How FinTechs and EMIs are disrupting traditional banking, by Sergio Gandolfo, CEO Transact Payments Malta Ltd.
Banking. A word steeped in hundreds of years of tradition, dating back to the first coins used by ancient empires, to the complex, digitised industry it is today. If we think of the traditional bank, we would probably imagine a large bricks-and-mortar institution, often with a network of branches. But the conventional banking industry is being disrupted beyond recognition. Here we examine the role of FinTechs and Electronic Money Institutions (EMIs) and how these nimble competitors are shaping the future of banking.
FinTech – the enabler of digital banking
Whereas banks come from a place of tradition, FinTech – Financial Technology – has its roots in innovation. FinTech dates back as far as 1866 when transatlantic cables were installed as the beginnings of a global infrastructure, and the more recent introduction of the ATM by Barclay’s in 1967.
It was mainly the large banks who, to enhance their existing services, continued to spearhead the decades of FinTech evolution that followed – until everything changed due to the financial crisis of 2008 when the public’s confidence in financial institutions was shaken to its core. A raft of new regulation was introduced in a bid to stabilise and reform the industry and rebuild customer trust, forcing banks to turn their attention to risk and compliance, at the expense of FinTech innovation.
The crisis was shortly followed by two major developments FinTech – the creation of Bitcoin in 2009 as the first cryptocurrency, and P2P payment systems in 2011.
FinTech companies now had the environment to flourish, leading to the creation of a whole host of new technologies, such as e-Wallets, Banking-as-a-Service, and RegTech.
In the 2010s, FinTech took hold around the globe, with China, India and Africa, who were not hampered by legacy infrastructures, readily adopting new financial technologies.
Incumbent banks who are today still shackled with legacy infrastructure, and who do not have the in-house technology or skills to take full advantage of this new digital world are looking outside their organisation for FinTech solutions. Indeed, a report by Statista in 2018 states that approximately 70 percent of senior banking executives worldwide said that collaborating with FinTechs and BigTechs to create a new service was an important opportunity for banks.
Electronic Money Institutions (EMIs) – a new breed of banking
Electronic money (e-money) as a concept has been around since the 1980s and became more widely used in the dotcom era. Accelerated by the demand for contactless payments during the Covid pandemic, e-money has now been firmly adopted, with the number of e-money transactions in the EU more than tripling between 2014 (2.1 bn) and 2021 (7.5 bn) (Statista).
With the growth of e-money we have seen a steep rise in the number of EMIs. There are now 570 registered EMIs in Europe (thebanks.eu). Authorised to issue only e-money, EMIs have emerged as a popular alternative to banks, offering similar services, such as personal accounts; business accounts; merchant accounts; payment cards; expense management; money transfers and cryptocurrency operation.
FinTechs and EMIs – driving the future of banking
FinTech startups have a plethora of choice when it comes to their business model. For example, they may partner with an incumbent bank or other payments business lacking their own tech. Or they may bring new banking solutions directly to market through sponsorship by a licensed organisation, removing the cumbersome and costly process of obtaining their own license. This agility is a clear advantage over traditional banking models when it comes to digital payments.
EMIs on the other hand have the benefit of being able to offer many of the same services as a traditional bank themselves, but with fewer regulatory constraints and licensing costs. They are, by their very nature, fully online, with their business model tailored to today’s digital customer. Without extensive premises, they also have greatly reduced overheads, able to invest more time, money and energy into products and services that address ever-changing customer demands.
At Transact Payments we offer BIN sponsorship and payment services to FinTechs and EMIs to bring new payments solutions to market. This approach means our clients can focus on innovation and technology, safe in the knowledge that licensing, scheme and compliance matters are all take care of.
So is there a place for traditional banks?
“Banking” no longer means the same as it did. The customer is now firmly in the driving seat with a vast array of providers and sophisticated products to choose from. Now, digitally native customers demand instant, secure, enriched and personalised online financial experiences. Customer behaviour is shifting away from having a primary bank account; they are happy to shop around and may hold multiple accounts with more than one institution.
But, however cumbersome traditional banks may be, they still have great advantages in terms of customer loyalty and data, and considerable resources to leverage for their digital operations. They have been forced to evolve and are still key contenders in the digital banking race.
There is now a sort of symbiotic relationship, where disruptors are driving change among incumbents, which in turn is driving innovation among disruptors, which is surely a healthy dynamic.
One thing we can be certain of is that “banking” has been changed forever and FinTechs and EMIs have a pivotal role to play in shaping banking services of the future.