Unlocking the Future of Embedded Finance: Navigating the Evolving Landscape

In the rapidly transforming world of financial services, digital advancements and the rise of Electronic Money Institutions (EMIs) are reshaping the industry. Zilvinas Bareisis, Head of Retail Banking and Payments at Celent, sheds light on this dynamic landscape, highlighting the importance of bank-EMI partnerships in the European Embedded Finance market.

Empowering Collaboration: The Symbiotic Relationship between Banks and EMIs

Embedded Finance: From Novelty to Necessity

Embedded Finance, the concept of enabling third parties to provide financial services, is not a new phenomenon. However, the digital revolution has transformed the customer experience, and advancements in cloud-native, microservices-based, and event-driven architectures have made it easier for companies to collaborate and rapidly develop innovative digital experiences. While the need for regulatory compliance and robust partnership frameworks remains, the Embedded Finance market is evolving, with players adopting more sophisticated approaches to compliance and partnerships.

The Pivotal Role of EMIs in a Highly Interconnected Ecosystem

The European fintech scene has witnessed the remarkable growth of Electronic Money Institutions (EMIs) over the past decade. 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 products and services, serving end customers directly or offering technical capabilities to fintechs, challengers, and other providers.The relationship between banks, EMIs, fintechs, and end customers is more nuanced than it may appear. While these providers often compete for customers and engagement, they also operate in a highly connected ecosystem. For example, regulators require that all customer funds kept with EMIs must be safeguarded, typically by banks. 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), reaching over EUR 35 billion in 2022.

The Hierarchy of Partner Selection Criteria: Navigating the Embedded Finance Landscape

As the EMI segment continues to mature, it represents a growing opportunity for banks to increase revenues and exposure in this dynamic market. However, the process of collaboration between banks and EMIs/fintechs can be challenging, from finding each other and performing partner due diligence to agreeing on an engagement framework and ensuring appropriate ongoing management and oversight.Celent's industry research study, commissioned by ClearBank, explored various aspects of Embedded Finance partnerships. The study revealed a hierarchy of partner selection criteria, akin to Maslow's hierarchy of needs. Essential criteria, such as alignment around product and risk appetite, take precedence before commercial discussions around technical and support capabilities or pricing can take place.

Unlocking the Embedded Finance Opportunity: Collaboration is Key

As the European Embedded Finance market continues to evolve, we expect to see more collaboration between EMIs and banks. EMIs can help banks align with risk appetite by insulating them from unregulated entities, bring relevant technology capabilities tailored for specific industries, and offer banks the opportunity to capture a share of the EUR 35 billion in deposits in the UK and EU that need safeguarding.In this age of competition, the same entities can be both competitors and partners when capturing the Embedded Finance opportunity. The UK and European banks and EMIs must navigate this dynamic landscape, leveraging their respective strengths to create innovative solutions and deliver enhanced customer experiences.