Promoting Financial Inclusion by Encouraging the Payment of the Interest on E-Money

Abstract

Funds equal to the amount of e-money issued are typically held on trust with commercial banks, and called the float. This paper analyses the policy options of a central bank in relation to the interest earned on the float. Despite e money being an established payment method, many regulators still find the issue of whether to permit the payment of interest on it to customers troubling. The prohibition of, or failure to encourage, such payments is retarding the growth of many DFS ecosystems. Regulators have far more policy options than they typically appreciate in this regard.

As we explain, allowing interest payments does not make e-money equivalent to bank deposits because interest payments are not a defining feature of a bank deposit. Furthermore, allowing interest payments does not increase risks when, as is common, e-money providers are required to hold the float on trust with a prudentially regulated bank, or are only allowed to invest the float in very limited low-risk options. Furthermore, market conduct regulation can ensure adequate disclosure to customers such that customers are well aware of the risks of e-money. We present a number of policy approaches to promote the payment of interest to either providers or customers. Encouraging the payment of interest will promote digital payments and thereby improve financial inclusion and lift economic growth.

Keywords: e-money, commercial banks, central bank, payment of interest, regulators, market conduct regulation