A woman in Tokyo displays an "e-money" card and a portable kit to show its value (Getty)
Show Hide image

Special Interview Feature

Why the future of money will be “pre-paid”

Peter Howitt of the Gibraltar E-Money Association says “e-money” transactions have the power to disrupt traditional banking and even reduce economic exclusion

New Statesman: What exactly is "e-money"?

Peter Howitt: Electronic money, or “e-money”, largely describes the alternative payment products to bank accounts and credit and debit cards. One of the most notable new entrants in this industry is Facebook.

The term “e-money” itself is somewhat of a misnomer, since it suggests that it is an alternative to normal money, when in fact it is merely another form of regulated payment service that involves the use of fiat currencies. The term was invented in Europe for devices that stored value and to distinguish it from existing banking accounts and card devices (such as a debit or credit card). Nowadays, most e-money is linked to a payment account in the name of the customer, and so the payment device itself is usually less relevant.

It is also fair to say that use of the term “e-money” has led to some confusion with virtual currencies such as Bitcoin, which are not currently fully-regulated and that can (or can attempt to) compete with fiat currencies. In North America, e-money is usually called “prepaid”, which is actually a more accurate term for reflecting how the process works: by pre-loading funds onto a card or online account for use in subsequent payment transactions (fund now, buy later) rather than, say, the use of credit (buy now, fund later). 

E-money is issued by authorised financial institutions who exchange payments received from customers into a “regulated liability” (in other words, an IOU) that enables those customers to make transactions (card purchases, ATM withdrawals, and online payment transfers).

NS: What makes e-money accounts different from a normal bank account?

PH: From a legal perspective I am afraid it is too complex an issue for such a short overview, particularly because prepaid products can be provided by both banks and e-money institutions. In many cases the differences for the customer are minimal. Prepaid products are used in an increasingly wide range of circumstances that relies upon the existing banking system, and can be complimentary to banking products. Yet it is also a disruptive new business industry. Why? Because of its strong technological focus and adaptability. The industry’s relative youth means e-money issuers are often more willing and able to adapt their relatively new business models and operational structures to meet the demands of fast-changing business and consumer behaviours.

NS: How big is the industry globally? 

PH: A 2012 MasterCard report estimated that the prepaid card industry is expected to reach $822bn globally by 2017. However, this figure did not include Near Field Communications (NFC) transactions, the contactless payment technology available on mobile phone, or other transactions that are not linked to a physical card. That means the estimate is significantly below the total potential prepaid market opportunity. In addition, it did not consider the use of prepaid for business-to-business payment transfers, which is a multi-trillion dollar a year sector.

NS: What impact has e-money had on the way that people trade and do business? 

PH: E-money is now a significant fixture in general consumer spending. It’s also being used for other kinds of transactions, such as corporate travel and expenses, payroll, healthcare and insurance payments, and even government cross-border money remittance. Today we use e-money in conjunction with a range of devices, including physical cards, mobile phones and other NFC devices, online accounts and even wearable technology.

We’ve seen major impacts in the speed of transaction making and in the range of payment options open to businesses, government and consumers. Another less widely know, but equally important impact of e-money is that it has enabled the greater inclusion within our economies of many people around the world who would not otherwise be able to have access to the banking system. When you are relatively wealthy and well-educated, it’s all too easy to forget that billions of people face challenges when seeking to makes payments other than with cash. As an alternative to traditional banking, e-money can help support the under-served.

NS: How big is the industry in Gib? 

PH: The industry in Gibraltar is represented by the Gibraltar E-Money Association (GEMA), a not-for-profit that was started in 2012. We have four local issuers (The Bancorp, IDT Finance, Payoneer EU and Wave Crest) and two other GEMA members (paysafecard and Ramparts) that have multi-national clients and projects in Europe and worldwide. In terms of local staff, it is still small in absolute terms (issuers employ less than 200 people in Gibraltar). However, in a territory with a total population of only 30,000 it is fast becoming an important part of the local economy.

NS: What are the biggest challenges for businesses in the e-money industry today? Are there any problems with fraud, money laundering or other criminal activity? 

PH: Regulatory uncertainty and costs, particularly in a cross-border context, as well as the political antipathy and resistance that usually arises from being an industry that disrupts traditional banking structures and national financial infrastructures. In addition, the model tends to require a degree of scale to achieve commercial success. Regarding fraud and criminality, in the opinion of the local industry these problems are no worse than those that exist in the traditional banking industry (and much better than the alternative cash based society). In fact, in many cases the problems are smaller (because the payment volumes are smaller) but more diversified than those that exist with pure banking products, and these present different challenges that also require innovative technologies and cost efficient solutions.

To give an example, customer identification and due diligence requirements were born in a traditional world that involved much more reliance on face-to-face transactions and inter-personal relationships. In this newer industry, the requirements to manage anti-money-laundering and terrorist risk, fraud and other issues requires the use of new technologies to help identify customers and manage transaction risk. It’s a very interesting area. 

NS: What does the future of e-money look like? 

PH: The future of e-money is already here. E-money/pre-paid, whatever term you prefer, is fast becoming the normal way to make payments for the majority of people in the world. I also expect prepaid to overtake credit and bank debit transactions (by payment volume) for consumers within the next 15 years.  The future for GEMA members looks bright. Also, keep an eye on the major technology giants like Facebook, Apple and Google who trying to move into this space and also mobile companies like Vodafone who have had major success with their M-PESA service; it’s no coincidence that we are seeing increasing interest in this area from a wide range of heavyweight operators from different industries.

Peter Howitt is Secretary for the Gibraltar E-Money Association (GEMA) and founder of Ramparts European Law Firm


Photo: Getty
Show Hide image


Gibraltar - impact of Brexit

Last week our editor took a general overview of some of the scenarios for Gibraltar if Britain were to leave the Euro. This week, as the atmosphere in the British Conservative Party becomes ever more toxic, Michael Castiel, partner at Hassans lawyers on the Rock, goes into more detail (this piece written before the Iain Duncan Smith resignation and subsequent arguments happened).

However unlikely it may prove, the prospect of Britain's withdrawal from the EU sends shivers through Gibraltar's financial services, gaming and tourism industries, which are at the core of Gibraltar’s economy. For, if Britain leaves the EU, Gibraltar goes too, and, should Brexit occur, it is Gibraltar’s relationship with the UK that as in the past, largely will shape Gibraltar's future.

Gibraltar joined the European Union in 1973 as part of the UK. While rights to freedom of services across borders of EU member states apply between Gibraltar and the rest of the EU, because Gibraltar is not a separate member state (and is in fact part of the UK Member State) those rights do not apply between Gibraltar and the UK. Instead a bilateral agreement, formalised almost two decades ago, gives Gibraltar's financial service companies the equivalent EU passporting rights into the UK. Accordingly and pursuant to such agreement, where EU rights in banking, insurance and other financial services are concerned, the UK treats Gibraltar as if it is a separate member state.

This reliance on the special relationship with the UK is recognised by both the Government and the Opposition in Gibraltar, and when the territory (which in this instance as part of the UK electorate) goes to the polls on 23 June, the vote to remain in the EU is likely to be overwhelming. This may have symbolic significance but realistically seems unlikely to influence the outcome. In actual terms, although some non-EU jurisdictions use Gibraltar and its EU passporting rights as a stepping stone into Europe, almost 80% of Gibraltar’s business dealings are with the UK.

But whether or not Britain maintains the 'special relationship' with Gibraltar, if Brexit becomes a reality, other factors will come into play, with the ever-present Spanish Government’s historic sovereignty claim over Gibraltar topping the list.

Recently Spain's caretaker Foreign Minister Jose Maria Margallo went on record that if the UK voted to leave the EU he would immediately 'raise with the UK the question of Gibraltar.' If this was to come about it could take one or more of several different forms, ranging from a complete closure of the border between Spain and Gibraltar, demanding that Gibraltar passport-holders obtain costly visas to visit or transit Spain, imposing more stringent border controls, or a frontier toll on motorists driving into or out of Gibraltar. The latter idea was in fact floated by the Spanish Government three years ago, but dropped when the EU Commission indicated that any such toll would contravene EU law.

Here, again, imponderables come into play, for much will depend on which political parties will form the next Spanish government. A Spanish government headed by the right wing PP party is likely to take a less accommodating attitude towards Gibraltar (the Foreign Minister having recently indicated that in case of Brexit the Spanish Government may opportunistically push once again for a joint sovereignty deal with the UK over Gibraltar) whereas a left of centre coalition will likely adopt a more pragmatic and cooperative relationship with Gibraltar in the event of EU exit.

The most significant changes to Gibraltar's post-Brexit operation as an international finance centre are likely to be in the sphere of tax, and while Gibraltar has always met its obligations in relation to the relevant EU rules and Directives, it has also been slightly uncomfortable with aspects of the EU's moves towards harmonisation of corporate taxes across member states.

Although it was formed as a free market alliance, since its inception fiscal matters have been at the root of the EU, but Gibraltar's 'special relationship' with Britain has allowed considerable latitude in relation to what taxes it imposes or those it doesn't. However, as is the case with other member states, Gibraltar has increasingly found in recent years its fiscal sovereignty eroded and its latitude on tax matters severely curtailed.

As in Britain, Gibraltar has benefitted from several EU Directives introduced to harmonise and support the freedom of establishment, particularly the Parent-Subsidiary Directive which prohibits withholding taxes on cross-border intra-group interest dividend and royalty payments made within the EU.

As a stepping stone for foreign direct investment, should Brexit come about EU subsidiaries could no longer rely on these Directives to allow tax-free dividend or interest payments to their holding companies based in Gibraltar. In the case of the UK, bilateral double tax treaties will no doubt mitigate the impact of the non-application of any tax related Directives. Gibraltar, however, is not currently a party to any bilateral double tax treaties. Accordingly, Gibraltar would either have to seek from the UK the extension of all or some of the UK’s bilateral tax treaties to Gibraltar (subject of course to the agreement by the relevant counterparties) or it would need to negotiate its own network of bilateral double tax treaties with a whole series of EU and non EU Member States. To say the least, neither of these options would be straightforward to implement at short notice and would need the wholehearted support of the British Government

Whilst Gibraltar’s economy is likely to be adversely affected should Brexit occur, there may be some potential benefits. An EU exit would result in fewer regulations and possibly may provide Gibraltar with greater exposure to emerging economies.

From a tax perspective, an EU exit would probably enable Gibraltar to introduce tax rules and incentives that are contrary to EU tax laws and would provide the Gibraltar Government more freedom to adopt competitive tax regimes that may be considered contrary to EU state aid rules. How possible or effective any such strategy would be is doubtful given the OECD driven anti-tax avoidance climate affecting all reputable jurisdictions whether within or outside the EU.

In this as well as other possible change much will hinge on any post-Brexit relationship with the UK - an issue which the Gibraltar Government addressed recently in a paper sent to Westminster's Foreign Affairs Committee. It stressed not only that 'EU membership has been an important factor in the development of Gibraltar’s economy' but also the importance of 'clarity as to the rights the British Government will protect and defend for Gibraltar in the context of its own negotiations.'