EMIs, or how the future of payments and the future of banks are set to decouple

We all know the fundamentals of banking. Those with excess liquidity pass on that money to a bank for safekeeping while those who need liquidity borrow money from the bank. Of course, banks employ an array of complex financial instruments, but they depend on the deposit/loan cycle for making money – a cycle that comes with inherent risk.

It is no surprise that estimating and pricing this risk is make-or-break enterprise for traditional banks.

The last decade has seen a steady change in the transaction landscape. Just ten years ago, we probably would not have considered paying for a coffee with our bank card – cash was the undisputed king of the small transaction.

This dependence on cash mostly has changed due to the increase of online commerce and new technologies. From purchase of physical goods to subscribing to streaming services, society is mostly happy to transition to a largely cash-less paradigm.

As our behaviour shifts online, we also make changes to our physical world transactions, reducing our cash-purchases to a minimum. With this worldwide behavioral shift comes a significant increase in electronic microtransactions that need a robust and secure infrastructure that can handle the staggering number payments that occur every second.

Enter the Electronic Money Institution. These are financial institutions that are licensed to handle electronic transactions. They give hundreds of millions of daily users a safe and convenient way to make payments within a convenient user interface.

EMIs aren’t new. One could argue that a large part of the success of eBay was the convenience of PayPal as a safe and easy-to-use EMI that millions of users were happy to adopt. That was over two decades ago, and it set the tone for a completely different way of doing business.

As we progress towards a civilization that has electronic money at the core of its end-user transactions, the trend is towards a larger number of transactions that have a smaller value. Large retailers are partnering up with buy-now-pay-later providers to split large purchases into easier monthly payments, the subscription model that was the reserve of entertainment delivery is extending to physical products, and more and more digital products and professional services are being offered as a service. And every one of these transactions is a data-point that tells us something about a consumer’s behavior.

A fundamental difference between banks and EMIs is that EMIs only make money when a transaction is made. This means that they do not use their customers’ money as an instrument, keeping customer’s funds completely free from risk. This extends to the way EMIs treat merchants. Unlike banks, EMIs pass on money that merchants make almost instantly while banks have every reason to delay the transfer of merchant funds.

As banks tend towards making personal client relationships a struggle for almost all categories of clients, EMIs are there to offer uncomplicated access to money to practically everyone.

Of course, they do not compete with banks for the traditional services such as lending and deposits. But, for the average user who wants an app that tells them how much money is in their account and that gives them the ability to pay anyone, anywhere on earth, EMIs represent the future of microtransactions, of consumer behavior data collection, and of uncomplicated payment processing.

The time for all financial services to be delivered by a single entity, such as a legacy bank, is fading fast. Smart business is moving to best-of-breed partners and, for the entire payments supply chain, this means choosing an EMI. The businesses of tomorrow that value security, speed, and simplicity of payments are making the transition, giving their customers a significantly quicker and less complex payments experience. When coupled with the cost benefit and the wealth of customer behaviour data that today’s EMIs provide, it becomes even harder to justify retaining legacy payments providers.