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Author:
Mr. Marc C Dobler
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https://orcid.org/0000-0002-9166-195X
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José Garrido
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Dirk Jan Grolleman
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Mr. Tanai Khiaonarong
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https://orcid.org/0000-0002-1731-3201
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Jan Nolte
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Publication Date:
14 Dec 2021
Language:
English
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Annex 1. E-Money Issuance—Specific Risks

General business risk: any potential impairment of the financial condition (as a business concern) of an EMI owing to declines in its revenue or growth in its expenses, resulting in expenses exceeding revenues and a loss that must be charged against capital. These risks arise from an EMI’s administration and operation as a business enterprise.

Legal risks: the risk of losses, following legal uncertainty. For example, when the liability toward customers in case of transaction failure is subject to uncertainty. It may include claims against the EMI for failing to comply with laws, as well as providing legal protection of customer funds that are pooled in trust accounts. Legal risk may also arise if multiple laws and authorities are involved, creating potential inconsistencies and legal uncertainty (Khiaonarong 2014).

Governance risks: the risk of losses following a lack of good governance and internal controls, for example, the lack of a trust board, the absence of good oversight by the trust board, inadequate governance of the risk management and treasury functions, or general absence of proper oversight by the board.

Operational risks: deficiencies in information communication and technology systems or internal processes and policies, or external events, cause disruptions to the e-money platform of the EMI, the connections to banks and agents, or the telecom network, which result in a reduction or unavailability of the EMI’s services. Disruptions can occur in the EMI’s own systems, as well as systems from third-party providers. The main types of operational risk are business continuity risk, cyber risk, internal and external fraud, and agent risk.

Financial risks: the risk that EMI customers lose access to the funds entrusted to the e-wallets because of (1) bankruptcy of the bank holding the customers’ funds; (2) insufficient protection against the failure of an EMI, for example, because the funds have not been adequately isolated; and (3) EMIs’ failure to manage the entrusted funds prudently, for example, the funds are invested in relatively illiquid assets. Risks can be subdivided as follows:

  • a. Liquidity risk: risk that clients’ funds are not available for payout.

  • b. Credit risk: risk that clients’ funds are invested in assets of issuers that fail.

  • c. Interest rate risk: risk of mismatch in interest rates between assets and liabilities.

  • d. Market risk: risk of loss on investments due to a fall in the value of the assets.

Money laundering/terrorism financing risks: e-money accounts and transactions may be used to launder criminals’ money and/or to finance terrorist activities. Hence, compared to cash, mobile money may be considered a good tool for reducing reliance on anonymous cash, as mobile money is generally more traceable and can be subjected to requirements limiting this risk (monitoring and limits).

Consumer risk: loss of customers, or customer confidence, due to ineffective or no disclosure of key information, unfair contractual terms and conditions, product and service failures, unfair sales practices, and a lack of redress mechanisms. Data privacy risks fall under this category as well, which is the risk of potential loss of control over personal information, such as when information about a customer is used without his or her knowledge or permission, and the risk that customer information is not treated in a fair and responsible manner.

Annex 2. Basic Payment Statistics

Annex Table 2.1.

Use of Payment Services/Instruments: Volume of Cashless Payments per Inhabitant1

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Source: BIS.

Please refer to the individual country tables for a detailed explanation

Annex Table 2.2.

Use of Payment Services/Instruments: Average Value of Cashless Payments per Inhabitant1

article image
Source: BIS.

Please refer to the individual country tables for a detailed explanation

Annex Table 2.3.

Number of Mobile Money Transactions per 1,000 Adults

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Source: IMF, Financial Access Survey.
Annex Table 2.4.

Total Amount of Outstanding Balances on Mobile Money Accounts (In Millions of National Currency)

article image
Source: IMF, Financial Access Survey

Annex 3. Application of the PFMI to E-Money Under the PISA

As the retail payments ecosystem is constantly evolving due to innovation, as well as technological and regulatory change, the PISA framework aims to address these developments and builds on past experience in the oversight of payment schemes and payment instruments. Accordingly, its scope includes digital payment tokens (for example, stable coins), alongside “traditional” payment instruments and schemes. Another new feature is the inclusion of payment arrangements in the framework. Importantly, the PISA framework follows the principle of proportionality and aims in particular to set requirements for those entities that play a more significant role in the euro area.

The PISA framework is aimed at the governance bodies of payment schemes or arrangements, which are expected to adhere to the oversight principles. It defines criteria to identify the payment schemes or arrangements to be overseen taking into account their relevance for the overall payment system and those which are exempt. These criteria consider the size, market penetration and geographical relevance of a payment scheme/arrangement within the euro area.

The PISA assessment methodology complements the oversight principles of the framework by specifying key considerations and assessment questions. Following are the 16 applicable principles:

  • ■ Principle 1: Legal basis. A payment scheme/arrangement should have a well-founded, clear, transparent, and enforceable legal basis for each material aspect of its activities in all relevant jurisdiction.

  • ■ Principle 2: Governance. A payment scheme/arrangement should have governance that is clear and transparent, promotes the safety and efficiency of the payment scheme/arrangement, and supports the objectives of relevant stakeholder.

  • ■ Principle 3: Framework for the comprehensive management of risks. A governance body should have a sound risk management framework for comprehensively managing a payment scheme/arrangement’s legal, credit, liquidity, operational and other risk.

  • ■ Principle 4: Credit risk. A payment scheme should effectively measure, monitor, and manage its credit exposures to payment service providers (PSPs) and/or end users as well as those arising from its payment, clearing and settlement processes. A payment scheme/arrangement should maintain sufficient financial resources to fully cover its credit exposure to each PSP with a high degree of confidence.

  • ■ Principle 5: Collateral. A payment scheme that requires collateral to manage its or its payment service providers’ credit exposures should accept collateral with low credit, liquidity, and market risk.

  • ■ Principle 7: Liquidity risk. A payment scheme should measure, monitor, and manage its liquidity risk effectively. A payment scheme should maintain sufficient liquid resources in all relevant currencies to meet its payment obligations in a timely manner with a high degree of confidence. This should be under a wide range of potential stress scenarios that should include, but not be limited to, the default of the PSP and its affiliates that would generate the largest aggregate liquidity obligation for the payment scheme under extreme, but plausible, market conditions.

  • ■ Principle 8: Settlement finality and crediting end users. A payment scheme should define clear rules for final settlement.

  • ■ Principle 9: Money settlement. If central bank money is not used for the money settlement of the obligations of the end users or the PSPs of a payment scheme, the governance body should minimize and strictly control the credit and liquidity risk arising from the use of commercial bank money.

  • ■ Principle 13: PSP default rules and procedures. A payment scheme should have effective and clearly defined rules and procedures for managing the default of a PSP. These rules and procedures should be designed to ensure that a payment scheme can take timely action to contain losses and liquidity pressures and, thereby, continue to meet its obligation.

  • ■ Principle 15: General business risk. A payment scheme/arrangement should identify, monitor, and manage its general business risk and it should hold sufficient liquid net assets funded by equity to cover potential general business losses. This would allow it to continue operations and provide services as a going concern if such losses were to materialize.

  • ■ Principle 16: Custody and investment risk. A payment scheme should safeguard its end-users’ assets and minimize the risk of losses on these assets or delayed access to them. A payment scheme should invest in instruments that carry minimal credit, market, and liquidity risk.

  • ■ Principle 17: Operational risk. Payment schemes/arrangements, PSPs and technical service providers should identify the plausible sources of operational risk, whether internal or external, and mitigate impact by implementing appropriate systems, policies, procedures, and controls. Systems should be designed to ensure a high degree of security and operational reliability and should have adequate, scalable capacity. Business continuity management should aim for timely recovery of operations and the fulfilment of the obligations of the payment scheme/arrangement, the PSPs or the technical service providers, including in the event of a widescale or major disruption.

  • ■ Principle 18: Access and participation requirements. A payment scheme/arrangement should have objective, risk-based and publicly disclosed criteria for participation, which permit fair and open access.

  • ■ Principle 21: Efficiency and effectiveness. A payment scheme/arrangement should be efficient and effective in meeting the requirements of the PSPs, end users and the markets it serves.

  • ■ Principle 22: Communication procedures and standards. A payment scheme/arrangement should use, or at least accommodate, relevant internationally accepted communication procedures and standards to facilitate the efficient transfer of value between end users.

  • ■ Principle 23: Disclosure of rules, key procedures, and market data. A payment scheme/arrangement should have clear and comprehensive rules and procedures and it should provide sufficient information to enable PSPs, technical service providers and end users to reach an accurate understanding of the risks, fees, and other material costs they incur by participating in/making use of the payment scheme/arrangement. All relevant rules and key procedures should be publicly disclosed, bearing in mind those rules and procedures which, if disclosed, could pose a threat to the security of a scheme or arrangement. The latter should only be disclosed to scheme or arrangement stakeholders on a “need to know” basis.

Notes: Principles 6, 10–12, 14, 19–20, and 23 are nonapplicable for the purpose of assessing payment schemes/arrangements under the PISA framework.

Source: ECB (2020).

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1

Any entity involved in the provision of retail payment services whose main business is not related to taking deposits from the public and using these deposits to make loans (CPMI 2014), which range from unlicensed fintech companies to e-money issuers with a narrow license for payment services.

2

Existing crypto-assets (for example, Bitcoin, Litecoin, Ethereum, etc.) do not fall within the definition of e-money. Most stable coins also do not meet the definition (for example, claim on the issuer and the right to redeem at par). Stable coins that are designed as, and fall within the definition of, e-money should be regulated according to the same requirements. For the categorization of digital currencies, see Mancini-Griffoli (2019).

3

At the same time, the number of Kenyans using two or more types of financial services has increased from 9 percent in 2006 to 74 percent in 2019.

4

The Basel Core Principles, the Principles for Financial Market Infrastructures, the IADI Core Principles for Effective Deposit Insurance Systems, and the FSB Key Attributes of Effective Resolution Regimes for Financial Institutions.

5

International prudential standards for banks, insurers and securities intermediaries, and financial market infrastructures are set, respectively, by the Basel Committee for Banking Supervision, International Association of Insurance Supervisors, International Organization of Securities Commissions, and the Committee on Payments and Market Infrastructures.

6

Colombia, European Union, India, Kenya, Nigeria, the Philippines, Singapore, and the United States.

7

However, under Basel III, EMI deposits will be treated as “short-term unsecured wholesale funding provided by other legal entities” required to be covered 100 percent by high-quality liquid assets.

8

Fund segregation is also relevant when funds are deposited in a central bank reserve account.

9

Generally, jurisdictions require that the reconciliation between the e-float and users’ aggregate balances takes place at least once a day, before the bank closes (24/7 processing is not yet possible in many jurisdictions).

10

Limits might also be relevant for a risk-based approach to AML/CFT.

12

Issued by the Committee on Payment and Settlement Systems and the Technical Committee of the International Organization of Securities Commissions.

13

Annex 2 provides payment statistics of e-money/mobile money payments relative to other types of retail payment instruments in selected jurisdictions.

14

For India, e-money is issued not only by payment banks but also by authorized nonbank payment system providers.

15

Countries that apply the indirect approach include, among others, Jamaica, Kenya, Malaysia, Nigeria, Rwanda, WAEMU (consisting of eight countries), and Zimbabwe.

16

Countries that apply the direct approach include Bangladesh and Colombia. India has direct coverage for eligible deposits mobilized by payment banks, while prepaid payment instruments are not covered under deposit insurance.

17

While several DIS recognized custodial or trust accounts before e-money, these are often used for a small number of beneficiaries with relatively stable balances (for example, notary accounts), which can be easily identified through the bank’s IT system. EMIs use trust or custodial accounts as pooled or omnibus accounts for many users whose fund balances fluctuate regularly, making it much harder and more costly to track in real time.

18

The risk that the provider may misuse customer funds, for example, through fraud or by pledging them as collateral to obtain loans from third parties or comingling them with its own funds still exists. If the funds are insufficient, the users should share the loss proportionately.

19

See UK Payment and Electronic Money Institution Insolvency Regulations 2021.

20

Consideration could also be given to transaction limits to delineate e-money from bank deposits.

21

IADI Core Principle 15.

22

Even in cases where user funds have been properly segregated, the DIS may play a crucial role in the failure of the EMI, as it may compensate users before the segregated funds could be released and a way found to return them to individual e-money users.

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Cover Departmental Papers
E-Money: Prudential Supervision, Oversight, and User Protection
Author:
Mr. Marc C Dobler
,
José Garrido
,
Dirk Jan Grolleman
,
Mr. Tanai Khiaonarong
, and
Jan Nolte
Volume/Issue:
Volume 2021: Issue 027
Publisher:
International Monetary Fund
ISBN:
9781513593401
ISSN:
2616-5333
Pages:
33
DOI:
https://doi.org/10.5089/9781513593401.087