- Banking as we know it has come a long way since its inception. From Babylonian money lenders, to the goldsmiths of 17th century London, to the soaring skyscrapers of Wall Street, banking has played a pivotal role in local and global economies.
- However, as technology continues to disrupt traditional industries, the financial sector is no exception.
- One important development that has emerged in recent years is the rise of E-Money Institutions (EMIs), a new wave of innovative firms which have not only reshaped the way we carry out our banking but are also enabling a new era of ethical finance.
When is a bank not a bank? EMIs: a driver for innovation — and disruption
Banking, as we covered in a previous post, began as a rudimentary system of storing valuables and evolved into lending and borrowing, eventually leading to the creation of banks as we know them today.
Fast forward several centuries, and this traditional model of large, centuries-old institutions has evolved into the form of EMIs. EMIs have been designed to make elements of traditional banking more effective, offering consumers a more convenient and digitally-driven experience in aspects such as payments.
On a mission to foster innovation and drive disruption in the world of retail banking, EMIs have not been required to get a banking licence in order to operate — meaning that they have been able to launch to the public faster (banking licences can take several years of regulatory due diligence and require substantial capital investments) — but this same regulatory freedom has also placed constraints on the products that they’ve been able to offer. EMIs, for instance, are not permitted to take deposits and lend them out again, as traditional banks do. They provide a service that can feel very much like banking, but are themselves not banks.
Open Banking & Banking-as-a-Service (BaaS)
Two key parts of the UK’s financial ecosystem have enabled EMIs to provide enhanced ‘everyday’ products — debit cards, payment processing, currency exchange etc — to their customers, without having to build and maintain their own banking infrastructure or hold a banking licence: Open Banking, and Banking-as-a-Service.
Open Banking allows EMIs to securely access customer data from other participating financial institutions, enabling features like personalised offerings and better risk assessment. Banking-as-a-Service (BaaS) enables EMIs to outsource certain core banking functions, reducing operational risks and costs and enhancing agility in the way that they’re able to launch new financial products and services. The evolution of both Open Banking and Banking-as-a-Service has opened the gates to innovation and agility in financial services.
Challenger Banks: A Catalyst For Transformation
The first wave of firms that have been broadly grouped together as ‘challenger banks’ saw names like Monzo and Starling reimagine retail banking for the digital age, taking advantage of the nimbleness and cost-effectiveness offered by the EMI regulatory status (both Monzo and Starling have since gone on to become full-blown banks). Disrupting the status quo, these EMIs introduced digital-only payment and monetary transaction products to empower customers to manage their finances, access services and conduct transactions, all from the convenience of their digital devices.
This not only led to a more enjoyable banking experience but also prompted traditional legacy retail banks to up their digital game.
Financial Inclusion
This digital revolution in banking has transformed our relationship with money; products such as current accounts, debit cards and savings accounts, while not exactly ‘new’ products, have been re-designed by the challenger banks with the customer in mind, making them more user-friendly and feature-rich.
While some argue that digital banking has led to the reduction of physical branches — potentially excluding digitally-averse customers — others, including unbanked or underbanked individuals, who lack access to traditional banking services, have found safe haven in EMIs, who have a far greater ability than traditional banks to focus in on and meet the specific needs of a particular segment of the population. Purpose-driven banking was born.
The Rise of Purpose-Driven Banking
The first era of challenger banks propelled the whole industry towards digital innovation and customer-centricity. It also opened the door for the second era: a new age of purpose-driven banking, designed to serve distinct communities and causes.
For consumers, rather than being the passive recipient of a legacy bank ’service’, they can now seek out account and money management providers that align with their own values and ethics, and experience positive outcomes from those relationships.
Raising The Bar: The Emergence of Ethical Banking
Ethical banking providers — a term including here both EMIs and full-blown banks — offer consumers a way to meet their own ethical requirements, while still having access to a range of banking products and cutting-edge digital services. Financial institutions like Science Card provide customers with the chance to make a positive impact with every transaction, and contribute to the causes that matter most to them.
Whether it’s addressing Environmental, Social and Governance (ESG) concerns, particularly the fight against climate change, or advancing our ability to fight diseases such as cancer and dementia, we are seeing the start of a shift by financial institutions towards meeting consumers’ ethical standards.
Consumers are realising that their money has a power of its own, and are demanding sustainable alternatives to the legacy banks, where their money and their use of banking products can help better the world we live in. Science Card, for example, believes that through science, an equitable and sustainable future can be created for all.
From the financial institutions of ancient times to the pioneering steps of the first EMIs, the emergence of ethical banking is allowing us to redefine our relationship with our finances, on our own terms.
No longer just about money, it’s about making a meaningful difference in the world.
