Electronic Money

What Is Electronic Money?

Electronic money, or what some people would call electronic wallets and digital wallets, is an electronic store of money that contains the value of a certain amount of money. It can be used to make payments or purchases.

This device is a prepaid instrument where the owner of the card/instrument should transfer or top up before using it. The value of e-money is backed by fiat currency. Because it may be exchanged for fiat currency, money distinguishes it from cryptocurrency.

Cryptocurrency

Cryptocurrency is virtual money that uses cryptography for a secure transaction. Cryptocurrencies do not have a central issuing or are not issued by any central authority.

Instead, they used decentralized networks to record transactions and issue new units based on blockchain technology (a distributed ledger powered by multiple networks of computers), also known as mining crypto.

One cryptocurrency that everyone knows is bitcoin; it was made in 2008 by Satoshi Nakamoto and made public in 2009. Right after that, more cryptocurrencies emerged, such as XRP, Ethereum, etc.

These coins are available for every transaction, although each cryptocurrency has its function.

Cryptocurrencies are not utilized for retail exchanges. Some e-commerce accepts cryptocurrencies, but most of them don't accept them.

Binance is one of the most popular applications that trade cryptocurrencies easily.

You could buy cryptocurrencies using a crypto platform, or you could make your coin. However, because the value of cryptocurrencies soars high, people use cryptocurrencies for trading instruments. They could also be used for cross-border transfers.

There are hundreds of cryptos out there, and you can trade your crypto just from your phone. These are some of the examples of the most common coins that are on the market.

1. Bitcoin (BTC)
2. Ethereum (ETH)
3. Binance coin (BNB)
4. SOLANA (SOL)
5. XRP (XRP)
6. Cardano (ADA)
7. Polkadot (DOT)
8. Terra (LUNA)
9. Avalanche (AVAX)
10. Dogecoin (DOGE)

Many alternative cryptocurrencies, known as "altcoins," have emerged in the aftermath of Bitcoin's popularity. Some are Bitcoin clones or forks, while others are entirely new currencies.

Solana, Litecoin, Ethereum, Cardano, and EOS are among them. By November 2021, the entire value of all cryptocurrencies in existence had surpassed $2.1 trillion, with Bitcoin accounting for roughly 41% of that total.

Blockchain in Cryptocurrency

Blockchain is a set of immutable ledgers that provides the process of the transaction and tracking of assets in a business network. For cryptocurrencies, using blockchain provides easier and trackable transactions.

Every transaction occurs, and each block contains data. The data block can track and record every information that you need.

The block data is connected to the previous and after blocks. This makes a sequence of the transaction that securely links each box and prevents any block from being inserted between two blocks.

Every new block must be verified, and that strengthens the previous block and the blockchain itself. This means that it is almost impossible to tamper with the blockchain and build a network that people can trust.

What is Fiat Currency (or Fiat Money)?

Fiat Currency or fiat money comes from the Latin word "fiat," which means "let it be done." It is a legal tender issued by a decree from the government and regulated by the government consequently.

Fiat currencies are the opposite of commodity money, as they are the type of money or asset that is not backed up by any commodities or underlying assets, such as gold and silver.

Because fiat money is not backed up by commodities, it could lose its value due to inflation Moreover; in case of hyperinflation, fiat money could immediately become useless.

For instance, in the first half of the year 1946, Hungary experienced a 13,600,000,000,000% rise in prices almost every 16 hours.

The government controls fiat money: it is the source of trust for its people. Furthermore, it acts as a medium for purchasing power and is also responsible for providing a better system.

However, if people are not willing to trust fiat money, it would become useless. The value of fiat money depends on the country's economic performance. Political stability is also a factor that determines the value of this money.

When the economy is worsening, and the country's politicians are not stable or trustworthy, this is going to affect the interest rate and lead to possible inflation.

Commodity Money

Commodity money is an item that has intrinsic value, which means the item has value even though it may not be used for a transaction. In some situations, like hyperinflation, people would use commodities for their daily transactions.

When tobacco, salt, coffee, seashells, and tea were used as money a few centuries ago, they were considered valuable. People would trade them because they were commonplace items. It began with seashells and progressed to salt, tobacco, and other items.

Even if nobody would accept it, the owner would still be able to use it for their personal use. Usually, the use and trust in commodities would be developed over the years. Although no one would accept it, it still has its alternative use.

The trust that comes from commodity money is from its rarity. As a matter of fact, commodities such as gold and silver are rare thing that makes them more valuable and increases their intrinsic value.

Farmers would produce large quantities of tobacco and salt, but the population would consume in equal size. So, using tobacco and salt was not effective, which is why the supply started self-regulating.

Electronic money can be hardware-based or software-based, depending on the technology used to store the money.

1. Hardware-Based Products

Hardware-based products, such as cards and chip cards, are physical instruments with hardware-based security features. In this device, money is either transferred, or the card is being top-up by the owner. The easiest and most popular examples are Debit cards, Credit cards, and Chip cards.

2. Software-based product 

Software-based products need a certain software that functions on personal devices, such as phones, tablets, or even computers.

To transfer money, the devices require an internet connection with the server that provides and controls the software. An example of this is PayPal, Apple Pay, Google Pay, or even an M-banking account on your phone.

3. Hardware and software-based mix

Mixing software and hardware-based products also exist. This is hardware and software working together to make it easier. For instance, NFCs on personal devices and ATMs.

Storing the money could be from transferring from an ATM, M-banking/E-banking account, scanning the card using NFC from your phone, or using a third party such as a top-up from a convenience store.

People should be aware of the tool's worth before utilizing it. Was it necessary to top it up again? The amount of value you require is then subtracted from the tool.

Examples

Let’s say someone has $10 on his e-money, and he needs to take the train that costs $1.30. When he scans his e-money, it is deducted for $1.30, meaning he has $8.70 left. This applies to software, hardware, or even mixed products.

This type of payment is global. In Japan, everyone uses e-money to go to the train station. Japan is known for its work ethic, and everyone knows how crowded and busy this country is, especially its train stations.

However, Japan introduced e-money in 2001: JR East’s prepaid train ticket (Suica) and JR West's IC Operating card (ICOCA) are examples of it. Both Suica and ICOCA are plastic cards with a built-in chip.

In addition, many types of electronic money are used in other train stations in Japan. For example, Kitana in the Hokkaido area. There’s also, Sugoca is used in the Kyusyu area, etc. Most electronic money is also used to pay for goods at convenience stores in Japan.

Singapore has also used this method as it is a small and dynamic country. Everyone is using e-money and even using NFCs on their smartphones. 

types of E-wallets

We have 4 types of E-wallets: 

1. Digital wallets

This type of E-wallets is a common use case. Digital wallets are a part of a central web platform operated by the wallet provider. Users can top up or withdraw money from their e-money. Popular examples are PayPal, Amazon Pay, and Apple Pay.

Some banks even provide financial plans or budgeting. This means the banks will alert us or notify us on how much we spent or if we spent too much. E-wallets has also become a staple for a lot of small business. 

2. Crypto Wallets

This form of e-wallet stores the public and private keys of a user. The key acts like a certificate of ownership for cryptocurrencies, where they are stored on the blockchain. Sometimes cryptocurrencies operate offline, and they are stored on a USB or hard drive.

3. Mobile wallets

Although our phones have apps such as PayPal, Amazon Pay, or Apple Pay, those apps are a bit different from mobile wallets. Mobile wallets typically hold debit and credit card data and also can be used for payment. The data is stored on the device using the word “secure element.” 

Usually, banks would provide a card with a chip that we could use to pay for everything. Even though we can use those cards, phones with NFC (near-field communication) could also be used to pay merchants.

Mobile wallets could sync available funds that were used from the debit or credit card. Some wallets could even work offline just to check the balance the user has. 

Nonetheless, it does mean it only checks the remaining balance and sync when it’s online again. Nowadays, mobile wallets offer easier transactions for our bills. 

4. IoT based Wallets

Some use e-cash, while others use virtual currency. Some are built into wearables like watches, bracelets, and outerwear, while others run on fixed wallet-enabled devices like your smart fridge or your smart vehicle's PC.

Advantages of Electronic Money

Customers can make cashless payments for goods and services using cards, mobile phones, or the internet using electronic payment. It offers several benefits, including cost and time savings, higher sales, and lower transaction expenses.

Using e-money for a transactional purpose has some benefits, which are:

1. An easier transaction, no need to carry a lot of cash.
2. Could transfer globally.
3. The exact amount of change, no need to carry more coins or small cash.
4. Applicable in mass and fast frequency transactions, such as trains, subways, toll roads, convenience stores, or even fast food places.
5. History, what this means is people could track how much they spent.
6. Higher security. This means we won’t lose some small amounts of money, coins, or small changes. Or, in a debit/credit card, our information of values and transaction history is safe.
7. Cleaner and safer: in today's situations, such as the pandemic, everyone is trying to minimize direct transactions. Using e-money prevents cardholders to maximize touchless transactions, meaning the staff doesn't have to take the card; they could easily place the transaction themselves.

While actual currency is still useful in some circumstances, its importance has waned over time. Because electronic money cannot be misplaced and is widely recognized by retailers nationally, many consumers and companies believe it is more secure and convenient.

The financial sector has built a strong infrastructure for electronic money transactions, which is principally enabled by payment processing networks like Visa and Mastercard.

We can confidently state that e-wallet arrangements provide significantly greater security than traditional payment methods such as Visas and cash, but not all e-wallets provide the same level of protection.

Disadvantages of Electronic Money

Although using this tool is supposedly easy, fast, and precise, there is also some risk using this instrument that users might need to be careful with; they are:

1. If we lose the card, it is easy for some people to take it and use it for their personal use. Since this device is the same as cash, you really can’t claim that’s your money. Everyone could use it.
2. It depends on other devices. If someone wants to top up but doesn’t have any batteries or reception in their devices, that could be a problem. But the biggest problem here is when the server is lagging, or there is an error in the system.
3. Scams: Online scams are everywhere, so if they could hack and breach your account, you could be in trouble. In some cases, when people store their money in an atm, our money is automatically transferred to an unknown account.
4. Fake scanner. In some countries, someone applied some fake e-money scanners on the train station or even an atm. It means that wherever you go, you are not paying the companies or the governments. 

Data Processing in E-Wallets

Data Processing is an essential aspect of payment processing in e-wallet conditions. Legal authorities put incredible emphasis on data security, which powers e-wallet suppliers to conform to different information-related regulations. 

In addition, information isn't just a wellspring of difficulties for organizations; yet additionally can go about as an important asset for offering clients the best client experience.

1. Digitized User Information

This section contains a large variety of data that doesn't necessarily have a direct monetary value. To make an e-wallet, most countries require data that are mentioned below.

• Authentication Data: like username and password.
• Personal Data: every country and e-wallet providers require data such as names, age, gender, date of birth, etc.
• Communication data: To easily contact the user, banks or e-wallet providers would need emails or phone numbers from their users. This also enhances the verification process.
• Stored Payment Instruments. Accounts that could be used as a connection between e-wallets and banks.
• Historical Transaction Data: a reference for the user, e-wallet provider, and banks to track previous transactions.

2. Digital Assets

This section refers to all information that addresses monetary value. The most obvious thing would be e-money. E-wallets, as the name suggests, can store and use for digital payments. That is assuming the wallet provider has gained an e-money license to legally do such. 

Besides e-money, e-wallets can store different sorts of digital assets as well. Loyalty points, virtual currencies, or vouchers.  

A digital asset is anything that is uniquely recognized and stored digitally that organizations can use to realize value. Documents, audio, movies, logos, PowerPoint presentations, spreadsheets, and websites are all examples of digital assets.

3. Data Tracking

When we have data, we can analyze it to track transactions. In their role as a database, e-wallet payments are tracking users’ payment history. Financial authorities require e-wallet companies to store payment history data over some time.

Analyzing historical payment transactions also presents an opportunity for companies. If financial authorities gave permission, companies could query the data and assumptions about the purchasing behavior of users.

This means companies could help users assess their spending; they aim for potential users to use budgeting and saving functionalities to track customers' payment histories.

Summary 

Electronic money is the future. Not only are they a hardware and software medium that allow us to ease any form of transaction, but they also are an automatic financial service that comes in many shapes, from cards, webs, and apps on your from that can go online and offline.

Researched and authored by Ilhaam Prayudi | LinkedIn

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