Electronic money law set to shake up banking industry

The EC has given the go-ahead for non-banks to issue electronic money payments. Nick Huber reports

The EC has given the go-ahead for non-banks to issue electronic money payments. Nick Huber reports

A European Commission directive allowing mobile operators to become virtual banks is set to throw the financial services market wide open.

You could forgive IT managers in the UK banking sector for not having an intimate knowledge of EC directive 2000/46. But closer examination reveals far-reaching business and IT implications for high-street banks.

The directive will allow non-banks to become electronic money institutions from as early as summer 2002. They will be able to issue payments in electronic money - in effect, telecoms providers could become virtual banks.

The directive is technology-neutral and is not specifically aimed at benefiting any one industry. However, the smart money is betting that telecoms companies will take advantage of the directive and move into the virtual payments area.

Many of the telecoms providers are already well versed in providing mobile commerce services based on micro payments.

Last week, for example, Vodafone signed an agreement worth more than £6m with e-commerce supplier Brokat Technologies to provide its customers with secure mobile payment capabilities. The telecoms giants also have the advantage of sprawling and sophisticated networks and IT systems which could easily support extensive payment services.

Both Orange and Vodafone have been tipped as the companies most likely to offer virtual banking services. Both have refused to comment on speculation that they will go head-to-head with the traditional banks. A Vodafone spokeswoman said that it would be premature to talk about the directive.

Not surprisingly, the banks have already played down the threat from the telecoms providers, arguing that there is only a limited market for pure virtual banking.

A spokeswoman for Barclays said, "The banking industry has opened up quite considerably over the past few years with, for example, supermarkets providing services. This is another area of industry that can come into banking.

"But at Barclays we have discovered that customers like the multi-channel approach, such as mobile phones, face-to-face and Internet banking," she added.

"Two million of our customers use our online banking but most want to be able to pop into their local branch on a Saturday when out shopping. The pure play virtual banks have only had limited success."

The argument is a solid one, but the banks should not be too complacent, according to industry analysts.

On the plus side for the telecoms providers is their wealth of experience in billing customers as well as having the systems to support virtual banking. And mobile operators also have another advantage in their vast networks.

"It's reasonably easy for telecoms firms to do the transaction [for virtual banking]," said Graham Taylor, vice-president at IT analyst Gartner.

"They would have to present different types of transactions and billing systems for different products, but I don't imagine that's a problem."

The IT challenge for the telecoms giants is likely to be in taking on new roles and risks if they move into virtual banking.

These potentially more difficult areas include dealing with disputes between the customer and the merchant about bills, handling high-value transactions and integrating their IT systems with those of merchants.

Telecoms companies could be ideally suited to handle only low-value transactions less than $10 (£6) for pre-pay services, Taylor said. But he added that credit card companies, such as Visa, may not think payments below this level are worthwhile.

"One possibility is that telecoms companies could become virtual banks but only offer pre-pay services for cashless facilities," Taylor said. "For example, you could buy a coffee and a newspaper by zapping money from a phone vendor. There might be a limit on what the telecoms companies might feel they are able to handle."

Taylor pointed to the experience of US telecoms company AT&T which started to build up a credit card business about 10 years ago only to pull out of the market later because of the level of bad debts accrued by the business. Much also depends on whether the telecoms firms are content to use the Visa and Mastercard credit card networks for routing the transactions, or whether they decide to go it alone and use their own networks.

Whatever the telecoms leaders decide to do they will have to pay close attention to security to gain the trust of the public and business.

However, there is also another scenario, according to industry observers. This would see telecoms firms working in partnership with the banks by supplying micro payments in the front end of the new virtual banks. Under this arrangement, banks could use their vast back-office systems for processing transactions and transferring money from the back office to the Web.

The EC directive is in no danger of sidelining UK banks but it does look set to shake up the technology underlying the industry. With their networks and billing systems, the main telecoms companies are well placed to become virtual banks, particularly if they offer micro-payment services.

Although the telecoms multinationals have refused to comment on the potential in virtual payment services, the banking industry cannot afford to ignore the threat from the telecoms sector. IT managers need to start planning whether to work with or against the new kids on the block.

EC says: "Show me the e-money"

  • All member states should bring laws into force to allow electronic money institutions to operate by May 2002

  • Electronic money can be considered a surrogate for coins and bank notes. It can be stored on an electronic device such as a chip card or computer memory. However, the electronic money is viewed as different to the deposit-taking activities of banks generally intended for payments of limited amounts

  • A single licence will be recognised throughout the European Union. The directive introduces a "technology neutral" framework for electronic money. A separate supervisory regime for electronic money will be introduced.

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