Electronic Money (e-money), Explained
Electronic money is a digital store of a medium of exchange on a computerized device. E-money can be used for payment transactions, with or without bank accounts. The great advantage of course is a cashless payment system that makes money transfers of any size quick and easy.
Digital Currency Revolution
A revolution has been taking place in the world during the past few decades, and it has nothing to do with political regimes or even economic systems. A new form of payment has been developed that is changing the way people buy and sell—probably forever.
Brief History of Money
Mankind has used all sorts of payment forms during his brief time on this planet; cowrie shells, weights of silver, salt, and even knives are a few examples on the long list of payment methods. Although coins and banknotes are the most well-known payment instruments today, they are actually based on very old technologies.
Now a new technology has appeared on the horizon: electronic money, or e-money for short. As the name suggests, this new type of payment instrument exists only in computerized form, although in some cases it is backed by fiat currency.
What Exactly Is Digital Currency?
The European Central Bank (ECB), the major monetary authority of the European Union, defines e-money as:
[A]n electronic store of monetary value on a technical device that may be widely used for making payments to entities other than the e-money issuer.
The move towards electronic currency hasn’t been monolithic; instead, the journey includes multiple forms of electronic payment methods, such as cryptocurrencies and virtual currencies. The latter are backed by government-issued fiat currencies, while the former are not.
And then there are lesser well-known forms of payment that fall into some other category. For example, Ven is a social networking currency whose value is determined by a basket of financial instruments, including carbon futures.
In all cases, the point is to develop a payment service that is user-friendly and has the capacity of sending funds in real-time to anyone in the world. Tipalti is one company that specializes in this form of global e-money products.
More broadly speaking, digital currencies include the hardware and software required to create, store, and transfer electronic payments.
Advantages and Disadvantages of Electronic Cash
With the new monetary landscape that has been built, e-money presents several advantages, including:
- The ability to move money quickly, literally at the speed of light.
- Better recordkeeping.
- Global money transfers.
- The ability to move large sums of money without any physical burden.
But advantages always come with their own disadvantages. These include:
- Cybercrime and new digital forms of money laundering.
- Users must have a minimum level of training and knowledge, especially with more complicated forms of electronic transfers.
- Some types of e-money, most notably cryptocurrencies, are closely linked to criminal activity.
- Both hardware and software are required to perform transfers of electronic cash.
Cryptocurrencies: a Digital Disruption
People use money because they feel safe knowing that some central bank is backing up the currency they’re using; thus, they feel their money has value because a government somewhere in the world says it does have value. Cryptocurrencies have thrown this model upside down by having no central bank at all. It completely bypasses government, at least for the time being.
According to CNBC, some central banks are considering developing their own cryptocurrencies. Although Venezuela has tried to create its own, its petro has not succeeded. If and when this revolution takes place, we will get hybrid currencies.
For now, we have traditional cryptocurrencies, which can function as an electronic means of payment; although it does depend on the country. In the United Kingdom, for example, the Financial Conduct Authority (FCA) has ruled that cryptocurrencies like Bitcoin are “exchange tokens” and not subject to its regulation.
The lack of regulation presents a new problem, which is actually quite old: money laundering. To help mitigate this risk, Bitcoin transactions are recorded on a blockchain, which is a public ledger. Transactions can never be erased, which helps create a transparent form of regulation.
Electronic Money Transfers
Money movement is where electronic cash really shines. Gold bars and even coins and banknotes have to be physically moved and stored, and the more money there is to move, the larger the burden. But e-money offers a completely different type of payment service, with the ability to move any amount without any freight.
Payment can be performed in a number of ways:
- Debit cards, prepaid cards, and credit cards make paying at point-of-sale terminals quick and simple. And chip cards and other forms of smart cards make these electronic transactions safer.
- Virtual platforms like PayPal provide methods to transfer funds without the use of a bank account. Money can be sent to individuals rather than businesses, as in the case with credit cards and similar payment instruments.
- Mobile phones have created yet another way to send electronic money. With a compatible electronic device, it’s now possible to send mobile payments to anyone with an e-mail address or mobile phone number.
- Phones and cards with near-field communication (NFC) capability provide the opportunity to make contactless payments in a matter of seconds for the greatest level of safety, convenience, and security.
Institutions that Handle Electronic Money
Financial institutions that work with e-money include the banks that process transactions and the non-bank companies that build the hardware and software used in these movements of digital cash. For example, Ally Bank may process an electronic transfer of funds that occurs through a Zelle app on a mobile phone.
Electronic money institutions also include the entities, both government and private, that create cryptocurrencies. Sometimes these e-money institutions remain completely unknown.
And then there are the digital wallets that store different types of electronic cash, verify the user’s credentials, and perform a variety of other useful functions for day-to-day money management.
Electronic Money is the Future
The horse and buggy didn’t survive the advent of the automobile. Likewise, banknotes and coins aren’t going to survive the dawn of digital money. The advantages of the newer technology far outweigh the disadvantages. The transition will be well worth it.