The Impact of E-money Directive in the EU - Essay Example

? The Impact of E-Money Directive in the European Union Member s Details: al Affiliation: Date of Submission The Impact of E-Money Directive in the European Union Member States Introduction Irked by the desire to usher in fundamental regulatory frameworks within its financial institutions, the European Union members combined efforts in the early 1990s and came up with a raft of measures that were quickly legislated upon, adopted and recommended for implementation in the entire region. Taking electronic commerce (e-commerce) related initiatives, the European Union (EU) aimed at boosting the Union’s economic prospects, improving its competitiveness and facilitating its progressive adaptability to the digital era (Hornle, 2000). Under the administrative guidance of the Lisbon European Council, EU commission drafted comprehensive ‘e-Europe Action Plan in March 2000-recommenadtions which were endorsed months later at the Feira European Council (Hartmann, 2006). With all arsenals pointed at streamlining electronic money institutions through legal, supervisory principles, the binding implementation provisions found quite a number of disparate legislative instruments that tended to hinder the functionality of the directives. The 2000 directives were the first attempts by the Union to harmonize EU e-money banking practices through legal frameworks (Vereecken, 2000). Unknown to the policy drafters was that the directives were headed for major legislative thrusts, which has since prompted the revision of e-Europe Action Plan on the same but with no tangible improvement as once anticipated. The provisions of the action plan of 2005 being the main EU e-money policy blueprint in this area was an updated version deliberated upon since 2000 (Penn, 2005). Indeed, the period of euphoria that characterized the adoption of the directive seemed to have died leaving the future of e-money regulatory legislations much less promising than never imagined. As a matter of fact, many new ideas never sprouted beyond their piloting stages. In essence, The EU e-Money directives were much more of wasted efforts than gainful strategies given that e-Money technology, to a grater extent, remains a figment of salesmen’s imaginations. Background of E-Money Regulations When e-money made a debut into the banking scene, almost all financial institutions in North America as well as the entire Europe took a noticeably stance well armed with different regulatory mechanisms. Rather than a ‘wait and see’ approach adopted by the United States, EU member states took immediate steps, to regulate e-money as soon as the technology appeared (European Commission, 2002). As early as 1994, EMI had recommended that only bank-issue e-money be legalized (EMI 1994; DeGeest 2001). The immediate established target as insinuated above comprised of standardizing measures with a wide spectrum of actions that included access to the Internet, as well as raising consumer confidence in IT-supported learning networks embodied in new electronic payment systems. Against a backdrop of concerns from different financial quarters, EU Commission pursued perspective was that proliferation of e-money without regulations could inhibit the proper functioning of the money market and stifle competition as well as innovation in the payment sector. What followed was a draft of directives on the same (EU Commission, 1998). Action Plans set out to achieve the objectives of the EU included numerous legislative measures. Among these were the Directive 2000/28/EC of the European Parliament in conjunction with the EU Council Directive 2000/12/EC touching on the conduct of business of credit institutions forming the first batch of e-Money Directives (EMI Directive, 2000a; 2000b). The second batch of e-Money Directives was the Directive 2000/46/EC from the same intuitions touching on prudential supervision of electronic money institutions (Long and Casanova, 2002; 2003; EMI Directive, 2000a; 2000b). The e-money directive initially published in the Official Journal of the European Communities dated the 27th October 2000 introduced ‘e-money institutions’ as special types of credit institutions and went ahead to define ‘e- money’ under the Directive 2000/46, Art. 1(3) (b) as, “….a claim on the service provider that is (a) electronically stored, (b) issued on receipt of funds equivalent in monetary value to amount stored and (c) with full acceptance as a means of transactional payments” (Pichler, 2001). Evidently, the central proposition concerns regarding e-money were its redeemability to ensure bearer confidence. However, redeemability omissions were largely inherent in the Directive 2000/12/EC as funds received in exchange for e-money were not given definite recognition as deposits or other repayable funds. In essence, the EU directive did not elevate e-money retailers to the status of large financial institutions such as banks. Nevertheless, it confirmed the understanding that digital money transactions were always at par value-a notion that reinforced the integrity of e-money as a form of credible exchange mechanism (EMI Directive, 2000a ; Wurtz and Lober, 2002). The legislation cleared doubts concerning specific risks linked with the issuance of electronic money and the subsequent ability to respond to security challenges. Another concern that the 2000 Directive exhibited was an admirable sensitivity to commercial, competitive fairness. The provisions of the directive aimed at erasing barriers for new market entrants such as non-banking institutions. According to the policy drafters, the problem of a level playing field between e-money institutions interested in engaging in the issuance of electronic money and hitherto existing credit institutions was solved. According to the Directive preamble, the balance was to be achieved through “…less cumbersome features” that characterize the stringent prudential, supervisory principles applied to other credit institutions then. The concern of the EU was to foreclose avenues that the preempted e-money business ventures would conceivably undertake. Further, the 2000 Directive imposed prudent limitations that would ensure obligatory support for e-money through sufficient liquid, low risk assets (Vereecken, 2001). Ironically, the 2000 Directive analyzed in respect to compelling causes of the 2007 European financial crises that have extended their effects to date, was an over simplification of unprecedented scenarios. The ‘traditional' inordinate risk taking by the credit institution willingness illustrated inefficiencies such of failure to capture the e-money service accounts in terms of sensible structuring and maintenance. In the 2000 Directives issued by the EU, all electronic money institutions were subjected to “…sound and prudent managerial control procedures”. In effect, outsourced activities for credit institutions related to e-money were to be harmonized to allow for prudential supervision. This was in recognition of a strong possibility that e-money services could be performed by entities not subject to prudential supervision. As such, the new rules and regulations were deemed “essential” to enable financial institutions that took up e-money technology establish internal structures responsive to financial and non-financial risks inherent to the new systems. The Directive was also cognizant of the possibility of destabilizing effect of the issuance and subsequent circulation of electronic money to the financial system and the smooth transactional payments systems. Therefore, the directive sought to facilitate cooperative mechanics to assess the integrity of e-money schemes.1 In this regard, the EU directive contemplated the issuance of operational licenses from a central regulator to guard against adverse effects to economic prospects to the region (Krueger, 2001; European Commission, 2004). The final philosophy underlying the EU directive concerned the regulatory nature of the financial system in each member state of the union. Accordingly, the directive through the principle of ‘margin of appreciation' afforded the option of waiving some or all of the conditional requirements for electronic money institutions with operational capacity not extending beyond the boarders of the respective Member States (Mansour, 2007). Notably, this provision was more of a symbolic preservative measure, given that e-commerce goes beyond the regulatory power of a single nation. Situation analysis of e-money market on the ground Even with these philosophical backgrounds of the 2000 EU directive, the performance of the EU e-money regime remains much elusive across the territorial borders of the entire Euro-zone. Even though the ECB’s proposals found their way into the final version of the e-money directive, a closer look at the directive reveals challenges into its actual implementation. Issuance of e-money had to be commensurate in monetary value issued’. The credit intuitions’ had to face more restrictions through increased capital requirements and conditions for waiver grants were significantly tightened. Additionally, these intuitions had to contend with new redeemability and reporting requirements. The objective of luring non-bank institutions to enter the e-money market as issuers anticipated under ‘light’ regime regulations seemed to have hit a dead end. Apparently, the fairly restrictive provisions of the directive as initially thought of proved very unattractive (Godschalk 2001a, Lelieveldt 2001). Similarly, clarity in the legal framework of the provisions has been lacking. The definition of e-money as provided for in the directive opens up a Pandora box of varied interpretations (Vereecken 2001, Lelieveldt 2001). In fact, given the inherent ambiguities in the definitive provisions of the directive, legislators in the EU member states came up with different interpretations while entrenching the directive in their systems. Under the operative circumstances, the deadline of the implementation process of the directive were neither respected nor beaten. To date, regulators in the entire Euro zone still grapple with the definition of e-money directive and its applicability to server-based schemes and its effects to e-loyalty. In this way, regulators found a lee way to draw up own definitions of e-money relevant to the market applicability of the new technology. In fact as early as the year 2001, the UK had orchestrated a move geared towards dropping the second criterion of Article 1(3) (b) requiring ‘issuance of e-money on funds received on equal value basis to the monetary value (HM Treasury 2001). The reason for this move as stated by the UK authorities was that this provision would legalize rather than impede credit creation by institutions taking up the new technology (Lelieveldt, 2001). A similar move was adopted by the German government in its proposed modifications of the Banking Act to abide by the directive. The fact of the mater is intuitional regulators in many countries sought to preserve hitherto regulatory structures in existence. After all, there were no real-benefits of introducing lesser regulatory systems to credit institutions. Traditional, restrictive policy regulations regarding the financial systems in the EU member states continues irrespective of the measures taken to implement the directive. Apparently, implementation process has taken an elbow room characterizing waiver conditions and broad definition of e-money as provided for in the directive. In the varied implementation mechanics, certain member countries implemented the directive partially; either applying restrictive waiver conditions or white-washing them. UK for instance adopted a stretched interpretation of the waiver provision to its boundary lines (HM, 2001; Bamodu, 2003). As such, firms waived of this provision, are neither treated within the regulated activity nor are they required to redeem electronic money at par value. Similarly, the Austrian e-money enactment did not include in it waiver conditions. In contrast, the German Banking Act allowed regulators to waive certain provisions making issuance of e-money principally regulated (Krueger, 2002). In most of the countries targeted by the directive, except in Germany, e-loyalty was more of a new idea. Multi-merchant e-loyalty schemes looked beneficial in the light of payment functions subjected to e-money regulation. In effect, this is the reason that shaped the early vision to the current regulatory directive. The notion was that E-money was attractive form of money that would soon replace cash and bank deposits as a general means of payment due to its convenience. No wonder central banks took the lead in pushing for regulations putting them firmly in control. However, the new technology has not lived up to the expectations. With meager market loyalty, retarded innovation, envisioned non-bank activities seemed to have been couched in premature regulation and so vanished in thin air. Server based e-money takeoffs are negligible while e-purses market penetration still struggles to hold enough ground with free issuance of cards by e-money service providers. As Van Hove (1999) notes, market introduction of e-money faces a dilemma akin to the chicken-and-egg problem. Inevitably, merchants require a large customer base with interest to provide e-money services. Conversely, wide usage by merchants would lure customers into adopting e-money. Evidently, all have lacking. As such, most countries have opted for a waiver clause for their localized schemes because of the low volume of e-money involved (Godschalk 2001b). Even with the waiver provisions, countries such as Germany have reached high market penetration of e-purses without a proportionate increase in usage numbers (Godschalk and Krueger 2001). Policy Options Notwithstanding the glaring efficiency gains in the adoption of e-money technology,2 which can only be realized should e-loyalty be cultivated, its development raises fundamental policy issues for central banks given the substitution proximity of e-money to banknotes and coins. In particular, the role of money as a definitive unit of account aiding transactions currently could be in jeopardy with wide circulation of e-money. Again, wide usage of the new technology could challenge the efficiency of monetary policy apparatus (central banks could lose control of their balance sheets through inability to steer short-term interest rates). Moreover, the role of central banks in ensuring smooth operation of payment systems could simply cease without structured policy systems in place. The overall effect of wider circulation of e-money would inevitably lower, if not deny, central bank seignoriage revenues. At noted above, the current relevance of e-money worth substantive monetary analysis remains a small fraction of the total money supply. This raises the question as to whether e-loyalty may have been stifled by early restrictive regulations. The answer to this concern is pretty obvious. If so, then what are the policy options available for exit? A plausible option would be a copy paste of the path chosen by Singapore. Singapore planned to make e-money legal tender even though the wait has been indefinite (Van Hove 2001). Unlike the EU which provided a legal framework for conscience catching technology, taking material steps would have encouraged the usage of e-money technology. Even though conversion of e-money to legal tender sounded convincing to give up cash for the new technology, the extent of the government’s involvement was not it was not clear. A direct involvement would mean large financial risks. Moreover, ubiquitous e-money raises fundamental concerns about privacy and security3 (Drehmann, Goodhart and Krueger, 2002). From a personal view point, this would be an ill-advised route to take. Another approach lies in the promotion of limited-purpose e-money schemes. In the Monthly Bulletin released in November 2000, the European Central bank made the distinction between ‘multi-purpose’ schemes and ‘limited-purpose’ schemes (ECB, 2000). However, the distinction fell short of defining single purpose from multi-purpose. Nevertheless, non bank institutions might be influenced more to accept the lighter burden on limited-purpose schemes. Less restrictive approaches have been known to trigger market circumvention (Kane, 1981). Conclusion Many at times, Innovation has been a process of trial and error. Market players must be able to experiment their ideas in the market. Currently, caps through restrictive laws are in place. Whether these caps are justified in the context of consumer protection or economic stability is an open question. Stability and systemic risks waiver thresholds as at now seem to be way below reasonable threat to such valuable conceptions. Regarding consumer protection, should central banks be involved? Again, that’s very contentious. The directive seems to have targeted lower levels of regulation. From a Union’s perspective, the directive provided a license of doing business in the entire Euro zone for credit providers. Such a move to limited-purpose payment schemes would presumably increase the number of credit issuers. Nevertheless, the varied interpretation regarding the definition of e-money coupled with a free hand in implementing the directive shows lack of absolute relevance of the directive. Invention of Electronic money technology occurred in a non-banking environment. Therefore, its adoption in the banking/credit institutional systems depends a lot more on the decisional mechanics within the banking community with client interests taking precedence. Notably, the interactive activities of the market players as well those of the regulators had a substantial impact into the negligible market penetration of e-money (Bootle, 2001, p.9). The market development of the new payment technology justifies the laissez-faire strategy adopted by some EU member states. In fact, global usage is hardly worth mentioning. Even in Germany where e-purses took an early lead, loaded volume has stagnated at roughly 0.01 percent of the total money supply. EU’s usage of e-money technology has been mainly card based. The discrepancy witnessed in implementing the directive, as captured in the short overview shows the magnitude deficit in the definition of e-money. Evidently, every member state implemented the directive according to how best they interpreted the provisions in line with national interests. The intentions of the directive have been met only to a very limited extent (Godschalk, 2001a). Contrary to the EU’s anticipation of wide usage of e-Euros within and across the boarders has not been fulfilled. The flow of cash continues to grow at much faster pace compared to the flow of e-money (Kohlbach, 2004). On the internet, transactional means known traditionally still dominates with credit card, direct debits or payment on delivery proving reliable to many would e-money users. Clearly, the desire to revolutionize and integrate new payment technology into the dynamic monetary systems to spur a paradigm shift seemed to have taken root earlier than necessary. What transpired in the boardrooms of the European central bank, noticing a threat to its monopolistic dominance over the money supply, domesticated monetary faux pas by regulation. E-money, seen then as a process of de-materialization, is yet to pick substantial ground due hampered progressive market forces. Even though the Directives were relatively straightforward in themselves, they lacked clear cut interactive centers. Defining e-money institutions as credit institutions overstepped the boundary line of categorization. Again, a neutralized playing field and cross-border trade promotion requires an amendment to the definition of e-money and a review of the waiver regime. Whatever route adopted henceforth, it is evident that a harmonized e-money framework fitted with business fostering capability guided by even prudential checks is of utmost importance for the technology’s future prospects as well as for a coherent financial service sector. 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