Maddara, Robert: Regulation of Electronic Money Products

I. Introduction

The development of information technology and the emerging of a number of new innovations are taking place in the area of retail payments known as electronic money (e-money). This development influencing the banking industry due to the increased use of pre-paid card, e-purse, and e-wires of money orders, e-banking, e-loans. These innovations have the potential to challenge the predominant role of cash for making small-value payments and could make retail transactions easier and cheaper for consumers and merchants. However, they also raise a number of policy issues for central banks because of the possible implications for central bank and monetary policy and because of central banks’ general interest in payment systems. [1]

Electronic money (also known as e-currency, e-money, electronic cash, electronic currency, digital money, digital cash or digital currency) refers to money or scrip which is exchanged only electronically. Typically, this involves the use of computer networks, the internet and digital stored value systems. Electronic Funds Transfer (EFT) and direct deposit are all examples of electronic money. Also, it is a collective term for financial cryptography and technologies enabling it.

While electronic money has been an interesting problem for cryptography (see for example the work of David Chaum and Markus Jakobsson), to date, use of digital cash has been relatively low-scale. One rare success has been Hong Kong’s Octopus card system, which started as a transit payment system and has grown into a widely used electronic cash system. Singapore also has an electronic money implementation for its public transportation system (commuter trains, bus, etc), which is very similar to Hong Kong’s Octopus card and based on the same type of card (FeliCa). There is also another implementation based upon the same system in the Netherlands, known as Chipknip. [2]

Electronic money products are intended to be used as a general, multipurpose means of payment in contrast to the many existing single-purpose prepaid card schemes. E-money products also need to be distinguished from so-called access products which typically allow consumers to use electronic means of communication to access conventional payment services (for example, use of the internet to make a credit card payment or for general “online banking”).

Card-based products, also known as multipurpose prepaid cards or electronic purses, are designed to facilitate small-value face-to-face retail payments by offering a substitute for banknotes and coins. They are intended to complement rather than substitute for traditional instruments such as cheques and credit and debit cards. Similarly, network-based or software-based products are designed to facilitate small-value payments over the internet (remote payments), as a substitute for making payments using credit cards on open networks.

The Committee on Payment and Settlement Systems (CPSS) of the central banks of Group of Ten countries in its survey dated November 2001 provides that, as in its previous survey, electronic money continues to be defined as a stored value or prepaid product that allows consumers to make small-value transactions using a chip or smart card (card-based product or electronic purse) or over computer networks such as the Internet (network-based or software-based schemes). A record of the funds or value available to the consumer for multipurpose use is stored on an electronic device in the consumer’s possession. In the case of card-based products, the prepaid value is typically stored in a microprocessor chip embedded in a plastic card – “smart card”. On the other hand, network-based products use specialised software installed on a standard personal computer for storing the “value”. The loading of value into the device is akin to withdrawal of cash from an ATM and it is used for purchases through a transfer of value to the merchant’s electronic device. [3]

The European Central Bank (ECB) Report on Electronic Money (August 1998) defined e-money as “an electronic store of monetary value on a technical device that may be widely used for making payments.”

Finally, the Bangko Sentral ng Pilipinas (BSP) defines e-money as monetary value as represented by a claim on its issuer, that is –

(a) electronically stored in an instrument or device;

(b) issued against receipt of funds of an amount not lesser in value than the monetary value issued;

(c) accepted as a means of payment by persons or entities other than the issuer;

(d) withdrawable in cash or cash equivalent; and

(e) issued in accordance with this Circular. [4]

II. Development of e-money products

A. Card-based schemes

In a sizeable number of the countries surveyed, card-based e-money schemes have been launched and are operating relatively successfully: Austria, Belgium, Brazil, Denmark, Finland, Germany, Hong Kong, India, Italy, Lithuania, the Netherlands, Nigeria, Portugal, Singapore, Spain, Sweden and Switzerland. In some countries the products are available on a nationwide basis and in others only within specific regions or cities. Card-based products are gradually gaining acceptance. In some countries the e-money facility has been combined with other functionalities such as access control, holder identification or local transportation ticketing. Card-based e-money products have been piloted in another 16 countries,v and are under consideration in a further six. A common feature though is the involvement of the major international payment card companies such as Visa and MasterCard in most card-based e-money schemes.

In contrast, a large number of the central banks which responded to the survey questionnaire stated that, given the current economic growth and development in their respective countries, they do not have any plans to introduce any e-money schemes in the near future. [6]

B. Network-based schemes

Compared to card-based schemes, the developments of network-based or software-based e-money schemes have been much less rapid. Network-based schemes are operational or are under trial in a few countries (Australia, Austria, Colombia, Italy, the United Kingdom and the United States), but remain limited in their usage, scope and application. In some countries card-based schemes are adopting features that would enable the card to be used over the internet. In other countries, for example as in Japan and Norway, pilot projects have been conducted with no further plans for wider distribution. A vast majority of the participating central banks have indicated that there are no plans to introduce network based e-money products. [7]

C. Development of e-money in the Philippines

There have been attempts in the past years to introduce e-money to the consumer market. However, acceptance has been quite slow and it is only now that we are seeing renewed interest for it.

Interestingly, it may be the mobile communications sector, and not the banks, that will serve as catalyst for the more widespread use of e-money in the country. Even major banks in the country recognize that the rapidly growing mobile communications market may be the way to go to re-introduce e-money here. As the Philippines made a global trend with its novel adoption of text messaging, who knows the country may be showing the world a different way of cashing in on e-money. [8]

Examples of e-money products available in the Philippines are Smart Communications, Inc.’s Smart Money which is a cashless based transaction in a reloadable cash card linked to the MasterCard network [9] and Globe Telecom’s GCash wherein its customers are enabled to load their mobile phones with e-money by buying credits from authorized retailers such as banks, sari-sari stores and other merchants. In addition they can send e-money to friends or relatives through text, and the recipients may encash the credits at authorized establishments. [10]

III. Policy Issues on E-money

The Committee on Payment and Settlement Systems (CPSS) of the central banks of Group of Ten countries, Bank for International Settlements in its November 2001 survey made a questionnaire which asked the central banks to comment on several policy issues concerning e-money, such as: the impact of e-money on monetary policy and seigniorage revenues; the general legal framework; security aspects; issuer details; oversight of the payment system and e-money schemes; supervision of e-money schemes, law enforcement; and cross-border aspects of e-money. The following briefly reviews the major policy responses formulated by the central banks participating in the survey.

A. Monetary policy and seigniorage

A number of central banks including those of Austria, Belgium, Finland, Germany, Hong Kong, Italy, Lithuania, the Netherlands, Singapore, Spain, Sweden and the United Kingdom are collecting data on the e-money issued by banks. Nigeria and Switzerland have reported that the inclusion of e-money data in monetary statistics is under review, whereas in Denmark there is no such requirement. In the United States the Federal Reserve currently has no statutory authority requiring non-depository institutions to report on the e-money balances issued, while in the United Kingdom the Bank of England will at a future date arrange to collect data on issuance of e-money by non-banks if and when the amounts are significant.

So far no central bank has indicated an adverse impact on the size of its balance sheet due to a possible decline in the value of the banknotes in circulation as a consequence of widespread adoption of e-money. The European Central Bank (ECB) is of the view that the central banks can maintain the size of their balance sheet if necessary by imposing minimum reserves on e-money issuers or by issuing e-money themselves. As reported, given the low average value of e-money transactions and the relatively small cap on the amounts that can be stored on stored value cards, the value of e-money float is still very low. Losses on account of decline in seigniorage revenues are also perceived to be negligible by the central banks and have so far evoked no specific policy responses from them.

B. General legal issues

Within the Eurosystem, a comprehensive and harmonised regulatory framework for the issuance of e-money by traditional credit institutions and a new class of credit institutions called electronic money institutions (ELMIs) is provided by two EU Directives: the European Parliament and Council Directive 2000/46/EC on the taking-up, pursuit of and prudential supervision of the business of electronic money institutions and the European Parliament and Council Directive 2000/28/EC amending Directive 2000/12/EC relating to the taking-up and pursuit of the business of credit institutions. Most EU national central banks accordingly envisage making suitable changes to existing legislation or new statutes in line with the two EU Directives. Elsewhere, for example in France, Hong Kong, Korea and Malaysia, it is felt that the existing legal framework is adequate to deal with issues related to e-money. In some countries specific legislation is being contemplated for regulating the issuance of e-money.

C. Relevant security issues

Several measures are commonly taken to address security issues. These include tamper-resistant chips on cards and the use of sophisticated encryption techniques. Further, limits on the amount of value that can be stored on consumers’ and merchants’ electronic devices, limits on the value for individual transactions, and the use of a PIN (personal identification number) for authorising loading and/or transfer instructions are also widely adopted to limit potential losses on account of a breach in security. In Germany the central bank has developed a questionnaire which is used as a checklist to analyse the security of e-money products. A similar approach is followed in Singapore, where the monetary authority assesses whether the issuing bank has put in place a robust security system to prevent counterfeiting and fraud. In France the central bank uses a tool called “protection profile” to assess the security profile of the scheme. In other countries, such as Austria, the assessment of security features is entrusted to a relevant technical organisation, while in Mexico a special task force has been constituted. In Hong Kong the central bank intends to engage outside experts to assess the security features as necessary.

D. Issuer details

Most EU member countries are in the process of transposing the two relevant Directives (see above) into their national banking laws. In Hong Kong, special purpose vehicles whose principal business is to issue multipurpose stored value cards (MPCs) may be authorised as deposit-taking companies under the Banking Ordinance for the purpose of issuing MPCs along with traditional credit institutions.

In India, Lithuania, Mexico, Singapore and Taiwan e-money can be issued only by banks, whereas in Canada, Malaysia and the United States there are no restrictions on issuance of e-money by a particular type of institution. In several other countries, such as Bolivia, Thailand and Venezuela, policy guidelines on the subject are either under review or are being framed.

E. Oversight issues

Most central banks performing an oversight function of the payment system also monitor and analyse developments with regard to e-money. This includes collection of data and periodic meetings with the issuers. In other instances a wider range of activities are undertaken to study the organisational, legal, administrative, technical and security features of the product and the operator. The Eurosystem, as part of its oversight role with regard to e-money schemes, is working towards establishing a harmonised approach in the areas of standard setting and assessment methodology relating to the technical security of the e-money schemes. The Bundesbank cooperates with the Federal Office for Security in Information Technology to draw on the latter’s expertise to assess the potential risk of counterfeiting in e-money.

F. Supervisory issues

The two EU Directives referred to above provide a comprehensive and regulatory framework for the prudential supervision of the business of electronic money institutions within the Eurosystem. In Hong Kong, India, Lithuania, Nigeria and Singapore guidelines have been framed or vested in the central bank through legislation for the issue of e-money by banks. Federal banking authorities in the United States are updating bank examination procedures to include e-money developments and their associated risks. In Thailand an amendment to the existing legislation is being proposed by the central bank to vest it with explicit capabilities of supervision. In other countries the supervisory role is executed by other bodies. In still other countries such as Korea, Mexico and Switzerland, specific regulations on the issuance of e-money have not been issued.

G. Law enforcement issues

Many of the security features of e-money schemes, including the limits on value that can be stored on the cards, make them less attractive for the purposes of money laundering and other criminal abuses. Laws combating money laundering are applicable to e-money schemes, as they are to credit institutions, which in many countries are the sole issuers of e-money. As part of the oversight function emphasis is laid on studying the features of the e-money schemes to ensure that they do not broaden the scope for possible criminal abuse. Some measures insisted upon are the maintenance of an audit trail, ascertaining the identity of the customer and restricting the issue of cards to account holders at the relevant credit institutions.

H. Cross-border issues

The introduction of the euro and the creation of the EU passport under the EU Directive on the prudential supervision of the business of electronic money institutions will in the future increase the relevance of cross-border issues within the Eurosystem. As part of the current initiatives for cross-border interoperability of e-money in the euro area, two projects have been launched: “PACE” and “Ducato”. [11]

I. Other issues

Some central banks are urging the market participants in their respective countries to adopt common standards on a nation wide basis to achieve the goal of standardization and building up a common technical infrastructure such as card readers and terminals, in order to increase availability and reduce operational costs. [12] Consumer protection issues are being addressed by some central banks (eg in Spain). In other countries the issue is addressed by an appropriate institutional authority different from the central bank. The emphasis in both cases remains the protection of consumer interest.

IV. The Bangko Sentral ng Pilipinas Regulation on E-money

The BSP as the regulator of banks and non-bank financial institutions has issued Circular 649 dated 9 March 2009 which provides guidelines governing the issuance of electronic money (e-money) and the operations of electronic money issuers (EMI). [13]

Sec. 1 of said circular provides that it is the policy of the BSP to foster the development of efficient and convenient retail payment and fund transfer mechanisms in the Philippines. The availability and acceptance of e-money as a retail payment medium will be promoted by providing the necessary safeguards and controls to mitigate the risks associated in an e-money business.

Banks, non-bank financial institutions and money transfer agents registered with the BSP require prior BSP approval to be an electronic money issuer (EMI). [14]

Sec. 4 of said circular also provides the following provisions applicable to all EMIs:

A. E-money instrument issued shall be subject to aggregate monthly load limit of P100 thousand unless a higher amount has been approved by BSP. In case an EMI issues several e-money instruments to a person (e-money holder), the total amount loaded in all the e-money instruments shall be consolidated in determining compliance with the aggregate monthly load limit.

B. EMls shall put in place a system to maintain accurate and complete record of e-money instruments issued, the identity of e-money holders, and the individual and consolidated balances thereof. The system must have the capability to monitor the movement of e-money transactions and link e-money instruments issued to common e-money holders. The susceptibility of a system to intentional or unintentional misreporting of transactions and balances shall be sufficient ground for imposition by the BSP of sanctions, as may be applicable.

C. E-money may only be redeemed at face value. It shall not earn interest nor rewards and other similar incentives convertible to cash, nor be purchased at a discount. E-money is not considered a deposit hence it is not insured with the Philippine Deposit Insurance Corporation.

D. EMls shall ensure that e-money instruments clearly identify the issuer who is ultimately responsible to the e-money holders. This shall be communicated to the client who shall acknowledge the same in writing.

E. It is the responsibility of EMls to ensure that their distributors/e-money agents comply with all applicable requirements of the Anti-Money Laundering laws, rules, and regulations.

F. EMls shall provide an acceptable redress mechanism to address the complaints of its customers.

G. EMls shall disclose in writing and its customers shall signify agreement to the information embodied in item C above upon their participation in the e-money system. In addition, it shall provide clear guidance in English and Filipino on consumers’ right of redemption, including conditions and fees for redemption, if any. Information on available redress procedures for complaints together with the address and contact information of the issuer shall also be provided.

H. Prior to the issuance of e-money, EMls should ensure that the following minimum systems and controls are in place:

  • Sound and prudent management, administrative and accounting procedures and adequate internal control mechanisms;
  • Properly-designed computer systems which are thoroughly tested prior to implementation;
  • Appropriate security policies and measures intended to safeguard the integrity, authenticity and confidentiality of data and operating processes;
  • Adequate business continuity and disaster recovery plan; and
  • Effective audit function to provide periodic review of the security control environment and critical systems.

I. EMls shall provide the Supervisory Data Center of the Supervision and Examination Sector, BSP, quarterly statements containing, among others, information on investments, volume of transactions, total outstanding e-money balances, and liquid assets in such form as may be prescribed later on.

J. EMls shall notify BSP in writing of any change or enhancement in the e-money facility thirty (30) days prior to implementation. If said change or enhancement requires prior BSP approval, the same shall be evaluated accordingly. Any change or enhancement that shall expand the scope or change the nature of the e-money instrument shall be subject to prior approval of the Deputy Governor, Supervision and Examination Sector. These changes or enhancements may include the following:

  1. Additional capabilities of the e-money instrument/s, like access to new channels (e.g., inclusion of internet channel in addition to merchant Point of Sale terminals);
  2. Change in technology service providers and other major partners in the e-money business (excluding partner merchants), if any; and
  3. Other changes or enhancements.

V. Conclusion

While the use of e-money provides many benefits such as faster, convenient, more efficient, and privacy of transactions, less need to pocket money, and lower transaction fees, among others, this also posed policy issues particularly to central banks which are responsible for promoting and maintaining monetary stability. Hence, the need for the central banks to design appropriate regulatory framework taking into consideration the effect of e-money on the monetary stability, financial capacity and integrity of EMIs, protection of consumers and the public in general, business competition and opportunities, and the effect on the general economy, among others.

In the Philippines, major communications network such as Smart Communications, Inc. and Globe Telecommunications have been subjected to the supervision of the BSP because of their e-money products and services. This however posed a question on the jurisdiction of BSP as its charter only provides supervision over banks and non-bank financial institutions performing quasi-banking functions which are not the case of both Smart and Globe.

However, as reported by BSP Deputy Governor Nestor A. Espenilla the central bank is projecting a directive with legible instructions on e-money business. Since those persons or agencies who receive cash for conversion into e-money hold public money and are no different from banks who receive deposits they should be regulated. [15]


Endnotes

[1] Development of Electronic Money and Its Impact on the Central Bank Role and Monetary Policy by Mohamad Al-Laham and Haroon Al-Tarawneh (Albalqa applied University, Karak, Jordan) and Najwan Abdallat (The Arab Academy for Banking and Financial Sciences, Ammam, Jordan). Issues in Informing Science and Information Technology Vol. 6 (2009). Informing Science Institute.

[2] Electronic Money, Wikipedia, the free encyclopedia. http://en.wikipedia.org/wiki/Electronic Money Accessed 25 February 2010.

[3] Survey of electronic money developments prepared by Committee on Payment and Settlement Systems (CPSS) of the central banks of Group of Ten countries, November 2001. Bank for International Settlements.

[4] Sec. 2 of Circular 649 dated 9 March 2009.

[5] Pilot projects are underway in Australia, Bolivia, Canada, Colombia, France, Japan, Korea, Malaysia, Mexico, Norway, South Africa, Taiwan, Thailand, the United Kingdom, the United States and Venezuela.

[6] Survey of electronic money developments prepared by Committee on Payment and Settlement Systems (CPSS) of the central banks of Group of Ten countries, November 2001. Bank for International Settlements.

[7] Ibid.

[8] Understanding e-money by Helen S. Andrade-Jimenez.

[9] Wikipedia, the free encyclopedia. http://en.wikipedia.org/wiki/Smart Communications Accessed 11 April 2010.

[10] http://ecommerce-journal.com/news/philippine central bank to regulate e-money business. Accessed 11 April 2010.

[11] The Ducato project was announced on 12 September 2000 by Banksys, Europay International, Interpay, Proton World, Sermepa, Sistema 4B, Visa International and Cartes Bancaires (joined in January 2001). This is a pilot project covering schemes in Belgium, France, the Netherlands and Spain.

[12] The central banks of Thailand, Korea and India are active in this area. Bank of England considers that these issues are best determined by market forces, but as part of its monitoring role looks for evidence of market failure in these areas.

[13] The Monetary Board, in its Resolution No. 324 dated 26 February 2009, approved the said guidelines.

[14] Sec. 3 of Circular 649 dated 9 March 2009.

[15] http://ecommerce-journal.com/news/philippine central bank to regulate e-money business. Accessed 11 April 2010.

Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: