Let’s Chat: Electronic Money

Outline of Circular 1166

Here’s a quick total view of the circular:

• Title, Policy, Scope, Terms
  • Application for authority to offer e-money services
  • Governance
    • Minimum Systems and Controls
    • Consumer Protection
    • Minimum Disclosure Requirements
    • Interoperability of Systems
    • Aggregate Limits
    • Liquidity Requirement
  • Classification of EMIs
  • Capital Requirements
  • Sanctions
  • EMIs without the appropriate approval from the BSP
  • Registration with the AMLC
  • Outsourcing of EMIs to Electronic Money Network Service Providers (EMNSPs)
• Applicability to Non-Bank Financial Institutions (NBFIs)
  • Certificate of authority
• Amendments to Appendix 7 (reports)
• Amendments to Appendices Q-3/S-2/N-l (reports)
• Transitory Provisions
• Effectivity

Appendix A: Gap Assessment

BSFI - Bangko Sentral-Supervised Financial Institutions

MORB - Manual of Regulation for Banks

Q&A Notes on certain provisions of Circular 1166

What is e-money?

E-money, an electronically-stored monetary value, encompasses several key characteristics that distinguish it from traditional forms of currency. An explanation of each element:

1. Maintained in a non-interest-bearing non-deposit transaction account: E-money is stored electronically in an account that does not accrue interest and is not classified as a deposit account. This distinguishes it from traditional bank deposits that typically earn interest.
2. Denominated in or pegged to Philippine Peso or other foreign currencies: E-money is linked to a specific currency, such as the Philippine Peso, or may be pegged to other foreign currencies. This ensures that the value of the e-money remains stable relative to the chosen currency.
3. Pre-funded by customers to enable payment transactions: Users of e-money preload funds onto their accounts to facilitate future payment transactions. This pre-funding mechanism allows for convenient and swift electronic payments.
4. Accepted as a means of payment by the issuer and by other persons or entities including merchants/sellers: E-money is recognized as a valid form of payment by the entity issuing it as well as by various merchants and sellers who accept it as a mode of transaction.
5. Issued against receipt of funds of an amount equal to the monetary value issued: E-money is issued to users in exchange for an equivalent amount of funds received by the issuer. This ensures that the total value of e-money in circulation is backed by real funds.
6. Represented by a claim on its issuer: E-money represents a claim on the issuer, indicating that the issuer is liable to honor the monetary value stored in the e-money account when requested by the user.
7. Withdrawable in cash or cash equivalent or transferable to other accounts/instruments that are withdrawable in cash: E-money can typically be converted into cash or its equivalent, allowing users to withdraw physical currency or transfer the e-money balance to other accounts or instruments that enable cash withdrawals.

E-money combines the convenience of electronic transactions with the stability and usability of traditional currency, offering users a versatile and efficient payment method that aligns with modern digital financial practices.

What are electronic instruments?

Electronic instruments or devices include cash cards, prepaid cards, stored value cards, digital wallets accessible via mobile phones or other devices, and similar products falling under the category of electronic payments and financial services as defined in Section 701.

Closed-loop or open-loop wallets?

A closed-loop electronic wallet systems restrict the use of the electronic wallet to a specific group of merchants associated with the issuer, while open-loop electronic wallet systems allow for broader acceptance at third-party merchants.

Can banks issue e-money?

Yes. Banks are permitted to provide E-money services upon obtaining approval from the Bangko Sentral through an Electronic Payment and Financial Services (EPFS) license. They must also adhere to the prudential standards outlined in Section 111 and meet the licensing requirements specified in Appendix 136 of Section 701.

Is e-money considered deposit?

No. Here are key principles and restrictions related to the issuance and redemption of e-money.

1. Issuance and Redemption:
   • Face Value: E-money must be issued and redeemed at its face value, ensuring that the value credited to the customer's account is equivalent to the amount of fiat money used to purchase it. This practice prevents the manipulation of E-money values for profit or discount purposes.
   • No Discounts: E-money should not be sold at a discount where the credited value exceeds the actual amount of fiat money exchanged. This rule maintains the integrity and transparency of E-money transactions.
2. Foreign Currency Denomination:
   • Regulation: The issuance and operations of E-money denominated in foreign currency are subject to existing foreign exchange rules and regulations. This ensures compliance with currency exchange policies and safeguards against potential risks associated with foreign currency transactions.
3. Non-Deposit Nature:
   • Not a Deposit: E-money is distinct from traditional bank deposits and is not considered a deposit. As such, it does not accrue interest or similar incentives that could be interpreted as interest earnings. This distinction helps clarify the nature of E-money as a payment instrument rather than a deposit account.
4. Promotional Incentives:
   • Usage Promotion: While E-money does not earn interest, financial institutions may offer promotional incentives to encourage greater usage and attract new users. These incentives should be designed to enhance user engagement and adoption without being tied to interest-bearing features linked to the outstanding balance of the e-wallet.

The guidelines emphasize the fair and transparent issuance, redemption, and operation of e-money, ensuring that its value remains consistent with the fiat currency used for its purchase.

What is the required interoperability?

To ensure seamless connectivity, financial institutions offering e-money services must enable interoperability with fund transfer capabilities by engaging in an Automated Clearing House (InstaPay/PESONet) as per the directives outlined in the National Retail Payment System (NRPS) Framework.

What is the required liquidity for EMIs with e-money balances of 100M and above?

BSFIs with e-money balances of at least P100,000,000 must maintain unencumbered liquid assets. Half (50%) of the e-money balance must be held in trust for liquidation purposes, ensuring fund preservation and prudent management. The trust account should not drop below the minimum balance, with losses from market fluctuations not considered breaches. Any deficiencies must be replenished within five days after month-end. The remaining balance can be held in bank deposits earmarked for liquidity, government securities, or a settlement account with the BSP for net clearing obligations. Additionally, other liquid assets permitted by the Bangko Sentral can be utilized.

What is the required liquidity for EMIs with e-money balances below 100M?

BSFIs with e-money balances below P100,000,000 have the flexibility to manage their liquid assets in the following ways: (a) They can hold liquid assets according to the requirements specified for higher balances. (b) They may hold liquid assets equal to the total amount of their outstanding e-money balance. (c) They are also permitted to hold other liquid assets as authorized by the Bangko Sentral.

What are the categories of Electronic Money Issuers (EMIs)?

EMIs are categorized into two groups:

• EMI-Banks
• EMI-Non-Bank Financial Institutions (EMI-NBFI), which includes cooperatives.

What are the capital requirements for EMI-Banks?

For EMI-Banks, the required capital is determined as the higher of:

• The mandatory minimum capitalization for banks based on their category.
• The necessary minimum capitalization based on the EMI category:
  • Large scale EMI-Bank: PHP 200,000,000
  • Small scale EMI-Bank: PHP 100,000,000

What is large scale EMI?

EMIs must conduct a review of aggregated transactions twelve (12) months after starting EMI operations. Subsequently, quarterly assessments will be carried out by the appropriate supervising department of the Bangko Sentral to evaluate the volume and value of EMI transactions. An EMI-Bank will be classified as Large scale if the twelve-month average value of aggregated inflow and outflow transactions equals or exceeds P25.0 billion. Once classified as large scale, the EMI-Bank will remain in that category unless approved by the Bangko Sentral. EMI-Banks are required to meet the PHP 200,000,000 capital requirement within one (1) year from the date of reclassification.

What are the capital requirements for EMI-Non-Banks?

Capital Requirements for EMI-NBFIs:

• The required capital for Electronic Money Issuer-Non-Bank Financial Institutions (EMI-NBFIs) is determined as the higher of:
  (a) The mandatory minimum capitalization for Non-Bank Financial Institutions (NBFIs) based on their types.
  (b) The necessary minimum capitalization based on the EMI category:
  • Large scale EMI-NBFI: PHP 200,000,000
  • Small scale EMI-NBFI: PHP 100,000,000

Cooperatives that are part of the Electronic Money Issuer-Non-Bank Financial Institutions (EMI-NBFIs) category must adhere to the higher of two minimum capital requirements:

1. The required minimum capital specified for EMI-NBFIs in the guidelines provided.
2. The minimum capital requirement mandated by the relevant provisions outlined in Republic Act No. 9520 or the Philippine Cooperative Code of 2008.

Are EMIs allowed to outsource their operations?

Yes. Outsourcing of services by Electronic Money Issuers (EMIs) to Electronic Money Network Service Providers (EMNSP) refers to the practice of EMIs contracting with specialized service providers to handle certain aspects of their electronic money operations. EMNSPs offer services related to the processing, management, and facilitation of electronic money transactions and services.

EMIs may outsource various functions to EMNSPs, such as transaction processing, network management, security services, customer support, and other operational activities related to electronic money services. By outsourcing these services, EMIs can benefit from the expertise and resources of specialized providers, allowing them to focus on their core business activities and improve operational efficiency.

However, when outsourcing services to EMNSPs, EMIs must ensure compliance with regulatory requirements, data security standards, and risk management practices. They remain responsible for the oversight and monitoring of the outsourced activities to ensure that they are conducted in accordance with applicable laws and regulations.

About Lyman Manzanares, Esq.

Founder and CEO, Law.net.ph. Founding and managing partner, Manzanares & Partners Law Offices, est. 2011. A lawyer based in Makati City, Philippines, he is a Lifetime Member of the Integrated Bar of the Philippines, Makati City Chapter, and the Philippine Bar Association. He graduated from the U.P. College of Law in 2004 and has been involved in various legal cases and discussions, particularly in the realm of commercial and cooperative law. He has provided insights into the world of jurisprudence and law through a platform called “A Case A Day,” where he discusses new cases and updates on different areas of interest such as criminal law, civil and family law, commercial law, and technology law.