New payment methods: e-money (1/3)

 

 

In this article we will look at the situation with which banks are confronted as far as new methods of payment are concerned (through the new channels, innovative offers from non-banking partners or competitors). We will also have a look at what is available on the e-money market and close the article with some tips on a monetary policy central banks could develop in this field.

To situate better the subject of e-money, we can subdivide e-commerce globally into e-payment and e-finance. So with e-payment we will cover all types of electronic money, mobile payments etc. Another definition comes from the legal side: e-money systems defined by the European Central Bank in 1998 and in the Directive 2000/46/EG about e-money institutions in 2000.

 What is a definition of e-money given by the IMF[1]?

Electronic money, or e-money, is any electronic payment media – any material, device, or system that conducts payment via the transfer of electromagnetically stored information

1.1. Situation[1] 

The e-money market was characterised by a slow take off in the past. The use of card-based e-money is every day more widespread in the European Union. Many countries are coming out the experimental stage. Developments in the area of network e-money have been a bit less rapid than those in the area of card-based products.

Some of the basic reasons for this are given here. Merchants were reluctant to accept new methods of payment and invest in new techniques. They did not want to have more to worry about with different accounts and inflow of money. This also influenced the cost structure, since every new way of payment involves new costs (banking, technology infrastructure etc.). For these new methods of payments (e-purse, digital cheques, …) special security measures have to be installed (these are different from traditional payment methods and also require a higher degree of  security control) in e.g. vending machines and storage media. This was another reason for the slow take off.

On the customers’ side adapting their payment habits (e.g. less cash) were rather slow in order to use e-money. During the introduction phase, the customer information about this systems were also insufficient.

 There were also worries about the legal and regulatory framework which had to be decided on, fixed in different countries, accepted and implemented before it could be used. Cross-border payments, funds of uncertain origin etc. were just some of the troubles merchants (and clients) had to face.

For a network system to work properly, a critical number (high volume) is necessary: acceptance in many countries, by many clients and by many merchants affiliated (to different systems).

Multifunctionality could have been another problem to solve before the system could be accepted widely by the merchants. Multifunctionality means that there are bridges between the different systems (new and classic payment methods, e-money and credit cards, bank accounts ant internet accounts etc.).

As soon as there is more liquidity and most of the problems mentioned above have been solved, the new payment methods will be an attractive alternative to classic methods of payment. Customers will use them more widely for their transactions both in shops and for person to person transactions (e.g. e-bay auctions paid from person to person through Pay Pal).

 To conclude this situational overview, let’s look at some figures:

Total amount of cash (notes & coins) in use of money
	1990	2003
Netherlands	28	5,7
France	15	7,4
Germany	24	11,3
Belgium	24	11,8
Italy	14	11,3

 A clear decrease in use of cash money can be noted in these European countries who introduced e-money, debit and credit cards as an alternative to cash.

 The new developments in the e-money sector are :

-          the integration of different sections into the chip card, such as electronic ticketing and other non-banking products
-          the combination of e-money facility with credit or debit cards
-          the cross border use of electronic money thanks to improved standardisation and interoperability

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[1] ECB The effects of technology on the EU banking systems, July 1999

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[1] Source: Six Puzzles in Electronic Money and Banking

Connel Fullenkamp and Saleh M Nsouli

International Monetary Fund