Electronic Money: Another form of Cash
For centuries money has played a very important role in civilised societies, and was considered a better solution to the bartering system. It took different forms throughout ages and an electronic format comes as no surprise in current times.
Electronic money (eMoney) is issued by financial institutions having an electronic money licence, thereby known as Electronic Money Institutions (EMIs). eMoney is another alternative of making money transfers and/or payments, due to the fact that they are instant payments (which is somehow different from traditional bank payments which commonly use SWIFT and SEPA to transfer funds). The purpose of the introduction of eMoney and EMIs was to increase competition and products offered in the market and enable consumers to benefit from lower transaction fees. A legal basis is established in the Electronic Money Directive (2009/110/EC), and reflected in Maltese Legislation through the Financial Institutions Act (Cap 376 of the Laws of Malta) under the Third Schedule.
A particular feature of EMIs is that they cannot offer credit to their clients thus the value of eMoney is prepaid by the customer into his/ her account prior to making the transfer (unlike credit institutions or financial institutions possessing a payment licence – known as payment institutions – which can give credit to their customers). Effectively EMIs change the form of money (from physical to electronic) to provide a service to their consumers whereby through electronic making it is more practical to execute transfers (rather than through physical cash).
The primary purpose of eMoney is to reduce the dependency on physical cash. Its characteristic can be of 2 types: 1 hardware-based products (most commonly known as prepaid cards) where the individual can use the card to buy goods / services physically or online, or 2 software-based which is an innovative solution useful for both corporates (amongst which are gaming companies) and individuals as one of their payment methods to transfer funds instantly without delays. The latter being discomforts commonly faced when making bank transfers. Therefore, such systems are considered to be as fast as cash. A typical system adopted by EMIs is to operate a closed-loop system, where a transaction’s output is another’s input, meaning that the outward transfer of one electronic account is the input of another, leaving no overall effect on the total client funds, but a mere transaction in the IT system. Such accounts cannot be used to make third-party payments (i.e. outside the closed-loop system).
Funds received by EMIs are to be used solely for payments. EMIs users do not hold accounts as a means of savings; in fact, funds transferred to EMIs do not constitute a deposit. In particular, EMIs are precluded to pay interest to their clients and also cannot invest and make a return on client funds. Client funds must always be kept at call and readily available when they want to make payment transactions. This is an important concept for eMoney as it needs to be treated as an electronic alternative to cash and not as an investment. It is important to note that the purpose of EMIs is not to move money out of banks, but to facilitate the payment process. A characteristic of EMIs is to effect a large volume of low-value transactions, very often averaging around €100 per transaction.
EMIs are bound by law to segregate client funds from company funds. They have the duty to safeguard the clients’ stored eMoney and keep client funds deposited with banks. Therefore, given that an EMI would be sufficiently capitalised, the client funds’ security would rest on the soundness of the banking industry. In this respect, if an EMI ceases to operate the clients’ risk would be relatively low, since the clients’ funds are held by the respective banks of the EMIs.
EMIs are important as they provide financial services accessibility to persons who very often face difficulty in accessing banking services such as immigrants, freelancers and young individuals who enter the country for work purposes. They can also offer better solutions to replace older payment methods such as the cheque system (including cheque payments made by Government in paying out social benefits). More importantly, EMIs use their competitive advantage of effecting instant payments to help facilitate ecommerce, a key factor in this industry. As ecommerce evolved, the payments industry had to evolve accordingly to provide fast and reliable payment solutions, without which the ecommerce industry would not have been able to flourish at such a fast rate.
The positive characteristics of eMoney are particularly suitable to the travel, hospitality and leisure industry. It is ideal for settling bills in restaurants, hotel accommodation, conference fees and sport activities amongst others. Very often such EMIs offer their services in different currencies and thus there wouldn’t be the need to convert money to the payment settlement currency.
If for example travel agents and hoteliers use the services of the same EMI, any payment transfers can be made instantly. Therefore, there would be advantages of efficiency in money transfers and also lower transaction fees. In addition, it is a known fact that the tourism industry employs a number of short-term employees due to the seasonal nature of the industry. If employees have an account with the EMI, wages could be transferred to their account, which they can thereafter use for other purposes, in a similar way as a current account held with a bank. This form of payment is also convenient for restaurants, since if they cater for a system of mobile payments, they can reduce the risk of cash fraud as well as efficiency in settling bills.
There are benefits for non-direct users of eMoney as well. As the use of eMoney increases in popularity and physical cash usage reduces, funds will become more traceable. Increased transparency in the flow of funds could lead to lower risk of tax evasion which would in turn benefit the society as a whole.
However, EMIs face challenges as very often their business is considered a grey-area by the banking industry which in turn is reluctant to provide services to EMIs, thus restricting the choice of establishing banking relationships. This is a very serious concern since despite authorities recognising the importance of creating more financial services accessibility, in practice this is resulting to be difficult. This goes against the previously mentioned purpose of creating EMIs. Also despite EMIs being regulated (albeit at a different level to banks) and obliged to perform due diligence procedures on their clients and AML/CFT monitoring on transactions.
In current times, this form of money is highly useful as well as practical, particularly in view of the accelerated advancement in technology, increased use of portable devices and greater mobility of people. Users need to familiarise themselves with this innovative concept and consider eMoney as another ‘wallet’, though in electronic format. There needs to be a change in mentality from one that sees these eMoney as different from bank accounts to one that sees it as there to facilitate payments, have other cheaper alternatives at their disposal and reduce the risk of forfeiture associated with cash. This is the way forward for both the payments industry as well as the necessary move towards a cashless society.