Electronic Money: A new way to pay

Author: Vijay Kasturi, Head of Business (Western Europe) at Profinch Solutions.

Money, as a medium of exchange, has always reflected the prevailing socio-economic, cultural, and technological environment. Through the history of mankind, money has taken several forms ranging from animal skins in Alaska, salt in Nigeria, or tobacco in America to metal, especially gold, and eventually to paper currency that is issued by the government’s decree (fiat). Inevitably, in the 21st century, money has gone tech.

What is E-Money?

In the current digital age, where individuals and businesses are embracing tech inspired solutions, the role of cash is fast diminishing. Instead, electronic money (e-money) and electronic payment systems are fast achieving ubiquity. E-money is simply the electronic alternative to cash. It is defined as the quantity of monetary value that is represented on an electronic device. From a device perspective, e-money could either be based on software (like a banking system or a payment service provider) or on hardware like a smartphone or a magnetic device such as a prepaid card.

The definition of the EMD[1]

In the European Union (EU), all handling of fiat-backed electronic money – from payment to obtaining an e-money license to supervising e-money institutions – falls under the purview of the Electronic Money Directive (EMD). It defines e-money as:

“electronically, including magnetically, stored monetary value as represented by a claim on the issuer which is issued on receipt of funds for the purpose of making payment transactions as defined in point 5 of Article 4 of Directive 2007/64/EC, and which is accepted by a natural or legal person other than the electronic money issuer”

As per this definition, e-money is simply a stored value which generates a claim once it is issued. E-money is regulated and backed by stable, well-accepted assets. When you use e-money, the issuer will release funds only ‘on receipt of funds.’ The fact that it is ‘backed’ and derives value from fiat money contributes to its increasing acceptance.

E-money versus other forms of digital currencies

While the distinction between cash and e-money is obvious, the differences start to blur when we compare e-money with other forms of digital currencies. From the perspective of distinction, the “Money Flower” diagram by M. Bech and R. Garratt[2] is a great way to visualise and understand the traits associated with different types of money. The four major traits defined include:

  • Widely accessible
  • Digital
  • Central bank-issued
  • Peer-to-peer

E-money would fall into the categories of “Digital” and “Central bank-issued”.

The Money Flower: A taxonomy of money

E-money: Gaining currency

E-money is fast gaining currency due to some of its inherent attributes that are beneficial for companies, financial institutions, and customers alike. These include:

  • Security: It is widely believed by many experts that e-money is possibly even more secure than holding cash. The first and foremost reason for this belief is that you can’t misplace it. Further, it cannot be stolen as easily as cash. E-money employs encryption and customer authentication technologies, like multi-factor authentication, which makes it secure and less prone to theft. Additionally, it has to comply with the relevant regulatory standards that ensure that it remains secure on the web. For example, to prevent identity theft and other cybercrimes that might impact the safety of the money in your e-wallet, service providers are obliged to comply with the mandated Know Your Customer (KYC), anti-fraud, anti-risk, and Anti-money Laundering (AML) norms.
  • Convenience: Standing in queues at bank branches to withdraw cash has now become a relic of the past. Inarguably, leveraging digital payment mechanisms is the norm today. Even within the online payment options, significant layers exist which make one form of payment better than the other. One of these layers is related to convenience. For example, if you choose to pay for an online purchase via bank transfer then you get redirected to the banks’ platform and have to navigate it accordingly. On the other hand, if you choose to use a credit/debit card as a payment method online, then you need to share the credentials of your card or your bank account data every time you make a transaction. In either case, you need to go through 2 to 3 steps and supply information. This can make the process highly inconvenient. In the case of e-money, service providers offer e-wallets in which you can store your payment instrument data. Subsequently, when you are making an online payment, you simply choose your e-wallet as the payment option and buy with just 1 click. It is actually akin to opening your wallet and handing over the cash, except you do this digitally.
  • Speed of transactions: The third factor contributing to its adoption is the speed of transactions. Generally, e-money transactions, whether taking place at points-of-sale or online, happen almost instantly. Just like cash.

The telephone did not survive the mobile phone. The horse and buggy did not survive the automobile. Similarly, the question now to ponder upon is whether banknotes and coins will survive the dawn of digital money. With the myriad benefits that e-money offers, it is inevitable that over a period of time, it will achieve wide-scale acceptance.

[1] e-money-faq-22122016_en.pdf (europa.eu)

[2] V. Cryptocurrencies: looking beyond the hype (bis.org)