Electronic Money

Reviewed by Vishnu | Updated on Aug 27, 2020

Introduction

Electronic money is referred to as the form of currency that is electronically stored in devices, such as the banking computer systems. Unlike the decentralised cryptocurrency, electronic money is backed by a fiat currency; meaning they are regulated by a central authority.

What is Electronic Money?

Over the last couple of decades, the essence of electronic money can be witnessed in various economies, including in India. It was not long ago that the Government of India announced demonetisation of its currencies to make the nation a cashless economy.

Electronic money a.k.a e-money can be transferred through smart cards (credit or debit cards), smartphones, and computer systems, among others.

In order to facilitate transactions from bank accounts, financial firms and banks sign deals with e-money networking processors to give customers access to smart cards with which electronic transactions will be possible.

Also, with most e-commerce platforms allowing e-money transactions, consumers can now shop for almost the goods and services available online.

Why is Electronic Money Important?

The Reserve Bank of India (RBI) regulates the field of electronic money under the Payment and Settlement System Act (PPS Act) 2007 in India. The act allows banks and financial institutions to issue pre-paid payment instruments in India once the regulatory authority has authorised the use of such instruments.

Thanks to significant advancements in the field of technology; digital transactions through smart cards, digital wallets, and mobile wallets have been picking up among consumers.

Also, since the announcement of demonetisation in India, the use of physical currency for such transactions are also on the decline. If regulated properly, the use of electronic money has a huge potential to promote cashless transactions in the country.

However, electronic money is often criticised for its risks and vulnerabilities. Since the transactions are carried out through computer systems, there can be instances where the electronic transaction may not be carried out due to a system error.

Also, as electronic transactions do not require physical verification to transfer from one individual to another, chances of fraudulent activities are high.