Thursday, October 17, 2019 / 05:34 PM / Content & Header Image from Meristem Research Fintech Column
How have you come to understand the word "money"? Are you on the bandwagon of paper money only and nothing else or have you found a way to digress into the various forms of money? In terms of money in the bank, money tied down in investment, money placed in an electronic wallet and, for the most adventurous of us all, cryptocurrencies? Whichever you have grown to develop an interest for, it goes without mentioning that for any form you have chosen, you expect that the value of money represented will be able to acquire an item of value for you; now or in the future.
In this commentary, we decide to digress into a growing nature of e-money; money in electronic wallets owned by non-bank institutions such as AliPay, WeChatPay, ApplePay and, in Nigeria, OPay amongst a few. For many, the need to differentiate the nature of e-money from money in the bank doesn't resonate.
However, as alike as they seem, their difference lies in the element of trust on which the safety of the depositors' fund borders on. With money in the banks, the depositor is given a certain reassurance of the safety of his/her funds owing to the backing which the government, through the central banks, gives. Also, in most countries, public deposits are insured by the national deposit insurance commission, which ensures that in the event of systemic risk, public deposits are protected to a certain limit.
The existence of these risk measures, as well as the regulations the banks are required to abide by, has groomed the level of trust the public attributes to the bank. However, with e-Money, the various levels of trust elements instituted for the banks have not been required by the nonbank institution.
Rather, e-money has evolved through the level of trust and familiarity which users have come to attribute to these corporate organisations. Due to the comparable lower standard of safety, the stability of the money which flows from the ability to get the face value of the currency at redemption is hampered. Hence, e-Money increases the nature of a run-risk and a systemic risk in its place of use; which all flows from the heightened nature of liquidity, default, market and cyber risk attributed to the currency. Despite these risk elements, e-money, through innovation, is breaking grounds in the banking space and giving banks a run for their money, owing to its ease of use, convenience, user-friendliness and ability to facilitate cross-border transactions. This has fast-tracked the acceptability and adoption of e-money platforms across economies. As highlighted in our FinTech Column Vol.2, transactions via these e-wallets account for 9% of total non-cash transactions. Hence, the revolution has come and while the public calls on the regulators to put in systems to minimize the risk, we believe that these organisations can adopt some structures to increase the perceived and actual stability of their currency.
Firstly, we recommend that users'/depositors' funds be put in safe and liquid assets such as risk-free government bonds and bank deposits, to help preserve the value of the customer's fund. Also, since these funds are now backed by assets, the organisations should ensure that the assets are not encumbered, that is, used as collateral for loans. If the assets are encumbered, it means that creditors can lay claims to users'/depositors' fund if the organisation defaults.
Lastly, these monies are in the custody of the organisation, hence we recommend the establishment of a Trust Fund that ensures the organisation continues to use money in the best interest of the depositor and that there is no conflict of interest in the organisations need and the safety of the depositors' funds.