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PERG 3A.3 The definition of electronic money

Q8. How is electronic money defined in the Electronic Money Regulations?

The definition in the Electronic Money Regulations mirrors that in the Electronic Money Directive. Electronic money means monetary value as represented by a claim on the issuer which is:

  • stored electronically, including magnetically;
  • issued on receipt of funds;
  • used for the purposes of making payment transactions (as defined in regulation 2 of the Payment Services Regulations);
  • accepted as a means of payment by persons other than the issuer;

and is not otherwise excluded by the Electronic Money Regulations, see PERG 3A.5.

Electronic money is an electronic payment product. The value is held electronically or magnetically on the payment instrument itself (either locally or remotely) and payments using the value are made electronically. So, for example, monetary value stored on a:

  • prepaid payment card;
  • personal computer; or
  • a plastic card that uses magnetic stripe technology;

may all fall within the definition if the value is intended to be used for the purposes of making payment transactions.

Q9. Does the electronic money definition only apply to card-based schemes?

No. Any electronic payment scheme that involves prepaid monetary value that can be used to purchase goods and services directly from third party merchants is capable of being electronic money. This would include account-based schemes.

Recital (7) of the Electronic Money Directive states that the intention is to introduce a definition of electronic money in order to make it technically neutral so as to cover all situations where the payment service provider issues pre-paid stored value in exchange for funds. Hence the definition expressly captures both electronically and magnetically stored value and there is no longer a reference to there needing to be an 'electronic device' on which the electronic money is stored. These changes make it clear that electronic money stored on computers hard drives or account-based schemes are caught.

Q10. Can you explain why pre-payment is a necessary ingredient of electronic money?

The definition of electronic money says that for a product to be electronic money, it must be issued on receipt of funds. This part of the definition means that electronic money is a prepaid product. That is, unlike credit provided through a credit card, the customer pays for the spending power in advance. This is why credit cards are excluded from the definition of electronic money. This does not mean that electronic money paid for with a credit card falls outside the definition. The purchase of the electronic money represents the purchase of monetary value. The fact that the purchaser is lent the funds to buy the electronic money does not affect this. There are two contracts, one for the sale of electronic money and one for credit.

Value on a debit card may be electronic money or a deposit. Guidance on this is given in Q15.

Q11. Does it matter that the device on which electronic value is held may be used for other purposes?

No. The fact that the device on which monetary value is stored is made available, for example, on a plastic card that also functions as a debit or credit card or is a mobile phone does not stop that monetary value from being electronic money.

Q12. Does it matter that the monetary value can be spent with the issuer and third parties?

No. If monetary value can be spent with third parties, it does not stop being electronic money just because the electronic money can also be spent with the issuer. This is so even if in practice most of the electronic money is spent with the issuer and only a small portion spent with third parties.

Q13. Are electronic travellers cheques electronic money?

An electronic travellers cheque is a product, based on a plastic card, designed to replace paper travellers cheques. There are two types of electronic travellers cheques:

  • ones that can also be used to buy goods and services from third parties; and
  • ones whose only function is to allow the holder to withdraw cash in a foreign currency from ATMs when abroad.

The plastic card is loaded with value, the holder pays for the value on issue and uses the value to purchase goods and services. It is likely then to meet the first three conditions in the definition of electronic money listed at Q8. The remaining condition is whether the value is accepted as a means of payment by persons other than the issuer.

An electronic travellers cheque falling into (1) above is likely to be electronic money as it can be used to purchase goods from third parties.

An electronic travellers cheque falling into (2) is unlikely to be electronic money provided that:

  • it can only be used to withdraw foreign currency from ATMs owned by the issuer of the value; or
  • the withdrawal of foreign currency by a cardholder will never involve the purchase of the currency from the owner of the ATM but instead the repayment of prepaid value by the issuer of the prepaid value.

Q14. If I use a trust account to store monetary value in respect of funds I have accepted payment for, will I be issuing electronic money?

Putting monetary value into a trust account does not, of itself, prevent the person who accepts the payment for electronic value from issuing electronic money.

Q15. How does electronic money differ from deposits?

Recital (13) of the Electronic Money Directive provides that electronic money does not constitute a deposit-taking activity under the BCD "in view of its specific character as an electronic surrogate for coins and banknotes, which is used for making payments, usually of limited amount and not as a means of saving."

In distinguishing electronic money and deposits, relevant factors include the following:

  • If the monetary value is kept on an account that can be used by non-electronic means, that points towards it being a deposit. For example, an account on which cheques can be drawn is unlikely to be electronic money.
  • If a product is designed in such a way that it is only likely to be used for making payments of limited amounts and not as a means of saving, that feature points towards it being electronic money. Relevant features might include how long value is allowed to remain on the account, disincentives to keeping value on the account and the payment of interest on it.
  • One should have regard to whether the product is sold as electronic money or as a deposit.

In other words, a deposit involves the creation of a debtor-creditor relationship under which the person who accepts the deposit stores value for eventual return. Electronic money, in contrast, involves the purchase of a means of payment.

Q16. What sort of factors will the FCA take into account in deciding whether a particular scheme might be electronic money?

In considering this question relevant factors include:

  • the risks incurred by the holder of the value;
  • the nature of the rights and obligations of the holder of the prepaid value, the issuer of the value and third parties involved in the scheme; and
  • what the scheme allows the holder of the value to do.

Therefore artificial features of a scheme that disguise, or try to disguise, the payment function as the supply of another sort of service are not likely to prevent the scheme from involving the issuance of electronic money.