EMIs now hold deposits of €35bn across Europe, an increase of 84% from 2019, but often struggle to find a banking partner that meets their needs. That is according to a new report on the Electronic Money Institution (EMI) market in the UK and Europe. The independent report was released by ClearBank.

The report, UK and European banks and EMIs: friends or foes?, is based on interviews with over a dozen industry players, including banks, EMIs and fintechs. 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.

EMIs are looking to add new banking partners

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.

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It also found that 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.