Alternate names: E-money
If you paid for your morning coffee with a debit card, electronic money was transferred from your account to the merchant’s account. If you paid with a credit card, funds were transferred from the credit issuer to the merchant. When you get paid via direct deposit, you receive funds via an EFT.
How Does Electronic Money Work?
Electronic money can be held on cards, devices, or a server. E-money is not a separate currency and is overseen by the same central authority in charge of fiat currency. It is widely used in developed economies and is increasingly being adopted in developing economies. A good way to understand how e-money works is to put it in the context of an electronic funds transfer (EFT). An EFT is a broad term for a payment processed electronically where e-money is digitally transferred from one account to another. The electronic funds transferred are backed by money in your account. You can make an EFT between two banks via an automated clearing house (ACH) network. EFTs are a critical part of everyday banking and the vehicle through which government programs such as Social Security, Supplemental Security Income, and the Department of Veterans Affairs disburse money to individuals. In a wider sense, electronic money can be used to empower citizens who do not have access to safe, secure, and affordable financial services. One way to do this is to pair e-money with mobile devices. The Groupe Speciale Mobile Association (GSMA) Mobile Money Program aims to accelerate the mobile e-money ecosystem to underserved populations—particularly the 2 billion unbanked people across the globe. In the program, mobile money users don’t need a bank account and can use peer-to-peer transactions as a substitute for cash.
Notable Happenings
In a way, electronic money has been around for more than 100 years. In 1871, Western Union developed the business behind EFTs. Money could be wired over the telegraph from one place to another without the physical exchange of cash. For a fee, a person in one location would deposit money with Western Union and the receiver could pick the money up in another Western Union location. However, this isn’t the same technology used in electronic money transfers we know today. Another advancement in technology came in 1972 when the first automated clearinghouse (ACH) association was formed to handle electronic payments. This technology came hand-in-hand with the magnetic stripe card, which computerized the process of individuals transacting with merchants. This information was transmitted through networks owned by merchants and banks. Consumers didn’t see it until the closing statement of their credit or bank card arrived in the mail. The internet changed much about the process. Electronic money became more readily available for the individual to see, control, spend, bank, and more. Though money had been processed electronically for decades, the digital transformation brought faster and more efficient e-commerce transactions.
Electronic Money vs. Cryptocurrency
Electronic money is not a cryptocurrency (like Bitcoin). Cryptocurrencies have many features that distinguish them from electronic money:
