Introduction
In our day, we see more than one hundred
billion dollars being deposited into our bank accounts every year. A recent
survey was conducted in Britain by the UK’s financial affairs committee (FCA)
which found that only 25% of the participants in its own industry would be
totally satisfied with the banking system of today, while 55% wanted a change.
However, despite all this, the central banks of many countries that have been
using for centuries are not happy with their current models of providing
services. This has resulted in financial institutions across the whole world
now seeking ways to better meet the needs of customers who want to use them.
One such way is through Electronic Money Transfer (EMT).
The EMT can provide solutions to address
issues like environmental awareness, financial inclusion, consumer rights, poor
education opportunities, and poverty reduction. With people living longer and
working more, they demand a faster, more convenient, efficient service. People
require money for anything from buying clothes to education expenses, so the
modern financial institution should give everyone the opportunity to earn
enough to live comfortably and sustain their lives. That’s why the first step
towards creating an affordable and sustainable monetary framework is to
introduce electronic money transfer.
E-Money and Its Challenges
As said earlier in this paper the need
for e-money is growing as people continue to work beyond the physical
boundaries of the office and take part in activities such as sports, online
entertainment, and even gaming activities such as poker. In order to ensure
easy access to digital funds for people who need it most, there are new
technologies on the horizon that promise to solve some of these problems in the
financial sector. According to analysts who are focused on the topic, EMT
should be able to compete with traditional banking platforms but there are
still a number of challenges we face in this regard.
Challenges faced by E-Money
Although EMTs promise to improve the
lives of people around the world, the global economic recession has made people
lose confidence in the banking systems, leading to increased reliance on
alternative means. For example, according to some research in the US,
“Americans were unable to save $1 billion in 2009. Almost half of those
Americans reported saving less than $35 a week, according to a 2011 Nielsen
data report” (Cohen, 2013, para. 1). People who have to make ends meet usually
find themselves struggling financially. Some people may try to make it through
other sources of income, just as the banks can offer loans but the problem
comes when they lack the money for their own consumption needs. As a result, in
order to help others and reduce the impact that financial constraints in modern
society bring upon us, we can look at alternative sources of savings and lend
help. While we may not have the same level of efficiency that is seen in the
case of banks as an alternative avenue of supporting people in hard times, it
does present itself as a valuable resource that could easily supplement
people’s income generation model. However, if governments start to support
initiatives such as e-money, it will come at a cost. Governments should do
everything possible to develop policies, laws, rules, regulations and guidelines
to protect the interests of consumers in the event of threats that arise
(Cohen, 2013, para. 3-5). Allowing people’s ability to access and use E-Money
has significant implications as well as costs that are associated with it. Even
though we are witnessing an increase in consumer awareness of the importance of
reducing barriers of entry to credit into the credit systems, it is also
causing an increase in rates of defaulted debts, especially among young
individuals. Although credit card companies and mobile apps are having a big
impact on the reduction of defaults, the rate of credit cards being taken out
of circulation is also rising. Credit cards have limited life cycles, have low-interest
rates, and have no cash advances. Moreover, studies show that it may become
difficult for millions of American adults to repay their student loan debt
because of insufficient interest rates (Cohen, 2013, para. 5). Because
financial instruments such as credit cards are a necessity, the idea that they
can be used for transactions that cannot be paid off in money is appealing. But
while increasing the use of credit cards can help in avoiding bankruptcy,
financial institutions should consider how they affect the overall economy if
changes happen.
While developing a viable platform that
allows credit card users to receive funds directly, the financial institutions
will have to pay a price in terms of lower interest rates, lower fees, and less
privacy or information leaks. In return, the financial institutions may lose
their competitive edge.
The biggest challenge facing most
financial institutions today in trying to tackle EMT is the slow growth of the
smartphone and tablet population. These platforms have created tremendous
challenges in terms of making payments using EMT, such as the inability to
create and maintain payment relationships. Payments made through electronic
payments platforms have grown rapidly over the last several years, but they are
still far behind what one would expect from conventional transaction processes
(Cohen, 2014, para. 4-5). Financial institutions that are responsible for
managing money transfers are unable to provide the requisite technology
infrastructure necessary to process all of these transactions because of their
large size and complexity. Consequently, payment gateways tend to end up
holding the financial institution’s money and making it unappealing because it
takes too much time and effort for people in charge to check whether payments
are actually being made. Given that most of the world’s population is dependent
on formal banking, a situation where people spend a portion of their lives in
front of a screen is simply unacceptable, especially when it comes to financial
inclusion (Cohen, 2014, para. 6-9).
Incentives applied by Banks
to counter E-Money Transfer Apps
When people who need credit for purchases
that are not covered under the social security system or those who can afford
it apply for it, there is usually a question mark hanging over their head. If
they are unable to get credit due to financial reasons, they resort to
stealing. By giving them the option to buy goods without paying for them they
gain a sense of independence and control over their finances. They are then
rewarded with a smaller amount that can easily go towards making ends meet. In
the case of EMT, however, banks have no such incentive to cater to the changing
preferences of buyers and sellers. Their incentives involve offering interest
rates that are higher than they offer to loans and giving bonuses to employees
that produce results. Such rewards are meant to encourage people to stay within
their comfort zones and remain loyal to their employers. Nevertheless, if
consumers stop using credit cards, financial institutions are likely to cease
producing new ones. When E-Money comes into existence, both sides receive
something they cannot give and vice versa.
While banks usually offer discounts to
customers to stimulate spending, if someone is interested to enter the market
via another route, he/she must ask for benefits (Buckley & Taylor, 2012, p.
2-6). Those who are currently suffering from credit card indebtedness can be
incentivized to use E-Money to enable money to be saved in the form of points
that can be redeemed at any retail store. Consumers who want this benefit only
have to apply online for an account that offers this service and send back a
receipt confirming that the account has been opened. This reward goes far
beyond ensuring credit availability as there is a possibility of receiving
additional offers such as discounts on items that other consumers didn’t buy.
Merchants are encouraged to open their businesses and accept credit card
payments, instead of relying exclusively on cash. It becomes very attractive
for merchants to sell products that their competitors aren’t willing to, so
long as it gives an advantage to them (Dionisio & Tsiklis, 2011, p.
924-949). Retail chains that don’t provide E-Money programs often have trouble
getting clients. On average, consumers who subscribe to E-Money programs are 60
percent more likely to agree to purchase products and services from retailers
with an E-Money program. These customers often pay significantly higher prices
to their favorite brands than they would have done otherwise (Buckley &
Taylor, 2012). Research shows that most shoppers in developed economies tend to
buy products with high quality and affordability when given options to choose
between two different suppliers based solely on brand name and product variety.
Because they prefer purchasing more expensive goods, they will likely stick to
the same supplier until it begins to have a negative effect on their
pocketbook.
In terms of business, E-Money can be
described as having a similar reputation as credit cards, making it easier for
business owners to sell their products without the worry about getting them cut
off. When talking about business practices, the term that most strongly pops up
whenever the issue of E-Money arises is trust. When people are confident that
their personal information isn’t hacked, the chances of them making mistakes or
committing fraud to fall substantially (Fisher, 2001, p. 2-19). Similarly, when
people trust that they can receive credit from E-Money programs, they become
increasingly reluctant to risk loaning money to a bank in fear that it may not
repay them when needed. Businesses, particularly SMEs, are highly sensitive to
the risk that they may miss out on potential clients by taking out their
personal information and putting it on the web when applying for credit. In
addition to that, the risk that their applications won’t be approved because
they’re not protected by firewalls can really take a toll. A study showed that
85 percent of mortgage applicants who applied after knowing that their
application had been processed saw their application rejected as opposed to 50
percent of applicants who had their applications initially rejected (Fisher,
2001, p. 13). E-Money does have these issues to contend with, but this doesn’t
mean people don’t love it.
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