Reconciliation and Settlement

Issue

In the absence of clear rules governing settlement and reconciliation, allowing non-bank entities to issue e-money could create risk.

• Sound e-money issuance is based upon the principle that all issued e-money is fully covered by funds held in banks and/or other safe, liquid investments.
• Proper reconciliation and settlement procedures must be followed whenever e-money is issued or redeemed, such as when:
  • Agents purchase e-money (cash-in) or withdraw funds (cash-out).
  • Users cash-in or cash-out through the national retail payment system.
  • E-money issuers cash out transaction fee income.
• Frequent reconciliation of the balances of issued e-money and funds held by e-money issuers reduces the risk of fraud and loss of within and by the e-money issuer.
• There is wide variation in reconciliation procedures across e-money issuers. Ideally the reconciliation should be done in real time.
• However, practices vary greatly, ranging from highly manual (e.g., an e-money issuer staff calls the bank at the end of each day to increase/reduce the balance in the custodial account) to entirely automated (e.g., the custodial account is adjusted automatically once or several times daily [i.e., batch or even real time] through integrated e-money issuer and the bank systems).
• In the absence of clear rules governing settlement and reconciliation, internal fraudsters could create excess e-money in their systems or embezzle customer or e-money issuer funds.

• Each of the three fund flows that result in issuance or redemption of e-money (direct cash-in or cash-out by agents or other third parties, settlement of payment system obligations and cash-out by the e-money issuer) should be accounted for separately.
• E-money issuers participating in the national retail payment system, whether directly or through a sponsor institution, should provide their own funds to guarantee transaction settlement; funds backing e-money should not be used as security.
• Establishing ongoing minimum capital requirements that are tied to outstanding e-money liabilities can help ensure that e-money issuers maintain sufficient capital to cover any losses due to internal fraud.
• Active oversight of reconciliation and settlement procedures by supervisors is critical.
• If an e-money issuer uses several banks to hold portions of the float, supervisors can examine how the e-money issuer divides the e-float (e.g., whether it will depend on the banks where the master/ super agents have accounts).
• The e-money issuer should be able to ensure that the reconciliation is similarly effective for all banks. Supervisors should identify whether there are differences in reconciliation across banks and assess their effectiveness.
• Some regulators have required e-money issuers to provide offsite access to the system (viewing rights) to be able to monitor on a daily basis the float balance and the daily reconciliation with the pool of liquid assets. More intensive and real-time monitoring would be particularly important when the e-money issuer industry or individual e-money issuers are relevant from a financial stability or financial inclusion perspective.