Every day, you probably use e-money without even thinking about it. Tapping your phone to buy coffee, topping up a digital travel card, or sending money to a friend through an app—these are all ways you’re using electronic money, or e-money. But what exactly is it, and how is it different from the money in your traditional bank account?
In this guide, we’ll cover e-money in detail, exploring its benefits, how it works, and how it's revolutionising the way we manage our finances. We’ll answer the most important questions, from its distinct legal status to its security features, to help you understand why e-money and the companies that issue it are such a crucial part of our modern financial world.
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.
Imagine you put £100 into a digital wallet, like a prepaid card. That £100 isn't new money; it's a digital representation of the £100 you already possessed. The crucial part is that this digital £100 is accepted by many merchants, not just the company that issued the prepaid card. It functions like cash, but in a digital format.
Legally, e-money is distinct from traditional bank deposits. While both are digital, a bank deposit is typically held by a licensed credit institution and is subject to deposit guarantee schemes. E-money, however, is issued by specialised "e-money institutions" (EMIs) or sometimes by credit institutions, but specifically for the purpose of facilitating payments. The European Central Bank (ECB) and the UK's Financial Conduct Authority (FCA), among others, provide precise legal definitions, emphasising that e-money is issued on receipt of funds and is intended for executing payment transactions. It's a pre-funded instrument, meaning you load it before you spend it.
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.
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 process begins when a customer provides funds to an authorised e-money institution. This is often called "loading" or "top-up." Imagine you walk into a store and buy a prepaid debit card with £50. You've given the store (acting on behalf of the EMI) £50 in traditional currency. In exchange, the EMI issues you £50 worth of e-money, which is digitally stored on your card.
Crucially, the EMI doesn't lend you this money. It receives your funds and issues an equivalent amount of e-money. This e-money then represents a direct claim on the EMI – you essentially have a promise from them that they will honor your e-money for payments or redeem it back to traditional currency. As we discussed, these received funds must be safeguarded by the EMI, keeping them separate from their operational capital to protect customers in case of the EMI's insolvency.
A fundamental principle of e-money is the right of redemption. You, as the e-money holder, have the right to demand that the EMI converts your e-money back into traditional currency (e.g., Euros, US Dollars) at par value at any time. The EMI cannot charge excessive fees for this redemption. This right is critical because it links e-money back to the stable value of fiat currency, preventing it from becoming an independent, potentially volatile, currency. It ensures that e-money always remains a digital representation of traditional money, not a new form of money in itself.
Let's ground these concepts with some everyday examples you've likely encountered.
These are perhaps the most straightforward examples of e-money. When you buy a prepaid debit card with a certain amount loaded onto it, or receive a gift card for a specific retailer, you are holding e-money. The value is stored digitally on the card, and you can spend it up to the loaded amount. The issuer of the prepaid card (often a financial institution) or the retailer for a gift card is the e-money institution in this scenario, responsible for safeguarding the funds and honoring the transactions.
This is where e-money really shines in its modern form. Think of apps like Revolut, N26, Wise, or even the payment features within Apple Pay or Google Pay (though these can also facilitate traditional card payments). When you top up your balance in these apps from your bank account, you are often converting traditional currency into e-money held by the respective e-money institution. This e-money can then be used for online purchases, in-store payments via NFC, or even peer-to-peer transfers. These systems offer convenience, security, and often competitive exchange rates for international transactions.
Many loyalty programs and electronic voucher schemes also fall under the e-money umbrella, especially if the points or vouchers can be used to purchase a range of goods or services from multiple merchants within a network, and not just the issuing entity. If a coffee shop gives you points that can only be redeemed for coffee at their shop, it's generally not e-money. But if those points are part of a broader scheme that allows you to spend them at various participating retailers, they likely qualify. The key here, again, is the acceptance of the digital value by parties other than the issuer.
Electronic Money Institutions (EMIs) offer several advantages compared to traditional banks:
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:
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 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.
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:
E-money is not just a digital version of cash; it's a specific legal and operational construct. It's pre-funded digital monetary value, representing a claim on its issuer, and critically, accepted as a means of payment by various parties. Its growth is driven by its convenience and efficiency for both consumers and businesses, facilitating seamless digital payments and fostering financial inclusion.
However, this convenience comes with responsibilities, primarily addressed through robust regulatory frameworks. Laws like the E-money Directive and PSD2 in Europe, and similar legislation globally, are designed to safeguard customer funds, combat financial crime, and ensure the stability of the financial system. E-money institutions are mandated to protect customer funds through safeguarding measures and provide a clear right of redemption.
As you continue your journey in understanding finance, remember that e-money is a dynamic and integral part of the evolving payment landscape. It's a testament to how technology is reshaping how we conceive, store, and transfer value. With this foundation, you're well-equipped to engage with and understand the nuances of our increasingly digital financial world. Keep learning, keep questioning, and keep innovating!
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.
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.
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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