What is e-money? A Detailed study on electronic money.

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The concept of modern e-money is notably ambiguous. This ambiguity is, in fact, the reason people are now wondering why such a widely-used and recognised form of “money” has only recently attracted the attention of regulators. However, because the concept of e-money has evolved and naturally with it, the definition ought to change.

What is not e-money?

Let’s clarify the term by first pointing out “what e-money is not”.

E-money is not per se a traditional digitalised currency that is held in an account. It is not bank payment cards themselves and it is not online banking itself.

The difference between modern and traditional e-money lies in the fact that the latter allows operations with real money which is held in bank accounts. As such, bank cards and online banking merely provide a means of access to real money held by the bank. The novelty of the modern concept of e-money comes down to a technicality that was codified within the legislation in a broad manner as to encompass different types of e-money.

How can we positively define it?

Let’s now move to positively defining “e-money” i.e. outline what is e-money.

The European Central Bank (ECB) defines electronic money (e-money) as monetary value electronically stored on a card, phone, or over the internet, that represents a claim on the issuer. The Electronic Money Directive 2 (EMD2) definition of ‘electronic money’ also includes magnetically stored monetary value which is widely accepted as a form of payment by entities that are not the issuers themselves. Thus, devices on which this type of money is stored must be commonly and widely accepted and used for payments of all sorts. In simpler terms, it is a (digital) alternative to cash. The UK, same as many other European Member States, has identically transposed this definition into its legislation without giving much thought to it.

How does e-money differ from bank-related instruments?

Payment instruments store electronic money. These instruments take the form of a customised set of instructions or a personalized device, also known as electronic money products. Any payment instrument, including the above examples depicting traditional electronic money, can become a modern e-money product.

The notion of e-money as digital cash is quite helpful for differentiating it from bank-related instruments. When storing cash with an e-money issuer it, there is no interest, but the customer has easy access to his/her money. Moreover, the customer has the right to redeem the money. On the other hand, it is the bank that owns the money in interest-generating savings accounts. This means that the customer becomes a creditor of the bank. In this relationship, the customer has the right of repayment.

To understand whether a product is an e-money product you should check the regulatory status of an institution that issued the product. If an institution is an Electronic Money Institution (EMI) or Small EMI, it is allowed to issue only payment cards and digital bank accounts which are e-money products. However, to understand what exactly do you use may be confusing. For example, some banks (e.g., PayPal) also provide e-wallet accounts. Moreover, some EMIs work through a third-party and the account is opened not with an EMI itself, but rather with a bank (e.g., UK EMI Tide has integration with Clearbank).

The contrast between the right to redeem and the right of repayment highlights the innovation “e-money” brings.

e-money test framework

Types of electronic money instruments

The features that enable categorising types of electronic money (e-money) are the form of e-money storage, the identifiability of e-money users, as well as the mode of e-money usage. Based on these elements, the different categories of e-money instruments are hardware/software, identifiable/anonymous, and online/offline instruments.

Hardware/Software

As per the European Central Bank, the categorisation of e-money as hardware or software-based is the core division of all modern forms of e-money.

In the instance of hardware e-money, a personal physical device stores its monetary value. This device can be a chip card that is typically secured through hardware-based features. Even a ring that allows paying at a POS can be an e-money product. The advantage of this type of e-money is the fact that transfers do not require internet connectivity.

Software-based e-money products use specialised software that functions on PCs, laptops, tablets, phones. Unlike hardware-based e-money, an active network connection is necessary for enabling transfers and payments.

Often, a user does not even know whether he/she uses hardware or a software product. For example, many Electronic Money Institutions in the UK allows paying using mobile e-wallets such as ApplePay, AndroidPay, SamsungPay. When you in a store using ApplePay, you don’t even need a internet for a transaction to be completed.

Need an e-money advisor?

If you are interested in providing e-money services in Europe that require the authorisation or advise on operation- PSP Lab can be of help. Should you have any questions regarding the legislation or approach or national authorities to regulation, please do not hesitate to contact us.

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