Over the last several years, the payments ecosystem has experienced a surge of new entrants that seek to capitalize on the continued shift to electronic payments. Most are non-traditional financial services providers (such as fintechs, payment specialists, consumer product companies and media firms), introducing innovative products and services to enhance existing payment processes, address underserved areas or improve customer experiences. However, many of these entrants have faced challenges implementing solutions in the US due to the need to rely on third-party partnerships to bring their offerings to market.
In the US, card network rules require an entity to be a financial institution and have FDIC insurance to become a principal member and issue general purpose payment cards. These rules have presented challenges for some payment providers in quickly launching card-based products. The investment and scale needed to be a self-issuer in the US are significant and partnering with traditional financial institutions can add additional infrastructure, regulations, compliance oversight and costs.
In Europe, however, the Financial Conduct Authority has made it easier for non-traditional financial services providers to self-issue products and services by offering e-money licenses. E-money licenses provide a “bank lite” charter that allows companies to store monetary value electronically; customers can then use their stored electronic funds to make payments without necessarily involving a bank account. In parallel, the payment networks have granted full principal membership to companies holding e-money licenses, enabling them to issue physical cards tied to e-money funds. As a result, several companies have obtained both e-money licenses and principal network membership to eliminate the reliance on third-party partnerships, reduce costs and increase speed to market. Recent examples include FairFX, WEX and Facebook (Figure 1).
Three E-money Use Examples
While this strategy is relatively recent, the implications are far-reaching. With less regulatory burden and compliance oversight, the barrier to enter the payment ecosystem is significantly lower. Many of the companies exploring e-money strategies are more agile than traditional financial institutions, and their reliance on partnerships will no longer impede their speed to market.
The creation of e-money licenses coupled with principal network membership may be advantageous for card networks. The model expands the number of network participants and potential payments volume, while providing consumers and businesses with enhanced products and services not offered by legacy players. There are risks associated with expanding the base of market participants, however, and data security is a primary concern. Protecting cardholder data is paramount given the systemic and business risks involved. Traditional financial institutions invest significant resources to maintain necessary information/data security policies and procedures; the security standards for companies with e-money licenses may not always be as robust, as illustrated by some notable public examples.
It’s unclear whether the US will follow Europe and make it easier for non-traditional payment providers to self-issue cards. Fintechs have been eager to obtain bank charters as a means of offering a broader scope of products and services directly to consumers and businesses without reliance on third parties. The U.S. Office of the Controller of the Currency and FDIC continue to evaluate requests but have yet to approve applications.4 However, banking regulators of seven US states have agreed to simplify the way fintech companies can apply for licenses in a bid to make it easier for businesses to offer their services nationwide.5 Key to all of these trends will be balancing promotion of payments innovation for consumers and businesses with ensuring continued safety and soundness for the payments systems.
1Finextra.com, FairFX gains e-money licence through acquisition of Q Money, 1/20/2017
2Wex Press Release, WEX Virtual Payments Secures E-Money License and Becomes Principal Member of Mastercard in Europe, 8/30/2017
3TechCrunch, Facebook just secured an e-money license in Ireland, paving the way for Messenger payments in Europe, 12/7/2016
4Reuters, U.S. banking regulator not ready for fintech charter applications, 9/13/2017
5The Wall Street Journal, Seven States Team Up on Fintech Licenses, 2/6/2018