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A Complete Guide to e-Money

- 8 minute read

What are the benefits of e-Money and e-Money accounts compared to traditional banks? Our extensive guide has the answers.

 

What is e-Money?

E-money (which can also be referred to as digital or electronic wallets) is a digital form of cash stored electronically; it exists in banking computer systems and facilitates electronic transactions.

Although primarily used for electronic transactions, e-Money’s value is backed by fiat currency and the central banking system and can be exchanged into physical, tangible forms. 

A digital, monetary form of exchange, e-Money is represented on an electronic device, whether software (like a banking system, or a payment service provider like PayPal or Square), or a piece of hardware like a smartphone or a magnetic device like a prepaid card.

Pre-loaded cards and digital wallets are just two forms of e-Money used to facilitate everyday transactions. But how do they work? 

Although there are similarities between digital wallets and pre-loaded cards i.e. ease-of-use for the individual, ease of loading funds, a focus on self-service and real-time visibility of the balances on an e-Money account, there are of course differences. 

Pre-loaded cards are a great way for consumers to pay for ‘something’, whereas digital wallets help people with the whole end-to-end purchase, payment and management process.

 

How e-Money Works

At a basic level, e-Money is simply money stored on a computerised device. Virtual currencies, e-cash and central bank digital currencies are all examples of e-Money; transactions can be completed with or without a bank account.

As e-Money is digital with no physical form, e-Money allows for almost instantaneous transactions anywhere in the world. Individuals are able to process and receive electronic money through monthly wages direct deposits, electronic fund transfers or online payments and purchases. 

Of course, just like any other form of currency, the use of e-Money has to be issued and monitored - and that is where electronic money institutions (EMIs) come in. But how do they work? EMIs operate as digital financial intermediaries, offering a multitude of electronic services; from e-Money issuance, to facilitating fund transfers and online payments. 

In the UK, if an organisation intends to issue e-Money, the business must be registered to or authorised by the Financial Conduct Authority (FCA), unless they have permission to issue e-Money under Part 4A of FSMA or they are exempt.

In the UK, e-Money issuers must comply with certain FCA conduct rules about issuing and redeeming e-Money set out in the EMRs.

 

The Benefits of e-Money

Electronic Money Institutions (EMIs) offer several advantages compared to traditional banks:

  • Streamlined processes: EMI usually offer simplified e-Money account setup procedures, faster transaction processing times and efficient digital documentation, reducing paperwork and administrative hassles. The streamlined processes ensure greater ease of use for customers.
  • Lower fees: EMIs often have lower fees than traditional banks, including reduced transaction fees, maintenance fees or international transfer charges.
  • Digital convenience: Because EMIs operate primarily online they ensure their digital interfaces are user-friendly for customers to manage their finances anytime, anywhere. Its fully digital form allows for remote onboarding, which makes their service more accessible for companies and individuals.

 

e-Money vs. Traditional Bank Accounts

When trying to choose between an Electronic Money Institution (EMI) and a traditional bank, there are a number of differences between the two financial institutions:

Platform

  • EMIs: Primarily operate online, providing services through websites and mobile apps
  • Traditional banks: Traditional banks have physical branches for their services, where customers have the option to meet with banking personnel face-to-face

 

Services offered 

  • EMIs: Focus on offering services like easy money transfers, multicurrency accounts, and debit or prepaid card services. .
  • Traditional banks: Mortgages, investment products, loans, credit cards, as well as basic account management

 

Accounts setup

  • EMIs: Users can usually open an e-Money account with speed and minimal hassle due to a simpler and quicker account setup process offered online
  • Traditional banks: Usually have a more detailed account setup process requiring various documents

 

Fees

  • EMIs: EMIs often charge lower fees as they have lower operational costs than traditional banks
  • Traditional banks: Higher operational and maintenance costs of physical branches may lead to higher fees for certain services

 

Currency management

  • EMIs: Usually offer easy management of multiple currencies with one e-Money account, a bonus for international businesses or travel money cards
  • Traditional banks: May have more restrictive policies on managing and holding multiple currencies, sometimes charging higher fees for international transactions 

 

Customer support

  • EMIs: Usually provided through online channels, which is often available round the clock and can be more responsive
  • Traditional banks: Customers can get support through various channels, including in-person assistance in branches

 

Regulation

  • EMIs: The regulation of EMIs differs to that of traditional banks. EMIs undergo routine inspections and adhere to security guidelines and regulations that oversee the protection of client assets. For further information on the regulatory requirements that apply to electronic money and payment service providers, please see this information provided by the FCA: https://www.fca.org.uk/firms/payment-service-providers-conduct-business-requirements 
  • Traditional banks: Subject to stringent regulations and oversight by central banks and other financial regulatory bodies.

 

Personal financial management tools

  • EMIs: Often offer accounts that integrate with other software for budgeting and financial management 
  • Traditional banks: May offer the same tools as EMI, but may be less integrated or digitally advanced. 

 

But what is the fundamental difference between an EMI licence and a traditional bank licence? It’s the ability to lend money. 

EMIs are prohibited from offering lending in any form, and client funds must be ring fenced. Whereas in comparison, traditional banks are able to offer lending products to customers.

Due to rigorous safeguarding criteria, banks are guaranteed by a deposit guarantee scheme, whereas EMIs are not.

In 2009, the EMI licence was created. The EMI licence can be obtained with less capital requirements of a banking licence, paired with a more relaxed regulatory framework, the EMI licence is more obtainable.

 

Edenred Payment Solutions’ Role in e-Money Services

Edenred Payment Solutions is an Electronic Money Institution (EMI), regulated by the FCA and National Bank of Belgium for the issuing of e-money across the UK and EU.

In order to hold or manage funds in e-Money accounts, organisations need to have a licence - which can take up to two years to get with the local regulator. Edenred Payment Solutions can speed up time to market by setting up non-financial companies as Agents who operate using the Edenred Payment Solutions licence.

 

e-Money Technology and Security

Electronic Money Institutions  make the security of e-Money transactions a priority - namely because of the risks associated with online transactions. 

E-Money systems boast security techniques which protect users, their transactions and their account balances from cyber threats. Security measures include:

  • Encryption converts data into a code to prevent unauthorised access. The encryption then ensures sensitive information including account details and transaction amounts are protected 
  • Fraud detection and prevention systems to monitor and analyse transaction patterns to identify and prevent fraudulent transactions 
  • Authentication to validate a user’s identity before allowing access to an e-Money account. Facial recognition, fingerprint recognition, passwords or other biometric techniques are all commonly used as part of the Know Your Customer (KYC) checks
  • Firewall protection systems are the first line of defence in e-Money network security, preventing unauthorised access to or from private networks
  • Payment Card Industry Data Security Standard (PCI DSS) is a requirement for any organisation that stores, transmits, or maintains any cardholder data, regardless of size or the volume of transactions. The PCI DSS certification covers the technical and operational system components included in or connected to cardholder data
  • Any e-money institution that is participants of other payment schemes (such as Faster Payments, BACS, CHAPS and SEPA) is subject to scheme rules including those related to security topics

 

FAQs

How does e-Money work?

E-Money is currency stored in banking computer systems and backed by fiat currency. E-Money is usually processed and received through electronic fund transfers or online payments and purchases. However, physical cash can also be deposited into an e-Money account.

 

What is an example of e-Money?

E-Money is created – or issued – on receipt of funds, for example an e-Money issuer will take cash from a distributor, retailer or customer in exchange for the same value in e-Money. 

 

Is e-Money the same as digital money?

There are subtle differences between the two. E-Money refers to money exchanged electronically, such as through online banking, cards and digital wallets. This can include both traditional currency used in electronic form, as well as virtual currencies like Bitcoin. Digital currency encompasses any form of currency that exists purely in digital form, including cryptocurrencies like Bitcoin, Ethereum and others.

 

 

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