The rapid growth of the financial services industry, also known as “FinTech”, over the last five years has produced a tremendous range of new institutions that offer advanced digital banking services for personal and business users without themselves being registered as banks. One of the most common forms of the new fintech services goes under the name of Electronic Money Institutions, or EMIs. Here we will try to help you understand exactly what are the differences between Electronic Money Institutions and banks that you are familiar with, and to identify the pros and cons of each..
A brief summary of the structure of banking is as follows. Banks are licensed by a central authority in each country where they operate, and are subject to tight fiscal constraints and supervision. In general, banks have to be funded with a large capital base, normally set at a minimum of $10-$20 million (€5 million or up).
Banks can offer a wide range of services, such as checking accounts, overdrafts, mortgages, direct debit functionality, payment services, asset management, etc. and can issue their own debit and credit cards. As well, some banks are starting to provide some of the digital financial services that can be offered by EMIs.
Banks are required to report to the central authorities at least quarterly and have to keep a predetermined level of liquidity – the ratio of cash and short-term assets to liabilities. Generally, these obligations lead to banks adopting more conservative practices in conducting business, and in being more rigid in terms of services offered and in ability to adapt their services to changes in the market. It is for these reasons that the explosion in the financial services sector has happened since businesses have been changing faster than the banks could accommodate.
EMIs operate under a much more relaxed set of rules and supervision. In general an EMI can be registered with startup capital of less than half a million dollars (€350,000) and the reporting stipulations are less rigorous.
EMIs offer services of execution of money transactions, such as credit transfers and direct debits, money remittances, foreign exchange services, and can issue electronic money which is a form of cash stored on an electronic device. EMI can also provide IBAN accounts, payment cards and e-wallets.
Pros and Cons
The main differences in favor of regular banks are:
Banks can lend money to customers, or allow accounts to go into debit. EMIs work exclusively on funds that have already been deposited into accounts, and no lending is permitted.
In Europe, bank accounts are guaranteed up to €100,000 so that in the event of bank failure, credit balances up to that amount will not be lost. EMIs have no guarantee.
Banks can offer a wider range of services, so that a commercial bank can be a “one-stop shop” for all of a customer’s financial needs. EMIs are more limited in the services they are allowed to provide.
The differences where EMIs score points are:
EMIs are designed and built for the digital era to make full use of the internet. Most conventional banks were established in the pre-digital age, and will have to spend vast amounts of money and resources just to catch up, without ever being likely to get ahead in terms of range and depth of digital services.
EMIs offer the possibilities that are suitable right now. Electronic Money Institutions don’t spend millions on “bricks-and-mortar” facilities and local offices, which is a function needed for conventional banks to achieve market penetration, but instead can use their resources to acquire new business by spending their money where it will achieve the highest value.
EMIs are flexible in approach to innovation as well as in adaptability, whereas conventional banks are fenced-in by legislations and regulation. EMIs adopt the widest possible spread of options and provide their customers with choice. When it comes to movement of money, whereas banks work with limited services for card payments and wire transfers, EMIs can have many different payment options that may be better for their clients.
E money license vs banking license is much cheaper, allowing more competition between the operators, which means better services at lower costs for the end customer.
So, to summarize the differences between Electronic Money Institutions and banks, conventional banks can offer degrees of security and a broader band of service that EMIs cannot at this stage match, but they are relatively inflexible and conservative in terms of accepting customers and slow to introduce modern services. EMIs, on the other hand, are offering up-to-date and flexible products that are closely following needs in the business world, and are less restricted by regulations.
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