The independent report, commissioned by ClearBank and produced by leading analyst house Celent, finds that EMIs now hold deposits of €35 billion across Europe—an increase of 84% from 2019—but often struggle to find a banking partner that meets their needs.

The report, UK and European banks and EMIs: friends or foes?, is based on in-depth interviews with over a dozen industry players, including banks, EMIs, and fintechs that are EMI clients. The report estimates the value of funds held and safeguarded by EMIs in the UK and Europe, based on national and EU-level reports and financial data from EMIs. It also examines the growing systemic importance of EMIs, and how this sector is reacting to a particularly challenging few years and the resulting regulatory focus.

An e-money licence allows firms to offer limited payment and financial services and does not require the same high capital reserves as a banking licence. Unlike banks, deposits held by an EMI are not guaranteed by a deposit protection scheme, however an EMI is required to safeguard its customers’ funds at all times, through third party arrangements.

The report highlights the interconnectedness and complexity of the fintech ecosystem, where banks, EMIs and other fintechs are as much cooperative partners as they are rivals—there are very few cases where an EMI can offer its services without a bank involved somewhere in the value chain. Banks provide safeguarding services, credit and banking services, and act as sponsors for account-to-account payment systems.

By considering EMIs as key clients and partners in offering embedded finance, there is an opportunity for partner banks to capture a greater share of the €35bn in deposits across the UK and EU.

The report also examines how the EMIs, and their relationships with banks, are affected by the fintech downturn and increased regulatory pressure. It finds that:

Safeguarding of customer funds, as required by Electronic Money Regulations, is receiving more scrutiny from the customers and partners of EMIs. However, EMIs have limited choice in the safeguarding arrangements open to them.
Many EMIs are looking to add new banking partners to provide additional risk mitigation and resilience.
When an EMI is selecting a banking partner, ease of integration and risk appetite alignment are much more important than price.
EMIs expect regulation to tighten in response to market failures. However, this is welcomed by EMIs as a way to increase their reputation by demonstrating accordance with higher compliance standards. And for banks worried about counter-party risk this will increase confidence in EMIs and remove barriers to collaboration.

“EMIs have played a key role in the growth of fintech and are now systemically important. We live in an age of ‘coopetition’, with the same entities competing in one area and cooperating elsewhere,” said Zilvinas Bareisis, Head of Retail Banking and Payments at Celent, and one of the co-authors of the report. “This is the case for banks and EMIs—they can compete and partner on the way to capturing this opportunity.”

“EMIs fill the gap left by incumbent banks unwilling or unable to support the fintech sector and now play a significant role in how financial services are delivered,” said John Salter, Chief Customer Officer, ClearBank. “Their customers and regulators are, partly in a response to recent failings, demanding a greater emphasis on safeguarding, operational resiliency, fraud and AML controls. This report supports our core belief that cooperation and collaboration are key to better services for consumers and businesses”.