Rules introduced on Friday to regulate the digital cash industry should help protect consumers against ill-conceived e-money operations, but lawyers warn they could also restrict the market to all but the biggest companies.
The rules, imposed by the Treasury and the Financial Services Authority, were introduced to open up the market to new entrants from outside the financial service industry, such as mobile operators and ISPs, but are so rigorous that they are likely to bar all but the biggest companies.
Among the new rules are measures that dictate that any company must have FSA authorisation; must not make loans, grant credit or pay any form of interest if the company is not a bank; must maintain minimum levels of liquidity (£615,000 or 2 percent of outstanding e-money); must be able to fully redeem all e-money issued; and must comply with money laundering regulations and stop unauthorised creation, transfer or redemption of e-money. Key people in any e-money organisation will have to be approved by the FSA as "fit and proper", and the organisation will have to create proper procedures for dealing with customer complaints.
Furthermore, each individual purse limit may not exceed 250 euros (£150).
But however good the intentions, the rules could see fewer companies entering the market, according to city law firm Olswang. "In practice, the rigours of the new regime and the emergence of alternative methods of making micropayments may deter all but the biggest players from branching out into the issue of e-money," the firm said in an advisory note. In the wake of failed schemes, banks are looking at other methods of enabling payments: Earlier this week online bank Egg unveiled a service that lets its customers make payments of up to £200 to anyone with Web access, an email address and a bank account.
"Any businesses considering an e-money scheme must consider carefully... whether it can implement the technological and operational systems necessary to keep within the constraints," said Olswang.
Companies will be able to obtain a waiver if the e-money they issue does not exceed a certain amount or their customers are limited by number or by area -- such as on campuses -- but this waiver carries with it a cap of 150 euros (£90) per purse. "The waiver criteria are therefore of little help to the majority of would-be issuers," said Olswang.
The regulations are likely to be welcomed by consumers who have been stung by failed e-money companies in the past. In August 2001 Beenz.com ceased operations, and was dissolved several months later, leaving customers with worthless Beenz currency.
See Tech Update's Legal section for a full analysis of the new rules.