Electronic Money

What is Electronic Money?

Electronic money refers to the currency electronically stored on electronic systems and digital databases, as opposed to physical paper and coin money, and is used to make it easier for users to transact electronically. The value of the electronic currency is backed by fiat currency.

What is Fiat Currency (or Fiat Money)?

Fiat money, simply put, is a legal tender, whose value as a currency is established by an issuing government and consequently, is also regulated by it. Fiat money is the exact opposite of commodity money, whose value is based on an underlying asset, such as gold or silver.

Classifications of Electronic Money

Electronic money can be classified into two broad categories:

1. Hard

Hard electronic money is when e-money is used for irreversible transactions, ones that are highly securitized, and are more or less procedural in nature. They may include transactions that are drawn through a bank.

2. Soft

Soft electronic money is when e-money is used for reversible or flexible transactions. There is an increased level of flexibility offered, and users are allowed to manage their transactions even after payment is processed, like canceling a transaction or modifying the payment price, etc.

The changes can be made post-transaction within a defined period. They may include transactions that are passed through payment mechanisms like PayPal, PayTM, Interac, credit cards, and so on.

Features of Electronic Money

Just like physical paper currency, electronic money also includes the following four features:

• Store of value: Just like physical currency, electronic money is also a store of value, the only difference being, that with electronic money, the value is stored electronically unless and until withdrawn physically.
• Medium of exchange: Electronic money is a medium of exchange, i.e., it is used to pay for the purchase of a good or when acquiring a service.
• Unit of account: Just like paper currency, electronic money provides a common measure of the value of the goods and/or services being transacted.
• Standard of deferred payment: Electronic money is used as a means of deferred payment, i.e., used for the tools of providing credit for repayment at a future date.

Advantages of Electronic Money

Electronic money offers several advantages for the global economy, including:

1. Increased flexibility and convenience

The use of electronic money brings increased flexibility and convenience to the table. Transactions can be entered into from anywhere in the world, at any given time, with one click of a button. It removes the hassle and tediousness involved with the physical delivery of payments.

2. Historical record

The usage of electronic money is becoming increasingly popular because it stores a digital historical record of each and every transaction made. It makes tracing back payments easier and also helps with making detailed expenditure reports, budgeting, and so on.

3. Prevents fraudulent activities

Since electronic money makes available a detailed historical record of each and every transaction made, it is very easy to keep track of transactions and trace them back through the economy. It increases security and helps prevent fraudulent activities and malpractices.

4. Instantaneous

The use of electronic money brings with it a kind of instantaneousness that has not been experienced before in the economy. Transactions can be completed in split seconds with the click of a button from virtually anywhere in the world. It eliminates problems of physical delivery of payments, including long queues, wait times, etc.

5. Increased security

The use of e-money also brings with it an increased sense of security. To prevent loss of personal information while transacting online, advanced security measures are implemented like authentication and tokenization. Stringent verification measures are also employed to ensure the full authenticity of the transaction.

Disadvantages of Electronic Money

Electronic money comes with the following disadvantages:

1. Necessity of certain infrastructure

To use electronic money, the availability of certain infrastructure is necessary. It includes a computer or a laptop, or a smartphone, and a stable internet connection.

2. Possible security breaches/hacks

The internet always comes with the inevitability of possible security breaches and hacks. A hack can leak sensitive personal information and can lead to fraud and money laundering.

3. Online scams

Online scamming is also possible. All it takes for a scammer is to pretend to be from a certain organization or a bank, and consumers are easily convinced to give away their bank/card details. Despite the increased security and presence of authentication measures to counter online scams, they are still something to be looked after.

Related Readings

CFI is the official provider of the Commercial Banking & Credit Analyst (CBCA)™ certification program, designed to transform anyone into a world-class financial analyst.

In order to help you become a world-class financial analyst and advance your career to your fullest potential, these additional resources will be very helpful:

• Cryptocurrency
• Digital Wallet
• Electronic Check
• Virtual Currency
• See all economics resources