New Statesman: What exactly is “e-money”?
Peter Howitt: Electronic money, or “e-money”, largely describes the alternative payment products to bank accounts and credit and debit cards. One of the most notable new entrants in this industry is Facebook.
The term “e-money” itself is somewhat of a misnomer, since it suggests that it is an alternative to normal money, when in fact it is merely another form of regulated payment service that involves the use of fiat currencies. The term was invented in Europe for devices that stored value and to distinguish it from existing banking accounts and card devices (such as a debit or credit card). Nowadays, most e-money is linked to a payment account in the name of the customer, and so the payment device itself is usually less relevant.
It is also fair to say that use of the term “e-money” has led to some confusion with virtual currencies such as Bitcoin, which are not currently fully-regulated and that can (or can attempt to) compete with fiat currencies. In North America, e-money is usually called “prepaid”, which is actually a more accurate term for reflecting how the process works: by pre-loading funds onto a card or online account for use in subsequent payment transactions (fund now, buy later) rather than, say, the use of credit (buy now, fund later).
E-money is issued by authorised financial institutions who exchange payments received from customers into a “regulated liability” (in other words, an IOU) that enables those customers to make transactions (card purchases, ATM withdrawals, and online payment transfers).
NS: What makes e-money accounts different from a normal bank account?
PH: From a legal perspective I am afraid it is too complex an issue for such a short overview, particularly because prepaid products can be provided by both banks and e-money institutions. In many cases the differences for the customer are minimal. Prepaid products are used in an increasingly wide range of circumstances that relies upon the existing banking system, and can be complimentary to banking products. Yet it is also a disruptive new business industry. Why? Because of its strong technological focus and adaptability. The industry’s relative youth means e-money issuers are often more willing and able to adapt their relatively new business models and operational structures to meet the demands of fast-changing business and consumer behaviours.
NS: How big is the industry globally?
PH: A 2012 MasterCard report estimated that the prepaid card industry is expected to reach $822bn globally by 2017. However, this figure did not include Near Field Communications (NFC) transactions, the contactless payment technology available on mobile phone, or other transactions that are not linked to a physical card. That means the estimate is significantly below the total potential prepaid market opportunity. In addition, it did not consider the use of prepaid for business-to-business payment transfers, which is a multi-trillion dollar a year sector.
NS: What impact has e-money had on the way that people trade and do business?
PH: E-money is now a significant fixture in general consumer spending. It’s also being used for other kinds of transactions, such as corporate travel and expenses, payroll, healthcare and insurance payments, and even government cross-border money remittance. Today we use e-money in conjunction with a range of devices, including physical cards, mobile phones and other NFC devices, online accounts and even wearable technology.
We’ve seen major impacts in the speed of transaction making and in the range of payment options open to businesses, government and consumers. Another less widely know, but equally important impact of e-money is that it has enabled the greater inclusion within our economies of many people around the world who would not otherwise be able to have access to the banking system. When you are relatively wealthy and well-educated, it’s all too easy to forget that billions of people face challenges when seeking to makes payments other than with cash. As an alternative to traditional banking, e-money can help support the under-served.
NS: How big is the industry in Gib?
PH: The industry in Gibraltar is represented by the Gibraltar E-Money Association (GEMA), a not-for-profit that was started in 2012. We have four local issuers (The Bancorp, IDT Finance, Payoneer EU and Wave Crest) and two other GEMA members (paysafecard and Ramparts) that have multi-national clients and projects in Europe and worldwide. In terms of local staff, it is still small in absolute terms (issuers employ less than 200 people in Gibraltar). However, in a territory with a total population of only 30,000 it is fast becoming an important part of the local economy.
NS: What are the biggest challenges for businesses in the e-money industry today? Are there any problems with fraud, money laundering or other criminal activity?
PH: Regulatory uncertainty and costs, particularly in a cross-border context, as well as the political antipathy and resistance that usually arises from being an industry that disrupts traditional banking structures and national financial infrastructures. In addition, the model tends to require a degree of scale to achieve commercial success. Regarding fraud and criminality, in the opinion of the local industry these problems are no worse than those that exist in the traditional banking industry (and much better than the alternative cash based society). In fact, in many cases the problems are smaller (because the payment volumes are smaller) but more diversified than those that exist with pure banking products, and these present different challenges that also require innovative technologies and cost efficient solutions.
To give an example, customer identification and due diligence requirements were born in a traditional world that involved much more reliance on face-to-face transactions and inter-personal relationships. In this newer industry, the requirements to manage anti-money-laundering and terrorist risk, fraud and other issues requires the use of new technologies to help identify customers and manage transaction risk. It’s a very interesting area.
NS: What does the future of e-money look like?
PH: The future of e-money is already here. E-money/pre-paid, whatever term you prefer, is fast becoming the normal way to make payments for the majority of people in the world. I also expect prepaid to overtake credit and bank debit transactions (by payment volume) for consumers within the next 15 years. The future for GEMA members looks bright. Also, keep an eye on the major technology giants like Facebook, Apple and Google who trying to move into this space and also mobile companies like Vodafone who have had major success with their M-PESA service; it’s no coincidence that we are seeing increasing interest in this area from a wide range of heavyweight operators from different industries.
Peter Howitt is Secretary for the Gibraltar E-Money Association (GEMA) and founder of Ramparts European Law Firm
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