operations. It is crucial to remain adaptable and ensure compliance whenever possible. For example, over the past decade, most of Europe's BaaS providers were established using third-party software. However, regulators have recently intensified their oversight. Leading companies in the sector, including Modulr and Railsr in the UK and EU, as well as Solarisbank in Germany, have all faced significant business-disrupting restrictions this year. So, think globally, but stay with your feet on the ground. EMIs looking to expand may encounter different regulatory landscapes and market dynamics. Careful planning and localized strategies are essential for successful international growth.

Cybersecurity threats are on the rise. EMIs need to invest heavily in robust cybersecurity measures to protect customer data and financial transactions. Data breaches involve unauthorized access to sensitive customer information, phishing attacks and different kinds of payment frauds with AI and machine-learning, is just a short list of what is making not only EMIs nervous but traditional banks as well. And the ingenuity of scammers will become even greater as technology advances.To mitigate these threats, EMIs should prioritise cybersecurity by implementing robust security measures, as well as employee training and awareness programs. Staying informed about the evolving threat landscape is crucial to maintaining the trust and security of customers and the integrity of operations.

Consumer trust is just last but not least on my list. And it will be crucial as EMIs become more mainstream. Any breaches in trust can have long-lasting negative effects on their reputation and user base. Despite having access to cutting-edge technology and an increased number of lawyers on retainer to handle regulatory matters, there is no replacement for the fundamental human-to-human connections that underpin trust. In an era dominated by advanced technology, the qualities of humanity and integrity will only grow in significance, particularly in the context of reputation management.

Bottom line to what we've come to. EMIs have not only integrated into the financial mainstream but are also poised to play a pivotal role in shaping the future of banking. Their commitment to innovation, customer-centric solutions, ecosystem partnerships, and financial inclusion positions them as key players in an evolving landscape, redefining the way we interact with money and banking services. While the future appears promising for EMIs, vigilance, adaptability, and a proactive approach to addressing potential risks and constraints will be crucial for their sustained success in the evolving landscape of banking and finance.