Tuesday, October 14, 2008

E-money Rides Again, at the Least appropriate Time Possible

This report from El Reg on the Commission's new Working Document on e-payments is so gloriously cynical that I'm not even going to try to re-write it.

"The European Commission has launched a new legal framework to boost the use of "electronic money" within the EU, even as we all realise we had even less real money than we thought.

The Eurocrats have admitted that earlier utopian predictions that we’d all be loading cash on our mobile phones, travel cards or internet accounts have proved to be somewhat overblown. In part, it is blaming itself, saying current rules “have hindered the takeup of the electronic money market, hampering technological innovation”.

Translated, this means the foolish peasants (the rest of us) have refused to stop keeping anachronistic wads of notes and piles of coins in stupid places like pockets, in wallets, under mattresses, that sort of thing, when what they really should be doing is paying smart young things to take their money and convert it into cyber cash, loaded on trustworthy items like phones, Oyster cards, servers and deelie boppers.

So, in the interests of keeping the dream alive, Brussels has proposed a new framework for “issuing electronic money”. This will include a “technologically neutral and simpler definition”, ie that electronic money is “monetary value stored electronically on receipt of funds and which is used for making payment transactions". This will include e-cash stored on devices in the holders' possession or “remotely at a server.” "

Internal capital requirements for EMIs will be reduced to 125,000 Euros - "“enabling market entrance for smaller players" - is this really what we want to encourage at a time when giants like HBOS etc are dropping like flies?! What happens when an EMI goes under? Does the relevant national underwriting guarantee apply? We have all the potential problems of Icesave staring us in the face as a stark example that national guarantees do not transpose well to virtual banks.

As all IT lawyers know, the main problem with the old EMI Directive was indeed that it was not technology-neutral at all, but modelled around smart card money, which was terribly hip before all the schemes like Mondex etc quietly flopped and failed. When in reality it turned out that what people wanted was credit, not debit, in times of free fast credit thrown at you from all directions, and/or alternately to use anonymous, data-protecting, handy account-based systems like Paypal (complete with useful guarantee for eBay transactions) rather than carry round yet another card whose loss might result in loss of actual money, without guarantee of repayment.

It sounds like Brussels has now finally recast the definition of an EMI to firmly cover the likes of Paypal. (See the now defunct argument about this via Andres Guadamuz here.) Which is sort of amusing when PayPal itself long gave up on the clunky EMI framework and instead just became a bank in Luxembourg. And when the bottom has dropped out the credit market so thoroughly that pre-pay debit cards might just possibly become saleable again.. (though I wouldn't hold my breath. The Oyster card/debit car all-in-one model however should be useful whenever they iron out the commercial holdups.)

What will be really interesting to see is how far the proposed new rules cover mobile- phone-as-e-wallet - which is the development that was already looking set to revitalise the digital payments sector, if anything could.

Also the problem remains that paying by Paypal , even when linked to a credit card, is not covered by the usual guarantees of the EC consumer credit legislation - or at least not according to the UK Banking Ombudsman and the FSA - and should thus really be discouraged for dubious or large purchases (eg travel companies about to go bust, unknown ebay sellers).

I doubt the consultation touches this , being mainly concerned with capital requirements and the like, but I'll report back when i've actually read it properly , ok?

EDIT: OK, an hour later..

The consultation does indeed refer to MNOs (MObile Network Operators)) as another problem for the definition of e-money, along with "server-based" systems like Paypal.

It is starkly admitted that traditional smart card systems a la Mondex are dead. Contactless transport cards as e-money are catching on yes (22 in the Czech Republic), but still almost exclusively used at unmanned sites such as transport turnstiles or car parks. Public shows no sign of wanting to use e-cash more extensively. (This may explain the mysterious failure of the Oyster system to expand to small value real world purchases eg newspapers..)

The only major problem asserted with the current ElMI system apart from the definition issues is the high internal capital requirement - hence the suggestion to reduce from 1 m Euros to an eighth of that!

There is no mention of the difficulties with credit card like guarantees for paypal etc payments, unless it is dealt with tangentially in the under discussion harmonisation of EU payment laws under the Payments Directive, currently due to be passed November 2009.

Similarly money laundering - which is known to be increasingly used by criminals to get funds past national borders, especially to Africa and Eastern Europe - is left to be dealt with as and when by financial fraud legislation.

Overall, a remarkably unambitious and pretty redundant consultation. One suspects it might habve been more sensible if politically difficult to shelf this document entirely untiul the dust settles a bit on the current financial meltdown.

1 comment:

Pragmatist said...


Thanks for the post. FYI, the link to the consultation on El Reg is wrong, and should be http://ec.europa.eu/internal_market/payments/docs/emoney/com_2008_627_en.pdf

One sure way to immediately increase the amount of e-money in circulation is to simply redefine it more broadly - hey presto!

Nevertheless, the consultation demonstrates yet again that regulation cannot be a catalyst for cross-border retail markets. There are too many practical obstacles that need to be overcome first, as the May '07 Civic Consulting report on the Consumer Credit Directive confirmed: language, culture, consumer preference for national products, lack of shared data on creditworthiness, tax/employment differences, difficulty in penetrating foreign markets, differences in consumer demand, lack of confidence in foreign brands, different stages of market development, lack of adequate marketing strategy. (see here for fuller discussion (see http://sdj-pragmatist.blogspot.com/2007/11/can-eu-regulation-create-cross-border.html).

While there's a ton of commercial stuff going on in relation to e/m-payments on a member state by member state basis, whether this initiative proves very useful for anyone remains to be seen. The attempt to achieve consistency with the Payment Services Directive is laudable, but the impact of the PSD itself is hardly very widely understood and neither addresses the practical obstacles mentioned above.