The online space keeps setting new frontiers. We now have digital currencies or electronic money to make the world a global village.
What is Electronic Money?
Electronic money refers to currency electronically stored on electronic systems and digital databases. Unlike physical paper and coin money and is used to make it easier for users to transact electronically. However, the value of the electronic currency is backed by fiat currency.
The march towards electronic money features multiple forms of electronic payment methods like cryptocurrencies and virtual currencies. The latter is backed by government-issued fiat currencies, while the cryptocurrencies are not.
Other lesser-known forms of payment fall into other categories. In all cases of electronic currency, the point is to create a user-friendly payment service that can send funds in real-time to anyone, anywhere in the world.
Classification of Electronic Money
Electronic money is classified into broad categories, which later trickle down to other more specific classifications. The two primary categories are:
Hard
Hard electronic money refers to when e-money is used for irreversible transactions. The ones that are highly securitised and are more procedural in nature. These may include transactions drawn through the bank.
Soft
This is e-money used for reversible and flexible transactions. They offer more flexibility, and the users are allowed to manage their transactions even after the payment is processed, like cancelling the transaction or modifying aspects of the payment, like the price.
The changes can be made post-transaction within a defined period. Soft e-money may include transactions passed through payment mechanisms like PayTM, PayPal, and credit cards.
Features of Electronic Money
Just like physical paper, e-money has distinguishing traits that include the following features:
Store of value
Electronic money is a stored value just like a physical currency. The only difference is with electronic money. The value is stored electronically until the money is withdrawn physically.
It’s a medium of exchange
Electronic money is also a medium of exchange. It can be used to pay for goods or services in the same way physical currency is used.
Unit of account
Electronic money provides a common measure of the value of the goods or services being transacted in more or less the same that physical currency does.
Standard of deferred payment
Electronic money can be used to provide credit repayment at a future date and is therefore used as a means of deferred payment.
How Electronic Money Works
Electronic money presents new opportunities and new methods of transacting business. But being a relatively new method, you might struggle to understand how it operates.
Electronic money has become a medium for global transactions. Although it may be exchanged for fiat currency, distinguishing it from cryptocurrencies, e-money is most commonly used through electronic banking systems and monitored through electronic processing.
Considerations for E-money
There are a few considerations to have in mind when considering how electronic money works:
Currency in circulation
Electronic money can be held in multiple locations. Most individuals and businesses store their money with banks that provide electronic records of the cash on deposit. Also credit cards and digital wallets also allow users to deposit fiat currency for electronic money. The companies make money by charging a percentage of any amount withdrawn from accounts or converted from electronic money back to fiat currency.
Electronic payment processing
There’s a multitude of ways to process e-money. These include receiving pay cheques through direct deposits, moving money from one account to another via electronic fund transfer, or spending money with credit and debit cards.
Physical currency might still be useful in some situations, but its role is gradually diminishing. Most consumers and businesses believe electronic money is more secure and convenient because it cannot be misplaced. It is widely accepted by merchants nationwide.
Countries, the UK included, have established a robust network for transacting electronic money. This is mainly facilitated through payment processing networks like Pay iO, Visa and Mastercard.
Banks and other financial institutions partner with these electronic money networking processors to issue their customers cards that facilitate electronic transactions from banks to merchants.
E-money is easily transacted through e-commerce, letting customers conveniently shop for goods and services online.
Advantages of Electronic Money
E-money is taking over physical currency because of its unique benefits to institutions, consumers and businesses. Such benefits include:
More flexibility and convenience
Using electronic money adds flexibility and convenience to the table. Transactions can be made from anywhere in the world at any time with just one click of a button. Moreover, it takes away the hassle involved with the physical delivery of payments.
Historical records
Using electronic money stores a digital historical record of every transaction you make. It is easier to trace back payments, helps make detailed expenditure reports, and aids with budgeting.
Discourages fraudulent activities
Because electronic money makes a detailed historical record of every transaction, it is easy to keep track of the transactions and trace them back through the economy. It enhances security and helps prevent fraudulent activities.
It’s instant
Electronic money makes payments and transactions more prompt. Transactions are completed in split seconds with the click of a button, and the payments are sent anywhere in the world. It removes the problem of physical delivery of payments, including long wait times and queues.
Increased security
The use of e-money has helped increase security. There are advanced security measures implemented to prevent the loss of personal information when transacting online. There are stringent verification measures that ensure the full authenticity of the transaction.
Disadvantages of Electronic Money
On the flip side, e-money has some downsides that need to be addressed to make this currency more effective.
First, for this currency to work, you need some infrastructure. The basics are a laptop, a smartphone and a stable internet connection.
Also, this type of currency is susceptible to security breaches and hacks. These breaches can compromise personal information and lead to loss of funds and money laundering.
The online space is also a hive of scams. The types of scams vary, including people pretending to be from certain organisations or banks convincing consumers to submit sensitive account details. Although security has come a long way, there is still concern about online scams.
