A recent development in the monetary and financial sector out of technological development is the emergence of electronic money. With every day, the physical use of cash is declining especially for small and medium transactions. Payments through mobile wallets, digital wallets and smart cards are picking up. A situation where money moves electronically is strengthening in most economies and India is not an exception. E-money indicates the changing essence of money. Demonetization launched by the government has a subsidiary objective of making a cashless economy.
What is electronic money?
Broadly, electronic money is an electronic store of monetary value on a technical device. The definition of electronic money is becoming more scientific and specific with developments associated with it. The European Central Bank defines e-money in the following words. “E-money can be defined as amount of money value represented by a claim issued on a prepaid basis, stored in an electronic medium (card or computer) and accepted as a means of payment by undertakings other than the issuer” (ECB).
E money is a monetary value that is stored and transferred electronically through a variety of means – a mobile phone, tablet, contactless card (or smart cards), computer hard drive or servers. Electronic money need not necessarily involve bank accounts in transaction but acts as a prepaid bearer instrument. They are often used to execute small value transactions.
In which form e-money can be kept?
E-money can be stored in hardware a chip card or software usually stored in a server. An access card like credit card or debit card that simply enables us to reach our deposit or to avail a credit doesn’t qualify as e-money.
Types of electronic money
E-money is usually issued by an institution upon receipt of funds and is given a value in a national currency like Rupee. Basically, money is of three types with the first two being the most important. The first category is stored value cards that contain prepaid money. Smart cards, prepaid cards and cards used in bus like Mybus card, are examples of this prepaid payment cards. Second is the software based electronic money where money is kept online in servers. Here, account balances are kept at online service providers such as Paytm.
Another type of e-money is virtual currencies without an issuer and that not denominated in national currencies. But there are several conditions that makes virtual currencies to be counted as electronic money. The ECB itself gives three areas of electronic money.
Empirically, the stored value cards like smart cards are used for standard retail payment transactions. On the other hand, the software based online payments supported by software based mobile wallets and digital wallets.
Electronic money in India
In India, the field of electronic money is regulated by the RBI mainly under Payment and Settlement System Act (PPS Act) 2007. The Act gives details about the issue pf electronic money under the name Prepaid Payment Instruments. Separate Prepaid Payments Instruments guidelines are also issued by the RBI on this behalf. As per the PPS Act, banks and non-bank entities can issue pre-paid payment instruments in the country after obtaining necessary approval / authorisation from RBI.
In 2002, a Working Group under YV Reddy has submitted report on Electronic Money by making an extensive study about the potentials of electronic money in India. Electronic money in the form of Prepaid Payment Instruments are expected to push cashless transactions in the country.