Chief Financial Officer Andrea Travis-Matthams discusses the function of e-money in the realm of digital banking.
Digital currency, or e-money, is money that exists digitally. The European Central Bank has reported that the value of electronic money issued in the Euro area than quadrupled between 2014 (EUR 5.4 billion) and 2021 (EUR 15.4 billion), demonstrating the significant development in its popularity in recent years.
The emergence of new electronic currencies has led to the interchangeability of terminology like “digital,” “virtual,” and “electronic” to refer to a variety of non-physical money forms. This is where we go into great detail on e-money and how its unique qualities have made it a widely used, practical, secure, and long-lasting payment option.
The Details of Electronic Money
E-money provides customers with an incredibly easy and safe way to send and receive money. Although the underlying technology was developed in the 1980s, it has taken many decades for it to become the widely used payment mechanism that it is today.
is now being driven by the Covid-19 pandemic’s impact and the ensuing spike in demand for mobile and contactless payments.
When funds are received, e-money is generated, or issued. For instance, an e-money issuer may accept cash from a distributor, retailer, or client in exchange for the equivalent amount of e-money. Because e-money is a digital version of cash, its value is supported by fiat (government) money and may be converted back to fiat currency, however this is rare because most people use e-money for transfers or purchases because of how convenient it is.
E-money can also be conceptualised as a prepaid product. Since electronic money may only be disbursed upon receiving funds, the user is essentially prepaying for the ability to spend. After then, their electronic funds are kept as digital records in bank computer systems, on prepaid cards, in digital wallets on their mobile devices, or in payment apps like PayPal.
In essence, electronic money is only a record of the value of actual currency that is somewhere else. E-money is a payment method—a way to transact using currencies that are issued and controlled by the government. Since e-money cannot be borrowed for interest like a bank deposit, it is not regarded as a deposit and is not protected by government compensation plans.Is electronic money secure then?
While there is some risk associated with all financial institutions, an Electronic Money Issuer (EMI) is restricted in what they can do by licence to a small number of banking activities, like providing current accounts and payment cards, which are low-risk operations. Since lending would put the e-money issuer’s cash deposits at substantially higher risk, the EMI Licence prohibits it from doing so.
The regulatory basis for e-money issuers is provided by the Electronic Money Regulations, which entered into force in 2011. According to the Regulations, funds deposited with the issuer of electronic money in exchange for electronic money must be pooled and ring-fenced in a different bank account. This way, should the issuer of electronic money become insolvent, its creditors will not be able to claim the funds, and the account holder will be able to receive their money back.
One of the main advantages of electronic money is its regulation. Since e-money is backed by a government-issued central currency, it is governed by national regulations and is, therefore, widely recognised as a safe and secure payment method. This is in contrast to certain digital currencies that are issued by the private sector and are decentralised, which are largely unregulated and therefore more volatile and risky.
What distinguishes digital money from e-money?
In order to avoid confusing it with e-money, it is worthwhile to quickly discuss different forms of digital money. The primary categories of virtual currency are:
Central Bank Digital Currencies (CBDCs): These are digital tokens that are issued by the government and may be stored or transferred using mobile and internet apps. The Atlantic Council reports that while 130 more countries—representing more than 98 percent of the world’s GDP—are presently investigating CBDCs, only 11 have completely implemented them. CBDC is only issued by the central bank and is digital in nature, not to be confused with e-money. For instance, the UK is now investigating the effects of a digital pound that would be issued by the Bank of England and have the same value as banknotes.
Cryptocurrency: Bitcoin and Ethereum are two of the most well-known examples. Digital assets that exist on several computer networks are known as cryptocurrencies. Cryptography is used to verify peer-to-peer transactions instead than relying on a central authority. Because of its decentralised nature, the money is valued according to supply and demand and functions independently of other currencies with a centralised structure. Cryptocurrency is kept in a digital wallet and may be used to make purchases. It has no physical form. Although 8685 cryptocurrencies were in circulation in February 2023, according to Statista, many of them are insignificant, with the top 20 making up around 90% of the market. The cryptocurrency market crashed in 2022, and it’s unclear how much will rise again.
E-money’s future
The emergence of cryptocurrencies may have caused some disruption in the digital payments business, but some people believe they will never become a competitive substitute for traditional money. The foundation of e-money’s success is the fact that most customers like to know that their money is supported by a central authority.
The rise in e-money as a payment option may thus be a sign that monetary systems will eventually transition to a fully digital paradigm, the beginnings of which can already be seen in the form of cautious moves towards CBDCs. However, this is a very long way off, if it occurs at all.
Cold hard cash also doesn’t seem to be going anywhere, at least not just now. Even if we are using much less actual cash for payments, the existence of banknotes is undoubtedly what is sustaining the rapidly expanding e-money market.
In the digital currency revolution, where fintechs and regulated businesses are vying to provide ever-more inventive e-payment solutions, e-money has established itself as a leader. Better payment and e-wallet solutions that meet exacting customer demands and provide highly personalised and intuitive payment experiences are being developed as a result of customers viewing once-attractive features like speed and safety of digital payments as merely hygienic ones.
At Transact Payments, we provide customised support to help our clients realise their payment ideas while enabling a wide choice of cardless technological solutions. In the UK and throughout Europe, we are a licenced Electronic Money Institution offering solutions for BIN sponsorship, settlement, and payment services. As a result, our clients can focus on innovation to set their solutions apart in the booming but extremely competitive field of e-money and e-payments, leaving the time-consuming and costly licencing, compliance, and Scheme side of things to us.
