E-money: what you need to know
ICAEW has created an e-money helpsheet to help businesses and their advisers understand whether such accounts are appropriate for their needs.
Small and medium-sized businesses and sole traders are feeling the constraints around opening a business bank account with a traditional bank, whether it be the fees, the structure of the business or the more limited number of providers compared to personal accounts. More recent entrants to the market include Electronic Money Institutions (EMIs), which offer business banking services (not a business bank account) via e-money accounts. These offerings may be the solution for some businesses, but it is important to understand whether they will meet your needs.
What is e-money?
E-money (electronic money) is money typically stored in a user’s account which can be accessed using a card or an electronic device, such as a mobile phone, and can be used to pay for goods and services. More commonly referred to as “digital” or “electronic wallets”, it also includes any “magnetically stored monetary value", such as payment cards and even computer hard drives.
EMIs are authorised and regulated by the Financial Conduct Authority (FCA) and can issue e-money and provide associated payment services, including transfers and foreign currency payments.
E-money business was previously associated with issuers who fell outside the scope of regulation because the pre-paid cards could only be used for a limited purpose, ie in a single retail chain.
Authorised Payment Institutions (APIs), which are similarly regulated by the FCA, can also undertake payment services such as money remittance and foreign currency transfers, but these firms cannot hold customer funds without holding a payment instruction for their onward transmission.
E-money, therefore, operates in some respects like a bank account. However, there are differences you need to be aware of when choosing whether such an account is appropriate for your needs.
How your money is held in an e-money account
Banks have permissions allowing them to take deposits from customers and use that money, including lending it on to borrowers and earning interest. The bank has to ensure that it retains sufficient liquidity for the customer to withdraw funds on request.
When an e-money firm receives money in exchange for issuing e-money, it must safeguard the money received and cannot lend it on. It can do this by segregating the money either into a special safeguarding account held separately from the firm’s own money, or investing it in secure, liquid low-risk assets which have been approved by the FCA and are held in a separate account by a custodian. Less commonly, the firm may hold an insurance policy or bank guarantee to safeguard the funds.
E-money firms have this limitation on using funds because of their lower capital requirements and lighter regulatory regime than apply to banks.
Why capital requirements are important
Capital requirements deter banks from taking too much risk and help ensure banks remain solvent in the event of shocks. Following the global financial crisis, capital requirements for banks were raised. E-Money firms are less tightly regulated, though recently the FCA has increased its supervision activity in this area. E-money firms are generally newer and, while growing in customer numbers, do not have a long track record. However, the more restricted business activities and rules around safeguarding mean that the capital requirements for these firms are less onerous than for banks.
Benefits of an e-money account
- Accounts from digital providers may have lower transaction fees, though you will pay more for cash withdrawals and deposits (with some providers charging £1-£3 per deposit, depending on the specific service)
- Access to some payment services that might not be available from a high street bank
- Innovative online and app-based banking features allowing easier account management
- Accounts can be opened very quickly
- Multi-currency accounts can be obtained more easily
- Accounts may interface with other services such as bookkeeping packages.
Limitations of an e-money account
- If your business handles cash and cheques, an e-money account may restrict or limit these transactions and it may be more appropriate to deposit and withdraw using a high street bank. Check arrangements first as some new banks only accept cheques and cash deposits in limited numbers (or via post office arrangements)
- Lack of lending and guarantee facilities including overdrafts and loans
- May be a cap on balances or number of transactions in a given time period
- Balances are not available for protection under the Financial Services Compensation Scheme (FSCS)
Note that some digital services may be available to customers of internet banks, or through the digital offerings from high street banks.
How is money protected in e-money accounts?
As noted above, money held for customers by e-money providers must be segregated in designated accounts that are held separately from the firm’s own funds so that, in the event of the firm failing, the administrator can distribute cash held promptly.
The FCA is putting in place additional requirements for EMIs around assurance of safeguarding arrangements so that users can have greater confidence in these firms. However, if an e-money firm failed, balances would not be eligible for compensation under the FSCS. Any money not returned through an administration process would be lost.
In contrast, if a bank fails, eligible customers are covered for up to £85,000 by the FSCS. This may be available to small business bank accounts and those business owners who operate via a limited company or LLP may claim separately for the business and any personal holdings they have with the bank. Sole traders would, however, be limited to one claim of £85,000.
If in doubt seek advice
ICAEW members, affiliates, ICAEW students and staff in eligible firms with member firm access can discuss their specific situation with the Technical Advisory Service on +44 (0)1908 248 250, via webchat.