Embedded Finance – enabling third parties to provide financial services – is not a new phenomenon. Most are familiar with the idea of buying car insurance or arranging financing through a car dealer. What’s different now is that customer experiences have gone digital; and the advances in technology – cloud-native, microservices-based, event-driven, composable architectures, accessible via APIs – make it much easier for companies to collaborate and rapidly develop those new digital experiences. What hasn’t changed though is the need for regulatory compliance and robust partnership frameworks.
The early days of Embedded Finance saw the proliferation of new entrants aiming to combine their technology capabilities with the bank partner’s – or in some cases, their own – regulatory license to offer ‘Bank in a Box’ or Banking-as-a-Service. However, some of them had a relatively lax approach to compliance and partner management, which attracted regulatory scrutiny, leading to consent orders (e.g., Blue Ridge Bank, US), restrictions (e.g., Solaris, Germany), and in some cases, bankruptcy (e.g., Synapse, US) of the newcomers. That is now clearly changing, and while it’s too early to call the Embedded Finance market ‘mature’, the players are adopting much more sophisticated attitudes to compliance and partnerships.
One of the defining characteristics of the European fintech scene over the last decade or so has been the growth of Electronic Money Institutions (EMIs). While EMIs are not banks, they are regulated institutions, and their services can be bank-like in many respects. EMIs today support a wide range of different products and services, sometimes serving their end customers directly, or by offering technical capabilities for fintechs, challengers, and other providers to serve their customers.
It may seem like banks, EMIs, and various fintechs are direct competitors; however, the reality is more nuanced (Figure 1). On the one hand, these providers often compete for customers and engagement. However, this is also a highly connected ecosystem in which the services provided by banks are fundamental to the ability of EMIs, fintechs, and other challengers to operate. For example, the regulators require that all customer funds kept with EMIs must be safeguarded, typically by banks. That means there must be a mechanism which would ensure that should an EMI (or fintech client of an EMI) fail, customer funds should be returned in full. Celent estimates that the customer funds safeguarded by EMIs in the EU and the UK almost doubled in a period of four years (2019-2022), to reach over EUR 35 billion in 2022.
Figure 1: Relationships between banks, EMIs, fintechs, and end customers
As the EMI segment continues to mature, it represents a growing opportunity for banks to increase revenues and exposure in this dynamic market. However, as banks and EMIs/fintechs seek to collaborate, their attempts at partnerships can be frustrating for both sides, from finding each other and performing partner due diligence, to agreeing to an engagement framework, to ensuring appropriate ongoing management and oversight. Celent conducted an industry research study exploring various aspects of Embedded Finance partnerships. The study was commissioned by ClearBank and the findings were first published in a report written independently by Celent. Among the questions we explored was what partners are looking for from each other at the selection stage. We found that there was a hierarchy of selection criteria, akin to Maslow’s hierarchy of needs. (See Figure 2.) The American psychologist Abraham Maslow claimed that human needs can be arranged in a hierarchy. The basic needs—such as food, water, safety, and security—lie at the base of the pyramid, and need to be met first, before the person becomes motivated by other concerns. Similarly, when considering partnerships, essential criteria, such as alignment around product and risk appetite come first. Only then, the commercial discussions around technical and support capabilities or pricing can take place.
Figure 2: Maslow’s hierarchy of needs and Celent’s hierarchy of partner selection criteria
Source: Celent
As the European Embedded Finance market continues to evolve, we expect more collaboration between EMIs and banks. EMIs can:
Help banks align with risk appetite by insulating them from unregulated entities.
Bring relevant technology capabilities—especially solutions that are tailored for specific industries.
Offer (some) banks the opportunity to capture a share of EUR 35 billion deposits in the UK and EU that need safeguarding.
We live in an age of competition, with the same entities vying in one area, while cooperating in another. This is true for the UK and European banks and EMIs, which can be both competitors and partners when capturing the Embedded Finance opportunity.
This editorial piece was first published in The Paypers' Embedded Finance and Banking-as-a-Service Report 2024, which is the latest comprehensive market overview and analysis focusing on the key players and products within the Embedded Finance and BaaS ecosystem.
Zil leads Celent’s Retail Banking and Payments practice. His research focuses on the impact of technology-driven change in banking, with an emphasis on consumer payments, digital identity, and the open financial services ecosystem. Zil has 25 years of advisory experience working with executives at banks and their technology partners.
Celent is the leading research and advisory firm focused on technology for financial institutions globally. For 25 years, we have been helping senior executives make confident decisions around technology strategies. We offer objective advice, backed by our analyst expertise, proprietary research, a large database of solutions, and award-winning global best practice use cases. We are part of the Oliver Wyman Group, a wholly owned operating unit of Marsh McLennan.
Every day we send out a free e-mail with the most important headlines of the last 24 hours.
Subscribe now