ELECTRONIC MONEY: How It Works, Advantages and, Disadvantages


Electronic money refers to money that is present in bank computer systems and can be used to facilitate electronic transactions. Examples of e-money are bank deposits, electronic fund transfers, payment processors, and digital currencies.

How does electronic money work?

Electronic money is used for transactions worldwide. While it can be exchanged for fiat currency, electronic money is most commonly used through electronic banking systems and is monitored through electronic processing. Since only a fraction of the currency is used in physical form, the vast majority is held in bank vaults and is covered by central banks.

Types of electronic money

There are two types of electronic currency: hard electronic currency and soft electronic currency.

Hard electronic money

This type of electronic money does not allow cancellation of fees, meaning only irreversible transactions are supported. The advantage of this type is that the operating costs of the electronic currency system are reduced.

Soft electronic money

The soft electronic money enables payments to be canceled. Payment will only be canceled in the event of a dispute or fraud. The reversible payment time is 72 hours or more. Some examples of this type are Credit Card and Pay Pal.

Electronic money systems evolve every day. Some of the developments are: It can be used with secured credit cards for a variety of establishments, and the linked bank accounts can be used with the internet to exchange money with a secure micropayment system such as Pay Pal.

Features of electronic money

Like physical paper money, electronic money also has the following four functions:

Store of value: Like physical currency, electronic money is also a store of value. The only difference is that with electronic money, the value is stored electronically until it is physically withdrawn.

Medium of exchange: Electronic money is a medium of exchange. It is used to pay for the purchase of a good or service.

Unit of Account: Like paper money, electronic money provides a common measure of the value of the goods and/or services being processed.

Electronic Payment System

An electronic payment system is a way of handling or paying for goods and services through an electronic medium without the use of checks or cash. Also known as an electronic payment system or online payment system.

The electronic payment system has grown more and more in recent decades due to the increasing spread of internet banking and shopping. As the world continues to advance as technology advances, we can watch the rise of electronic payment systems and payment processing devices. As these grow, improve, and increasingly provide secure online payments, the percentage of check and cash transactions will decrease.

Electronic payment methods

One of the most popular online payment methods are credit and debit cards. There are also alternative payment methods such as bank transfers, electronic wallets, smart cards, or Bitcoin wallets (Bitcoin is the most popular cryptocurrency).

Electronic payment methods could be divided into two areas: credit payment systems and cash payment systems.

Loan payment system

  • Credit Card: A form of electronic payment system that requires the use of the card issued by a financial institution to the cardholder to make payments online or through an electronic device without the use of cash.
  • Electronic Wallet: A form of prepaid account that stores the user’s financial information, such as credit and debit card information, to facilitate an online transaction.
  • Smart Card: a plastic card with a microprocessor that can be loaded with funds for transactions; also known as a chip card.

Cash payment system

  • Direct Debit: A financial transaction in which the account holder instructs the bank to electronically withdraw a specified amount of money from their account in order to pay for goods or services.
  • E-Check: A digital version of a check on old paper. It is an electronic transfer from a bank account, usually a checking account, without the use of a check. Electronic cash is a form of the electronic payment system in which a certain amount of money is stored on a customer’s device and made available for online transactions.
  • Stored prepaid card: Card with a certain amount of money that can be used to carry out the transaction in the issuing shop. A typical example of stored prepaid cards is gift cards.

Electronic money advantages

Electronic money offers several benefits to the global economy, including:

  • Time-saving: transferring funds between virtual accounts usually takes a few minutes, while a bank or postal transfer can take several days. Plus, you won’t waste time standing in line at a bank or post office.
  • Spend Control: Even if someone is keen to control their expenses, they need to be patient enough to write down any minor expenses, which often make up a large portion of the total amount of expenses. The virtual account contains the history of all transactions that the store indicates and the amount spent. And you can check it out whenever you want. This advantage of the electronic payment system is very important in this case.
  • Greater flexibility and convenience: Using electronic money brings greater flexibility and convenience to the table. Transactions can be completed anytime, anywhere in the world with the click of a button. Eliminate the hassle and hassle of physically making payments.
  • Avoid Fraudulent Activity: Because electronic money provides a detailed historical record of every transaction made, it is very easy to trace transactions and trace them through the economy. Increase security and prevent fraudulent activities and misconduct.
  • Instant: The use of electronic money brings a kind of immediacy never before seen in business. Transactions can be completed in a fraction of a second with one click from virtually anywhere in the world. Eliminate problems with the physical delivery of payments, including long lines, waiting times, etc.
  • Increased security: The use of electronic money also brings a greater sense of security. To prevent the loss of personal information during online transactions, advanced security measures such as authentication and tokenization are implemented. Strict verification measures are also applied to ensure the full authenticity of the transaction.

Cons of electronic money

Electronic money has the following disadvantages:

  • The need for a certain infrastructure: In order to use electronic money, the availability of a certain infrastructure is necessary. It includes a computer or laptop or smartphone and a stable internet connection.
  • Potential Security Breaches/Hacking: The Internet is always associated with the inevitability of potential security breaches and piracy. A hack can lose sensitive personal information and lead to fraud and money laundering.
  • Online Fraud: Online fraud is also possible. All a scammer has to do is pretend to belong to a specific organization or bank and consumers can easily be persuaded to reveal their bank or card details. Despite increased security and the presence of authentication measures to combat online fraud, these still need to be observed.
  • Lack of anonymity: Information on all transactions, including amount, time, and recipient, is stored in the payment system database. This means that the secret service has access to this information. You must decide if it is good or bad.

Electronic money institution

These Electronic Money Institutions are companies that are licensed to provide financial services to third parties and that store their funds in special segregated accounts. EMIs are more agile and faster to do business and a great alternative to traditional banks. They allow a faster account opening with fewer documents and without having to physically go to this facility. You can get an IBAN and send and receive payments in just a few steps.

EMI and e-money terms largely apply to companies and products offering e-money transfers, as well as the entire surrounding infrastructure. Examples of electronic money institutions are PayPal, SatchelPay, Apple Pay, and Google Pay. These companies require a license to run their products, goods, and/or services that are handled. They spend their money themselves.

E-money institutions may not yet come into play for giant companies, but they seem like a good fit for smaller businesses serving people’s daily needs.

READ ALSO: Financial Intelligence: Babysteps to Proper Mastery

What Is the Difference Between Digital Money and Electronic Money?

The term “digital currency” is used to describe monetary transactions that take place online rather than face-to-face. However, digital currency is a form of electronic currency that is not backed by any government or central bank and exists solely in digital form.

Is Bitcoin an Electronic Money?

Bitcoin: A Distributed Electronic Cash System.”

What Is the Difference Between Bank Money and Electronic Money?

In contrast to traditional forms of currency like paper bills and metal coins, digital money exists solely online. It has characteristics comparable to fiat currencies, yet it facilitates rapid transactions and the transfer of ownership across international boundaries.

What Are Examples of Electronic Money?

Cryptocurrencies, virtual currencies, digital currencies issued by central banks, and e-cash are all types of electronic money. It can be used to make purchases whether or not the user has access to a bank account. The convenience of electronic currency lies in the fact that it does not need to exist in any concrete form.

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