Positive changes in e-money regulation

William Long and Kai Zhang, from our friends at Sidley & Austin, present a typically good summary of the main issues raised in the consultations preceding the implementation of the new E-Money Directive (EMD) in the UK in the recent issue of E-Finance & Payments Law & Policy (December 2010).

Generally speaking, things look very positive. The capital requirements are being relaxed so that anyone who wants to provide e-money services probably can do with too much trouble, so I predict that you’ll see some major companies moving in now. The prime candidates to offer services are probably telecommunications operators and retailers, but transit operators, event managers, corporate “campus” suppliers and others will surely seize the opportunity. Some have already declared their intentions.

O2 will apply for an e-money licence this year, signalling its commitment to support contactless payments in the UK in the near future.

[From O2 to apply for e-money licence to support NFC payments – 2/2/2011 – Computer Weekly]

The French operators announced a similar move this week. I can’t resist noting that this is precisely the strategy that we recommended to mobile operators a couple of years ago (that is, use the upcoming PSD/ELMI changes to start their own payment businesses). Competition is good for innovation, and bringing these new players into the payments business will be very positive for all of us.

The interest of mobile operators is natural, and they have to move quickly to avoid being cut out of the loop by handset-based secure element providers (eg, Apple) who may move quicker than the UICC-based secure element providers (eg, mobile operators). The interest of the transit operators is also natural, since they have the cards out there in peoples’ pockets. I still think that we’ve yet to see the really big plays yet: these will come from the retailers, just as they are in the US.

Kmart has begun testing check cashing, money transfers and prepaid cards in stores in Illinois, California and Puerto Rico, with plans to roll out the services nationally later this year. Best Buy has installed kiosks in its stores for shoppers to pay utility, cable and phone bills. Wal-Mart has opened roughly 1,500 MoneyCenters that process as many as 5 million transactions each week.

[From Retailers offer financial services to ‘unbanked’]

The use of retailer-issued e-money pre-paid products as a low-cost alternative to bank accounts for the excluded is a win-win. It takes unprofitable customers away from the banks and gives those customers more convenient services. And the retailers could steer customers to use these products at POS, thus saving on their payment processing costs. Personally, I think the prepaid market is not competitive enough (the charges are still too high) but new entrants enabled by the ELMI, new entrants with economies of scale (such as high street retailers), could open up the market and drive down costs very quickly.

Finally, I was also very excited to note in the article that the Treasury is considering my idea of making the balance limit for simplified due diligence (under the Third Anti-Money Laundering Directive) for low-value electronic money “accounts” the same as the value of the largest banknote: in this case, €500. Although they are only looking at this for non-reloadable devices, I think this should be the guiding principle for reloadable devices as well. The link between the two, the “magic number”, is entirely symbolic: it doesn’t mean anything at all, but it’s a good way to focus debate and discussion about the regulatory balance between cash and cash alternatives.