PERG 3.3 Elements of the definition of e-money

The definition of e-money says that for a product to be e-money, it must be monetary value as represented by a claim on the issuer. Guidance on the meaning of issuer can be found at PERG 3.2.12 G to PERG 3.2.14 G.

The definition of e-money says that for a product to be e-money, it must be stored on an electronic device.

E-money is an electronic payment product. The value is held electronically and payments using the value are made electronically.

The fact that the device may be magnetic does not stop it being an electronic device for the purpose of the definition of e-money. Thus, for example, value stored on a personal computer does not fall outside the definition merely because it is stored on the computer's magnetic hard disk. Similarly, value stored on a plastic card that uses magnetic stripe technology may also fall within the definition if the value is transferred for spending using electronic technology.

The definition of e-money says that for a product to be e-money, it must be issued on receipt of funds.

This part of the definition means that e-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 e-money.

This does not mean that e-money paid for with a credit card falls outside the definition. The purchase of the e-money represents the purchase of monetary value. The fact that the purchaser is lent the funds to buy the e-money does not affect this. There are two contracts, one for the sale of e-money and one for credit.

Value on a debit card may be e-money or a deposit. Guidance on this is given in PERG 3.3.14 G to PERG 3.3.20 G.

The fact that the device on which monetary value is stored is made available on a plastic card that also functions as a debit or credit card does not stop that monetary value from being e-money.

For a product to be e-money, persons other than the issuer must accept it as a means of payment.

PERG 3.3.10 G means that the e-money holder must be able to use it to buy goods and services from persons other than the issuer.

Thus, for example, electronic value issued by an employer to its employees that can only be used to buy food and drink from the employer in its canteen is not e-money.

If monetary value can be spent with third parties, it does not stop being e-money just because the e-money can also be spent with the issuer. This is so even if in practice most of the e-money is spent with the issuer and only a small portion is ever spent with third parties.1

An electronic payment scheme that involves prepaid monetary value that can be spent without the involvement of the issuer is likely to be e-money. However, a product does not cease to be e-money merely because the scheme is account based.

The document published by HM Treasury in March 2002 called "Implementation of the Electronic Money Directive: A Response to Consultation" says:

"An important issue that respondents [to HM Treasury's consultation on the implementation of the E-Money Directive] requested clarification on was whether the Directive's definition should catch account-based schemes (i.e. e-money held remote from the owner and spent at the owner's direction) as well as, for example, card-based schemes (i.e. e-money in the possession of the owner, whether stored on a personal computer or a smart card, and directly spent by them). The Treasury believes that the Directive's definition does allow for the possibility of account-based schemes being e-money. Not allowing account-based e-money schemes would effectively create a regulatory gap between the e-money and deposit-taking regimes - and a difference of treatment between schemes that pose similar regulatory risks. Rather than attempting to amend the definition in the Order (which is already expressed suitably widely), the Treasury has clarified in the accompanying Explanatory Memorandum that the definition of e-money is to be interpreted as covering account-based schemes (so long as they remain distinct from deposit-taking)."

That explanatory memorandum says:

"The Treasury believes the Directive's definition includes both e-money schemes in which value is stored on a card that is used by the bearer to make purchases, and account-based e-money schemes where value is stored in an electronic account that the user can access remotely."

Thus monetary value issued under an account-based scheme can be e-money. On the other hand, not all monetary value recorded electronically on an account will be e-money. If all such monetary value were e-money, any deposit recorded in records maintained electronically could be e-money, thereby turning most conventional bank accounts into e-money. Thus it is necessary to distinguish between an account-based e-money scheme and a conventional bank deposit.

Recital (3) to the E-Money Directive says that "electronic money can be considered an electronic surrogate for coins and banknotes, which is stored on an electronic device such as a chip card or computer memory and which is generally intended for the purpose of effecting electronic payments of limited amounts."

The European Commission published an explanatory memorandum along with its proposal for a Directive about e-money. It said that it is appropriate to emphasise that e-money does not represent a deposit. Unlike a depositor, a user does not advance funds to an issuer in order to ensure their safe keeping and handling. Neither the issuer nor the customer pursues this objective. The Commission said that the underlying contract between the customer and the issuer is that the user will get value for the e-money from those merchants that accept it and that the issuer will honour his commitment to give value.

In distinguishing e-money and deposits, relevant factors include the following.

1. (1)

   As explained in PERG 3.3.3 G, e-money is a purely electronic product. 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 e-money.

2. (2)

   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 e-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.

3. (3)

   If an account has features on it in addition to those necessary for a pure payment facility, such as an overdraft or direct debit facility, that points towards it not being e-money.

4. (4)

   One should have regard to whether the product is sold as e-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. E-money, in contrast, involves the purchase of a means of payment.

1When deciding whether a particular scheme involves issuing e-money or not, it is necessary to take into account the substance of the scheme. In particular it is necessary to consider whether:

1. (1)

   the scheme involves the issue of prepaid electronic monetary value that the holder can spend with third parties; or

2. (2)

   the provision by the issuer of some other sort of service.

1In considering the question in PERG 3.3.22 G, relevant factors include:

1. (1)

   the risks incurred by the holder of the value;

2. (2)

   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

3. (3)

   what the scheme allows the holder of the value to do.

1Therefore 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 issuing e-money.

1The European Commission Services published a separate guidance note in January 2005 on the application of the E-money Directive to mobile network operators. The full text of this guidance is available at the following link: http://europa.eu.int/comm/internal_market/bank/docs/e-money/guidance_en.pdf. The FSA will have regard to such guidance when considering whether the issue of prepaid airtime to a mobile phone user, which can be used to pay for third party goods and services, whether delivered through or outside the telephone operator's network, constitutes the regulated activity of issuing e-money.