What is Electronic Money? Considerations for Corporates and EMIs
- Electronic Money is the digital representation of a fiat currency that is stored electronically.
- Electronic Money is prepaid and can be redeemed for cash or other payment transactions.
- Electronic Money plays a crucial role in the financial system and ecommerce.
- Electronic Money is neither a deposit nor a cryptocurrency.
- The unique legal and regulatory status of e-Money creates considerations for users.
Definition of Electronic Money
To be classified as e-Money, certain characteristics must be fulfilled:
Monetary Value: it holds a value equivalent to a fiat currency.
Stored Electronically: it is stored on electronic devices (prepaid card or smartphone) or servers (digital wallet or online platform).
Accepted by Third Parties: it is accepted as a medium of exchange by entities other than the issuer.
Prepaid: e-Money is issued only after receiving an equivalent amount of fiat currency in advance.
Use cases of Electronic Money
IBAN Issuance
Accounts with e-Money balances in a single or multiple currencies.
Neobanking
Bundled accounts, digital payments, FX, cards, etc, often augmented with software for easy management.
Banking-as-a-Service
Offering account and payment services to 3rd parties on your infrastructure in return for a revenue share.
Prepaid Cards
Cards that are loaded with a specific amount of money and can be used for purchases later.
Digital Payment Platforms
Websites and apps for EMI to orchestrate online payments and may hold a balance for users.
Digital Wallets
Platforms like PayPal and Revolut that store e-Money to facilitate online payments or money transfers.
Bank-Linked Digital Wallets
Wallets like Google Pay and Apple Pay, where e-Money is linked to bank accounts.
Mobile Money Services
Allows users to store, send, and receive money using their mobile phones, like M-Pesa.
Stored-Value Cards
Cards like Oyster, which are preloaded with money and used for transportation or other services.
Voucher Schemes
Users purchase vouchers online or at kiosks then user them to redeem for online purchases, like PaySafeCard.
Why does Electronic Money Matter?
eCommerce
e-Money is an alternative to traditional banks and payment rails. e-Money covers numerous use cases, currencies, and enables real-time eCommerce. Being digital in nature it is easy to integrate to other systems, creates data, and is often cheaper than traditional methods.
EMI
Low regulatory barriers have made it possible to enter and disrupt the financial services industry. Valuable unicorns such as Revolut have been formed, while others such as Wise have floated. EMI market share remains modest, but growth prospects are strong as clients adopt and the industry matures.
Regulators
e-Money has created choice for consumers, reduced dependency on the banks, and provided learnings for crypto, stablecoin, and central bank digital currency (CBDC) innovation. e-Money is subject to high levels of money laundering and payment fraud, thus rated high risk in national risk assessments.
Is Cryptocurrency e-Money?
No. Cryptocurrency and stablecoins are electronic however they are not tied to fiat currencies nor backed by a central authority. Crypto assets are subject to separate regulation than EMI.
Is a Bank Deposit e-Money?
No. Bank accounts hold fiat currency electronically, but are subject to separate legal status and regulation. Bank deposits qualify for state deposit guarantee schemes, e-Money is safeguarded. Bank deposits pay interest, e-Money does not.
How large is Electronic Money in Europe?
According to the European Central Bank, e-Money transactions in the Eurozone in H2 2024 were 4.6bn, up 2.6% on prior year. Total value was EUR 0.3 tn, up 15.8% on prior year.
e-Money payments account for 5.97% of total payments in the Eurozone.
At the time of writing, there are 325 authorised EMI in the EU.
How is Electronic Money Regulated in Europe?
The regulation of e-Money in the EU is primarily governed by the Electronic Money Directive 2 (EMD2).
Authorisation for e-Money is provided by the competent authority in the Member State where the applicant is established. Passporting to additional EU countries is possible on approval.
Applicants must meet robust requirements including a sustainable business plan, robust operating plans, technology infrastructure, experienced team, initial capital of €350k, local substance, customer conduct policies, governance structures, AML/KYC monitoring, client funds safeguarding, compliance program.
The process is extensive, 9-18mths depending on the services and jurisdiction. Applicants are expected to have capabilities in place (if not operational) at the time of application.
What is Electronic Money Safeguarding?
EMI are required to safeguard client funds by keeping them separate from their own operational funds. The requires the EMI to place client funds into a special segregated account with a highly rated bank or hold alternative insurance or guarantees.
If the EMI fails, safeguarded funds are not part of the EMIs assets and are returned to customers in the insolvency procedure.
If the safeguarding bank fails, funds are protected by the statutory deposit guarantee scheme and returned to customers in the insolvency procedure.
e-Money Considerations for Business
- e-Money is convenient, allowing for quicker and cheaper payments, especially in ecommerce and cross-border.
- e-Money balances are not interest-bearing.
- e-Money is not covered by state deposit guarantee schemes.
- EMI may be thinly capped and unrated, making them higher risk.
e-Money Considerations for EMI
- Volume is required to reach break-even.
- Good client engagement, regtech, and core banking technology are required to process efficiently at scale.
- Regulatory requirements for EMI are increasing, as are enforcements for non-compliance.
- Securing partners for safeguarding is lengthy and difficult due to AML/CFT risk.
- Is the flow of client funds between EMI and safeguarding partner smooth?
- Are safeguarding or BaaS partners disclosed?
- Are safeguarding or BaaS able to account for revenue share?
- Treasury management skills are required to manage liquidity, market and counterparty credit risks.
Electronic Money Summary
e-Money is a key component of the financial system due to its flexibility, convenience, and efficiency. Innovation, real-time payment infrastructure, and growth in eCommerce will drive further adoption. Challenges exist, including the fight against money laundering and payment fraud, thus it is reasonable to assume EMI will face increased technological and regulatory requirements in the coming years, ultimately leading to consolidation.
