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Consequences for Consumers of Electronic Money Institutions if Negative Interest Rates Appear

Experts believe that some EMIs may not be able to cushion the financial impact of negative interest rates,  who fear any costs could be passed on to customers through increased fees

They believe the prospect of negative interest rates could have dire consequences for some Electronic Money Institutions (EMIs), who also fear that EMIs could increase fees on the economic hard up to help mitigate the impact of negative interest rates.

With interest rates close to zero, the Bank of England (BoE) is looking at creative means to boost the economy- including reducing the interest rate below zero for the first time.

The possibility of negative interest rates was given a fresh impetus following a recent interview with Silvana Tenreyro, who sits on the BoE’s monetary policy committee, who told the Sunday Telegraph there was “encouraging” evidence the policy would fuel an economic recovery amid Covid-19.

The BoE set the base rate at the unprecedented level of 0.1 per cent in March and a shift to a negative base rate would mean the BoE would charge banks and buildings societies to hold money.

Other central banks which currently have negative interest rates include Japan, Sweden, Switzerland and the European Central Bank.

While much of the media coverage has focused on the impact negative interest rates would have on savings accounts and mortgages, the impact on EMIs could be significant.

Some experts are predicting the cost EMIs will have to bear, amid the pandemic, could cause financial havoc, even resulting in the closure of some EMIs, while some say that EMIs might ratchet up fees on their customers, some of whom are financially struggling.

 E-money payment programmes operating on “very tight margins”

David Parker , the founder of Polymath Consulting, said: “E-money payment programmes generally operate on very tight margins. A move to negative interest rates would represent an additional cost to be paid by programme owners, whether they are also the EMI or just the brand.”

Under the rules, funds held in EMIs- which include the likes of TransferWise, Revolut and Monese, can’t have interest paid or deducted to their customers, be it a business or non-business user.

Should negative interest rates comes to pass, the interest will be deducted from funds that EMIs have safeguarded. Although, all EMIs are required to safeguard funds received in exchange for e-money that has been issued, according to the FCA. They have to maintain a 1:1 ratio between the customer funds they take in and the e-money they give out.

Limited options for EMIs to recoup the additional cost

Parker added: “There are very limited options for how brand owners/ EMIs can recoup additional costs. Interchange will not go up, so that really only leaves charging the end-user, in most cases the consumer additional or higher fees. 

“This is of course even more concerning given that many e-money products look to support underserved and financially excluded users. This would mean further increases in costs for these groups.”

According to bank directory, Banks.EU, there are currently 187 firms authorised as e-money institutions in the UK. EMIs who operate are licenced and authorised by the FCA, including payment solutions, money transfer, banking providers and cryptocurrency businesses.

Alison Donnelly, director of FSCOM, the financial services compliance experts, says some EMIs “will be able to cushion it [the cost of negative interest rates] and others won’t.”

She said, “Across the sector, there are some payment terms providers that are winners and some that are not doing so well. It’s another financial burden on some firms that have done very well through this Covid period and some who are struggling.”

Donnelly points to the example of Wirecard’s demise, which led to thousands of people in the UK being unable to access their money owing to the fallout from the scandal to hit the German payments company, as a cautionary tale.

“If there is an increase in costs that has been passed on to consumers, it may well be those that can least afford it will be impacted most, as is always the case,” she adds.

The prospect of negative interest rates follows the FCA recent warnings EMIs and Payment Institutions that they must improve customer protection, amid concerns about the level of oversight across EMIs which have grown exponentially in recent years. One area under the FCA’s spotlight is EMI’s arrangements of safeguarding funds.

Crypto companies might benefit from negative interest rates

Humzah Amin is the head of finance at Wirex, a European crypto card provider which has an e-money license in the UK, said, the impact of negative interest rates could potentially have a positive impact on the business.

He said: “Actually, we don’t rely on savings or interest. Our product is based on people exchanging crypto, loving crypto and using crypto. From our point of view, it’s actually very interesting because when the government reduces the interest rate, what it does is it increases people’s will and determination to look into other assets which perhaps are more profitable than a savings bank or spending money. 

“They want to still save but they don’t want to put it into banks, they are going to have look elsewhere. One of the other asset classes that they can look into is crypto. So for us, we actually could potentially see a benefit.”

“Not a big concern” for UK EMI but “very detrimental” to European subsidiary

Paul-Henri Motel, CFO of PrePay Solutions, which has an EMI license in the UK and Europe, said it was “not a big concern” for the UK business but negative interest rates had been “very detrimental” to its European subsidiary business

He said: “It will affect us as anyone holding a large sum of liquidity because as an EMI we have got the obligation of safeguarding the fund of the customer. We’ve got a subsidiary that is operating as an EMI in Europe and there we have got already negative interest rates that is causing some issues.

“The first challenge we have got is that it’s a lost opportunity because obviously before where investment were not more widely open to EMIs as they were no interest, but in recent years we have been able to invest some of the regulated funds. We’ve been able to do that through zero-risk weighted investments but this has already become non-viable options because the effective rate were negative. So that is an option that is gone.

“There is always the option about freeing liquidity through safeguarding insurance, which is an option we use. But again, the investment options that we have got that are compliant with our policy are not many to give us any return. And already for our European business we suffer negative charges from our bank on any money that is left in Euros in our bank account which is very detrimental for our business.”

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