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The number of companies providing e-money services has more than doubled since 2013.
Research by financial services regulatory consultancy Bovill found that the number of providers of electronic money – where money is stored electronically on online payment accounts or pre-paid cards, dubbed e-money – has risen from 38 in 2013 to 79 by the end of 2015.
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This number has been on the rise over the past few years as consumer confidence in alternative payments methods has increased.
“This is a fast-moving and innovative sector. We expect the number of authorised firms to continue to grow at a rapid pace,” said Gillian Roche-Saunders, head of venture finance at Bovill.
“UK consumers and businesses are increasingly comfortable with the idea of a cashless economy, in which they might not be able to physically see or access money. More are embracing pre-paid cards, contactless and mobile payment systems for ease of use, efficiency and enhanced security.”
E-money can also refer to money stored magnetically or through a mobile payments system. Roche-Saunders predicts this increase in pre-paid cards in particular is a bid from consumers to avoid debt, which they could run into as a result of using traditional credit cards.
“Pre-paid cards are an increasingly attractive option for consumers who may not feel secure using a traditional credit or debit card online, for instance. They also work well where a consumer may not be able to obtain a conventional credit card or might not want to risk running up substantial debts on one,” she said.
Alternatives to cash have been on the rise for a number of years, with contactless card payments clocking up £1bn in November 2015 alone and predictions that smartphone payments will exceed card payments by 2020.
Online businesses drive use of e-money
An increase in online businesses has also driven this growth, especially in e-money, as startups and crowd funding platforms use third-party e-money providers to manage online payments and wallets.
However, these e-money providers must be registered with the Financial Conduct Authority (FCA) under the Electronic Money Regulations 2011, ensuring consumers are safe from fraud or theft.
“The regulatory background is complex and e-money providers need to ensure that systems, processes and controls are tight to ensure a high level of consumer protection. The FCA is not afraid to place these businesses under a microscope,” said Roche-Saunders.
Many are concerned that this increase in alternative payments methods will lead to the death of the traditional bank, but only if they fail to innovate and adapt to market trends and consumer needs.
UK financial services regulator are doing their best to encourage innovation in the industry, and the Prudential Regulation Authority and the FCA recently launched a New Bank Startup Unit to help young banks get off the ground.