The number of electronic money players in the European market has increased in recent years, from 4 in 2010 up to 48 in 2014*. Add to this the fact that numerous players beyond the banking world have also created their own electronic money institutions, including Leetchi, Google and Amazon and the sector is now seen as an innovative alternative to traditional payment providers.
‘Electronic money’ is the digital equivalent of cash, which can be stored and transferred using devices such as mobile phones, tablets and card servers. It can be issued by an electronic money issuer on receipt of funds and its value is expressed in a national currency, including euros or dollars. Other types of electronic money are decentralised, in that they are not issued by any particular issuer, and their value is not expressed in national currency. An example of this is Bitcoin.
However, along with innovation comes risk, which has seen the introduction of new regulations. In September 2009, the European Parliament issued a new directive on electronic money (2009/110/EC).
This directive is intended to modernise European regulations on electronic money, in particular by bringing the prudential supervision of the business of electronic money institutions into line with the requirements imposed on payment institutions by the directive on payment services. This directive was transposed in France in amendment of the Monetary and Financial Code by the Law no 2013-100 of the 28 January 2013.
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Innovation versus risk
The modernisation of European regulations on electronic money help to balance the four main risks associated with this growing sector, which are as follows:
- Risk of money-laundering and terrorism financing: like credit institutions or payment institutions, electronic money issuers must comply with the current regulations on combatting money-laundering and the financing of terrorism (Anti-Money Laundering and Countering the Financing of Terrorism AML/CFT) and establish appropriateKnow Your Customer (KYC) procedures**.
- Credit and counterparty risk: some players conduct their business using a network of distributors. An electronic money institution should therefore ensure the solvency of these distributors, and the suitability of their KYC policies.
- Operational risk: as transactions mainly take place through online merchants, issuers must set up Know Your Merchant processes, partly to verify legal operations but also to have confidence in internal control procedures. Furthermore, like any financial institution, the issuer must have a business continuity plan and a robust information system.
- Compliance risk: in view of the regulations applicable (see below), issuers must be compliant with numerous texts including the Monetary and Financial Code. Particular attention should be paid to the protection of customer funds, especially ring-fencing measures (if the institution does not have an insurance policy).
Although electronic money issuers are smaller than credit institutions and are mostly operating as “start-ups”, these institutions must cope with a growing body of regulation. The attention of regulatory authorities is focused on a number of areas, including:
- respect for a minimum capital level: in France, the minimum capital required is €350,000 (€100,000 for issuers operating under the simplified due diligence arrangements);
- respect for a minimum level of prudential capital: in France, prudential capital must be equal to or higher than 2% of the average amount of electronic money in circulation;
- protection of customer funds: in France, this protection is provided by opening a ring-fenced account with a credit institution entitled to receive money from the public, or else through taking out an insurance policy;
- implementation of a suitable internal control procedure: these institutions set up internal controls which closely reflect those used by credit institutions. For example, in France the internal control measures for credit, payment and electronic money institutions are all covered by the same regulatory text (decision of 3 November 2014);
- adoption of an appropriate anti-money laundering and terrorist financing policy (AML/CFT): the electronic money issuer must establish a suitable AML/CFT procedure to detect and analyse atypical transactions.
This last point has been emphasised following the November 2015 attacks in Paris. In a press release, Michel Sapin and Francis Villeroy de Galhau have reminded financial institutions of their obligations of vigilance and their duty to report suspicious behaviour.
The ACPR and Tracfin have issued new guidelines reminding financial institutions of these obligations. These guidelines set out the obligations on financial institutions answerable to the ACPR: an obligation of vigilance in respect of customers, and an obligation to report any suspicions to Tracfin.
Navigating such a growing body of regulation now requires electronic money issuers to adopt a more mature approach to how they conduct business, particularly as the sector becomes more prominent.
*ACPR Conference – 04.11.2014.
**The main obligations include the obligation to identify end customers and commercial partners (Articles L. 561-5 and L.561-6 of the Code Monétaire et Financier (CMF); Exemption (Article R.561-16 5° of the CMF) for electronic money where the maximum charging limit is €250 euros if not rechargeable or €2 500 euros if rechargeable; In the cases covered by this exemption, simplified vigilance procedures can be used, meaning that the identity of the customer does not have to be verified. Although this exemption does not apply if there is any suspicion of money laundering, or where there is a demand for repayment above €1000.