July & August 2016 Credit Management magazine

WALLETS, or purses, have been
around since bartering was
replaced by the exchange of
goods for currency of whatever
variety. Therefore they were a handy means
of carrying that currency in case you needed
to ‘buy’ something on your travels. Centuries,
if not millennia, have passed and we are now
in the electronic, or digital, age. The wallet
and/or purse are still with us albeit with
that all important prefix the ‘E.’ There are a
plethora of ‘E’ wallets these days all offering
the provision of various beneficial attributes,
depending on the requirements of the user
but the fundamental reason for being remains
much the same.
For the purposes of this article I will, briefly,
examine just two basic models, comparing
and contrasting the differences and why
payment professionals should be aware of
them.
THE AMERICAN
The first model, which I am calling the
American, works primarily on the basis that
someone wishes to buy goods online.
This model, unsurprisingly, is suited to the
American payment culture and transactions
are, literally, like for like. This is used for
account discretion, security and may also
embody a loyalty program. There is no
element of stored value and transactions
are fully card based, so it may be possible
for chargebacks to be passed through,
depending on the circumstances.
So having decided I’m going to buy
something online and flag that with the
merchant I will be presented with, typically, a
number of payment options that will usually
include a wallet alongside the usual payment
card options. If I choose to pay by the wallet
option, assuming I already hold an account,
then the payment I have committed to is
cleared and settled via the wallet operator
using my pre-determined deposit option.
Should that deposit, or load, option be a
payment card then it is easy for the scheme,
and its associated issuer and acquirers, to
identify the beneficiary of the funds and have
the transaction coded in the most appropriate
way since the funds are ‘passed through’ for
an end-to-end transaction, in simple terms
anyway.
There are many organisations operating
wallets of this type, including the card
schemes themselves. All good so far then.
THE EUROPEAN
Now we come to the second type of wallet,
which I’m going to call the European. Catering
for the many different payment cultures in
Europe and featuring various forms of load,
where cards may be one of many options.
One of the reasons that most of these
types of wallets have payment cards attached
to them is so that a broader range of
merchants can be reached and facilities, such
as ATMs, can be accessed.
This type of wallet
works in much the
same way as a bank
current account, but the
fundamental differences
are that E-money
accounts are not allowed
to offer credit, so no
overdraft facility. They
are also not allowed
to accrue interest on
outstanding account
balances, although there
are ways to reward those
situations.
Again this model is used where financial
and account discretion and security is
desired, but it also, invariably, incorporates
a stored value element, including multicurrency
capability. Because the load is used
to complete a purchase of ‘electronic’ money,
any chargeback liability must stop with the
wallet operator.
This type of wallet works in much the
same way as a bank current account, but the
fundamental differences are that E-money
accounts are not allowed to offer credit,
so no overdraft facility. They are also not
allowed to accrue interest on outstanding
account balances, although there are ways to
reward those situations. The most noticeable
difference, which is not entirely apparent, is
that bank accounts are safeguarded under EU
deposit protection schemes up to a specified
limit (£75,000 in the UK, for example).
Electronic money is not covered under these
compensation schemes, but is subject to
even greater security stringencies in that
100 percent of funds must be ring-fenced in
compliant safeguarded client accounts that
have no financial limits imposed.
So it is these ‘wallets’ that have funds
deposited in the safeguarded accounts that
must have those funds deposited, or loaded,
before any further transaction can take place.
With this type of ‘wallet’ a number of different
types of transactions can occur, in much the
same way as a bank current account does as
mentioned previously, usually including the
use of a payment card to access the funds
contained therein.
It is clear, therefore, that the beneficiary
of the funds is the ‘wallet’ operator as
funds are stored for future transactions or
future multiple transactions. If the funds are
deposited/loaded using a payment card then
the transaction coding should always be of a
financial services nature since the customer is,
at this point, purchasing ‘electronic money.’
The customer now has the wherewithal
to conduct transactions, at their leisure, as if
it were a current account, in fact there is an
increasing number of individuals, and SME
businesses, that are choosing to use these
accounts instead of, or in addition to, bank
current accounts.
I have, perhaps, laboured the point here
but the purpose of this is to highlight the fact
that some card schemes are trying to force
the second model, as described, to fit the
first type of model that just isn’t realistic, or
accurate. My contention, therefore, is that we
should have a category of ‘digital account’
for the second model and definitions applied
accordingly thus giving full transparency and
accuracy.
So perhaps the question to ask should
be: When is a wallet not a wallet? When it’s a
digital account!
Phil Davies is the Managing Director of
PSI-Pay. Prior to heading up PSI-Pay, spent
eight years with MasterCard Worldwide
as Vice President-Business Development
where he was responsible for implementing
new initiatives designed to encompass
new products, technology and strategic
partnership to stimulate growth in emerging
markets throughout Europe.
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