By Jens Bader, chief commercial officer, Secure Trading
E-money, the digital equivalent to cash, is a concept that has created a great deal of disruption in financial services. Today, it’s at a crossroads in its history. Down one path, it could continue on its growth trajectory and further pave the way for payments products that are in direct competition with the traditional payments framework. On the other, the ever increasing weight of regulation and governance being stacked against it could stop its progress in its tracks.
From its inception in 1997, e-money has had the potential to be a game changer by enabling companies to use technology to completely bypass the banks and break into a conservative and closed-off financial services industry.
The concept really began to be put into practice with the EU Electronic Money Directive of 2000, which created a legal foundation to passport e-money issuing in Europe. This law is still without real counterpart in the world and, as a result, Europe became a hotbed of e-money innovation, with services from PayPal, to TransferWise and Skrill being built on top of this unprecedented legal framework.
Catalyst for change
E-money quickly began to act as a catalyst for some of the biggest changes we have seen in payments in the last century, from London’s Oyster Card, to the encroachment of the largest technology players into payments, with products such as Samsung Pay.
In recent years, the number of e-money institutions has increased, and the services and applications have become ever more diverse, from pre-paid cards, to online payment accounts, and mobile payment systems. Recent research showed that the number e-money providers registered in the UK with the Financial Conduct Authority (FCA) has more than doubled since 2013 [Bovill 2016].
Even many cryptocurrency developers have become e-money institutions, as it provides a structured governance framework. However, with competition comes confrontation, and behind the scenes the battle lines between e-money issuers and traditional financial institutions are being drawn ever deeper. In response to unwanted industry disruption, banks and card schemes are arguably looking to maintain their dominance through regulation and restriction.
On the one hand, roadblocks are being created by barring e-money institutions from accessing core banking functions and data, knowing that further access would cause further disruption. On the other hand, there is an increasing amount of anti-money laundering requirements and general governance of payment services outside traditional banking systems. This slows down e-money providers who are struggling to stay compliant, and in the process it halts any progress they could be making in changing the payments industry.
Where there was no substantial regulations between the first EU Electronic Money Directive of 2000, and the second in 2009, today regulations that have dramatic implications on e-money companies come thick and fast.
The fourth Anti-Money Laundering (AML) Directive, for example, will have very real implications for e-money institutions when it comes (likely) into effect in 2017. The new AML rules will require issuers to undertake far greater customer due diligence in order to stay compliant. Not only will this slow e-money institutions down, with more compliance to work through, but it also could put them at risk of being cut off by their own bank accounts, now operating a “know your customers-customer” practice.
Regulations such as this raise big questions for the sustainability of the e-money model. Built upon the foundation that customers can use services without going through the same arduous processes that have to partake in to get a bank account, will e-money services lose their edge if they are forced to be compliant to the same or even more stringent regulations than traditional payment providers?
By putting tighter caps on how much value e-money products can hold, and increasing KYC regulation, innovative payment entrepreneurs must be asking themselves if it would simply be easier to go down the route of becoming a payments institution.
In fact, becoming a fully licensed payments institution rather than an e-money institution could become an increasingly attractive option thanks to the revised Directive on Payment Services (PSD2).
Due to go live in January 2018, the groundbreaking feature of PSD2 is that it will require banks to securely open access to customers’ account data to third party payments providers, allowing them to build financial services on top of the banks’ data structure through an obligatory application program interface (API). Ultimately, licensed payment institutions will be given access to key information, from transaction data, to account balances, at a time when the amount of information e-money institutions can access is being reduced.
Whether we’ll see the number of registered payment institutions dramatically rise while e-money institutions slowly become extinct remains to be seen. However, as an industry we have to ask ourselves whether we are suffocating e-money innovations with regulation. Is there still an application for e-money institutions? And by stifling them, are we cutting off products that customers still want, and that could benefit the industry as a whole?
Secure Trading offers a reliable and secure internet payment gateway and is fully Level 1 PCI DSS compliant.