Systemic Risk

Issue 1

In countries with high volumes of e-money usage, a disruption in the e-money service could affect much of the population.

Such an event could be considered systemic from the perspective of the financial authorities.

Other Impacts of E-Money on Stability

Usage of e-money for savings and credit could strengthen financial stability by increasing aggregate savings in the formal financial sector and enabling financial institutions to diversify their depositor base and loan portfolios.

On the other hand, rapid credit expansion without proper controls could reduce financial stability through over-indebtedness and high non-performing loan ratios.

Issue 2

An EMI has become systemic because of the size (e.g., transaction volume, value of stored funds) as well as the number and types of customers and where the failure could have a macro-financial impact, as other sectors (e.g., banking) could be negatively impacted by the failure of large e-money issuers, through large exposures to e-money balances (e.g., concentration risk) and interdependencies.

Although e-money issuers are not allowed to intermediate customer funds, they can provide fund storage and payment services to customers. Supervisors need to assess whether an EMI poses systemic rick and understand that some e-money issuers can grow very large in a very short time.

To determine the systemic importance of an EMI, supervisors need to consider certain criteria and indicators in their analysis (see the next slide for Potential Systemic Risk Criteria and Indicators for e-money issuers)

Size

The importance of an EMI for the welfare of the population, which generally increases with the volume of payments and other services that it provides (including across border).

Indicators

• Number of customers measured by (active) accounts. 
• Types of customers such as individuals, merchants, utilities, insurance companies and governments.
• Number and value of transactions; market share controlled.
• Breadth of services provided.

Substitutability

The importance of an EMI increases where it is difficult for other entities to provide the same or similar services (including in size).

Indicators

• Availability of cash-out points that do not need the use of the e-money issuers, that is, agents and ATMs linked to other e-money issuers and banks, and bank branches.
• Availability of other payment options such as debit/credit cards, checks, postal money orders and bank transfers.

Interconnectedness

Systemic risk can arise through macro-financial linkages between e-money issuers and national sectors and/or markets so that the e-money issuers failure negatively impacts the functioning of the other sectors, or public confidence in any of the sectors.

Indicators

• Float balances of e-money issuers expose banks to concentration risk through exposures to large deposits.
• e-money issuers growth affects the profitability of banks by competing for customers, funds and services.
• The use of e-money for paying government taxes and utility bills exposes governments and utilities to potential loss of income if the EMI fails.
• The failure of an EMI may undermine public confidence in other e-money issuers and entities (e.g., banks, utility firms).

Monitoring e-money transaction growth (volume and value) over time could help mitigate systemic risk to the financial system and operational risk to the national payment system.

If high adoption of e-money leads to a large increase in NPS transaction volume, regulators could take steps to ensure that the NPS infrastructure is able to keep pace, such as:

• Increasing server capacity.
• Increasing network redundancy and resilience.
• Hiring additional staff.
• Reviewing and updating business continuity and disaster recovery plans.