Electronic Money Supervisory Commission

Future of e-Money

Future of e-Money

  • Many articles are stating their own perspective about the future of electronic money. Electronic money is the digital replacement to cash and the use of e-money is fast revolving and is believed that this will continue to grow for it is much easier, better and more effective way to do business.

    “Electronic money is considered to be a game-changer. “

    From its inception in 1997, e-money has had the potential to be a game-changer by enabling companies to use technology to completely bypass the banks and break into a conservative and closed-off financial services industry. The concept really began to be put into practice with the EU Electronic Money Directive of 2000, which created a legal foundation to passport e-money issuing in Europe. This law is still without real counterpart in the world and, as a result, Europe became a hotbed of e-money innovation – with services from PayPal, TransferWise and Skrill being built on top of this unprecedented legal framework.

    E-money quickly began to act as a catalyst for some of the biggest changes we have seen in payments in the last century, from London’s Oyster Card, to the encroachment of the largest technology players into payments, with products such as Samsung Pay.

    In recent years, the number of e-money institutions has increased, and the services and applications have become ever more diverse – from pre-paid cards, to online payment accounts and mobile
    payment systems. Recent research has shown that the number of e-money providers registered in the UK with the Financial Conduct Authority (FCA) has more than doubled since 2013. Even many cryptocurrency developers have become e-money institutions, as it provides a structured governance framework.

    Where there was no substantial regulation between the first EU Electronic Money Directive of 2000 and the second in 2009, current regulations that have dramatic implications on e-money companies come thick and fast.

    The fourth Anti-Money Laundering (AML) Directive, for example, will have very real implications for e-money institutions when it comes (likely) into effect in 2017. The new AML rules will require issuers to undertake far greater customer due diligence in order to stay compliant. Not only will this slow e-money institutions own, with more compliance to work through, but it could also put them at risk of being cut off by their own bank accounts, now operating a “know your customers-customer” practice.

    Regulations such as this raise big questions for the sustainability of the e-money model. Being built upon the foundation that customers can use services without going through the same arduous processes they have to partake in to get a bank account; will e-money services lose their edge if they are forced to be compliant to the same or even more stringent regulations than traditional payment providers?

    By putting tighter caps on how much value e-money products can hold, besides increasing KYC regulation, innovative payment entrepreneurs must be asking themselves whether it would simply be easier to go down the route of becoming a payments institution. In fact, becoming a fully licensed payments institution, rather than an e-money institution, could become an increasingly attractive option thanks to the revised Directive on Payment Services (PSD2).

    Due to go live in January 2018, the ground-breaking feature of PSD2 is that it will require banks to securely open access to customers’ account data to third party payments providers, allowing them to build financial services on top of the banks’ data structure through an obligatory application programming interface (API). Ultimately, licensed payment institutions will be given access to key information – from transaction data to account balances – at a time when the amount of information e-money institutions can access is being reduced.

    In the long history of how things get paid for, is electronic money the next step?

    If the issue is how money is transferred, that question is settled–it is happening now. But if it is the creation and acceptability of new forms of money, the jury is out.

    Like so many other tools of civilization, money has evolved tremendously over the centuries. While change was glacially slow at first, the pace of evolution has recently been accelerating, and there is no reason at all to think that will stop. But what new forms might money assume? Will electronics take over, and if so, how soon will it do so?

    Money has three functions in society, and how well electronics serves these functions will determine its future. First, money is a unit of account, or a way to measure and record value: a pig is worth X dollars. Second, it is a way to store value conveniently for future use; possession of a pig is replaced by possession of a bank account recorded in, and retrievable in, money. Finally, it is a medium of exchange; instead of having first to find a pig to trade for cloth, money buys cloth or a pig.

    For money to fulfill these three functions, it must satisfy certain requirements. It should be easily and broadly recognizable and hard to fake (counterfeit), its value should be reasonably stable (a major matter, indeed!), and it should be durable and not deteriorate (electronic pulses are potentially wonderful). Finally and crucially, it should be convenient and inexpensive to use (vital for its acceptance in daily commerce).

    The history of money illustrates these points. It began, of course, with barter. In a primitive society a pig might be traded for a bolt of cloth. The obvious limitations of this kind of exchange led to the use of proxies for value. In societies near oceans, sea shells served; in other places, special stones; and later on, pieces of metal, often gold or silver, did duty and came to be shaped into coins. The development of printing spurred the use of paper notes. From this came checks, with which payments could easily be made over a distance, a major breakthrough. When the telegraph was invented, the technology for making remote payments developed further, as transfers became virtually instantaneous. Then a natural extension was the use of modern electronics and computers.

    Today, money is transferred in a wide variety of ways. Most of the value moves nearly invisibly to consumers and businesses through what may be termed wholesale payment systems, such as the Federal Reserve’s Fedwire, and these systems are almost entirely electronic already. But most of the products under development are designed to serve the vast “retail” channels, which encompass the infinity of smaller transactions occurring daily throughout the economy.

    How will electronics fit into this matrix of functions and requirements? The products being developed today fall into two groups, and it is important to distinguish between them because only one of them is a new form of money. Those referred to as electronic banking do not represent a new kind of money, but rather offer a new way to access a number of traditional bank services with traditional money. Such activities as bill paying and shifting funds among accounts over a telephone or computer connection belong here, and development is well along in this field. The many emerging types of stored-value cards and other media, however, do create new money, as they represent an alternative to government-issued or -guaranteed instruments.

    In stored-value systems, the liability of the issuer is recorded directly on the card, and a corresponding deposit account is not necessarily maintained for the individual card holder. Innovations of this type are coming along a bit more slowly. To be sure, some systems may involve both stored value and a deposit balance transfer capability, thus integrating the two types of products.

    Predictions of an electronics-based cashless society have been around since the 1960s and, at least to date, it has not emerged. Consumers and businesses have proven quite conservative in their money management, relying heavily on tried and true methods even after more advanced techniques have become available. To one degree or another, this conservatism will likely be the case in the future as well. That said, why should the course of events be different now?

    The characteristics of e-money and the speed of its advent will depend in large measure upon whether it serves the historic functions of money better than do its existing forms–whether electronic cash does better as a unit of account, a store of value, and a medium of exchange. How acceptable the new products are will be determined by the market and the classic economic factors of basic supply and demand characteristics. Suppliers will have to deliver a product that consumers want to use at a price that they are willing to pay, and that merchants see as a desirable additional way to conduct business.

  • In determining product prices, the cost factor is always crucial, and engineers designing the product’s technical characteristics will have an important influence on these costs. Components will include the costs of cards themselves, of terminals, of creating and maintaining software, of obtaining funds and of settlement, and (lest we forget) a profit margin. It is likely that the advance of technology will lower all of these costs continuously.

    A long list of features, some essential and others only desirable will determine the demand for the product. The degree to which these features are incorporated in new products will determine whether e-money does, in point of fact, represent an improvement.

    Convenience will be key for everyone. For consumers, this will consist, among other things, of ease in obtaining cards and replenishing them, as well as plenty of opportunity to use them. Merchants will want to see fast and easy service requirements on the part of their staff and fast settlement of the amounts due to them. Privacy may be a tricky issue as consumers will want to keep the details of their transactions private, whereas merchants and issuers will want to ensure they capture an appropriate record of their transactions.

    Then there is the all-important issue of safety for the store-of-value devices. Both consumers and merchants will want their stored-value systems to be simple in operation and error free, because neither will favor a device at all likely to somehow eliminate its own value through electronic malfunctioning.

    Both consumers and merchants will also demand a high degree of financial stability on the part of the issuer. Otherwise insolvency may leave the holder with a worthless asset.

    All the items on that laundry list have significant technical dimensions, and these technical problems are well on the way to being solved. For instance, engineers have made solid progress in solving the hardware and software issues posed by stored-value cards. Chip cards can now be mass produced, and advanced cryptography techniques are incorporated into the operating systems stored in the chips.

    Meanwhile, issuers are confronting the managerial, financial, and legal issues, which could prove far more difficult in many cases. For example, potential issuers are looking into the financial and legal structures that will provide their product with the greatest financial stability while at the same time avoiding the need for regulation, or at least minimizing their costs of complying with regulation.

    Governments are keeping a watchful eye on all of this activity, chiefly through their finance ministers and central banks. The Federal Reserve, the central bank of the United States, is closely following several issues. First of all, the safety and soundness of the financial system, especially the banking system, are major concerns, as instabilities there can disrupt the economy at large. On this point, the Federal Reserve is unalarmed by developments to date, because market forces should help ensure sound financial practices. After all, consumers and merchants will be most inclined to purchase stored-value products from those issuers who have implemented prudent financial structures and have taken steps to minimize the possibility of fraud.

    Furthermore, the stored-value industry appears unlikely to be large enough to threaten the financial system.

    Then there is the need to protect against crimes such as fraud and money laundering, as well as to ensure the privacy and security of the financial activity of society. The Federal law-enforcement community is looking closely at those issues.

    Over the longer term, there could be implications for the control of monetary policy, central banks will be able to adapt their monetary policy procedures to the growth of stored-value products, if the necessity arises. Perhaps most controversial in this context is who should be permitted to issue stored value and under what conditions. While all these issues require resolution, none seems to present insoluble concerns, and the Fed sees no present reason to jump in with preemptive regulations before any clear public policy requirements have been demonstrated. To do that could disrupt the socially beneficial entrepreneurial processes of the private sector, and would imply that market forces could not do the job.

    How all this will evolve as time goes along is hard to predict. The large-value wholesale systems are fully electronic already, and while they will no doubt evolve over time, they are not the focus of creative energies in the private sector today. The electronic banking products designed to improve access to existing retail banking functions will almost certainly soon find a place in our financial activities. The stored-value or e-money products could at the least evolve to serve a special niche in small transactions. For larger purchases, the financial incentives may continue to lead consumers to use other means of payment, such as checks and credit cards. It seems unlikely that e-money will make major inroads in the existing order of the financial system for the foreseeable future, but innovation in this area may well lead to noteworthy new efficiencies for the payment system.

    “Change is the only constant thing in this world”, scientists, engineers and technologies do evolve to provide us better way of living that includes money. Cashless society is possible in this modern world.

    Stated below some advantages and some recommendations provided by some writers in accordance for using electronic money.

    • E-Money reduces overall cost of operation drastically compare to Paper money.
    • E-Money is more environment-friendly as there is no need of paper and no paper means no cutting down tree.
    • As the technology is new, there are some security and stability concern about “E-Money” which are controllable in most of the case.
    • There should be some legal guidelines and law about e- money to prevent money laundering and other unethical uses of e-money.
    • Banks and Financial Institutes and Government should come forward and work along with the Tech-Giants such as Google, Apple, Microsoft, Facebook etc. to develop the revolutionary but secured and stable transaction system using “E-Money.

    An example insight of BANKO SENTRAL NG PILIPINAS regarding the future of e-Money.

    With the onslaught of Bitcoin and online shopping in the Philippines, banking and financial institutions are forced to keep up as the consumers’ habits rapidly change with the times.

    The road to digital adaption will not be smooth ride, as a study of Better than Cash Alliance in 2015 revealed that out of all payment transactions done in the Philippines, only 1% are considered digital.

    Bangko Sentral ng Pilipinas (BSP) is not turning a blind eye on these realities; in fact, they aspire that 20% of payments in the country will be done digitally by 2020.

    Bangko Sentral ng Pilipinas (BSP) proposed the National Retail Payment System (NRPS) framework to the industry that will, hopefully, convene financial institutions, banks, and other Government agencies to embrace the digital solutions available and craft innovations for better services to the public. The NRPS will provide a central system that allows for interconnected transactions across different financial institutions. The system aims to increase the share of electronic payments in the country’s financial transactions to 20 percent by 2020. Ahead of the NRPS’ full rollout, the BSP launched two automated clearing houses (ACHs) earlier this year: PESO Net, a system for batch electronic fund transfers, and InstaPay, a retail payment system for small-value payments. PESO Net would be convenient for large companies who need to deliver salaries and invoices in bulk, while InstaPay can be used by MSMEs to accept digital payments.

    The electronic credit transfer scheme may be possible, which will enable any individual or business with an account in any financial institution to transfer funds and/or make payments to any other account within the framework.

    Once it pushes through, the retail payment system will hopefully clear consumers’ initial hesitation to keep their money in digital form for security purposes or impending inconvenience as its use is still limited.

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