What is 'Electronic Money'

Electronic money is money which exists in banking computer systems and is available for transactions through electronic systems. Its value is backed by fiat currency and it can be exchanged into physical form however its uses are often more convenient electronically.

BREAKING DOWN 'Electronic Money'

Electronic money is used for purchases and transactions globally. While it can be exchanged for fiat currency, it is much more conveniently monitored and utilized through electronic banking systems and electronic processing.

The value of electronic money is established by its fiat currency which makes it different from emerging cryptocurrencies. Electronic money is backed by the central bank system. However, In the United States, only a small fraction of the currency is utilized in physical form. The remaining percentage of it is held in bank vaults and also against collateral.

Currency in Circulation

Electronic money can be held in various accounts. Most individuals and businesses store their money with banks which provide electronic records of the cash on deposit. Other forms of stored value electronic money include digital wallets such as PayPal and Square or prepaid cards which allow users to deposit fiat currency for electronic money.

With all types of stored electronic money sources the need for fiat currency varies and as such the banking system provides for this through varying means. While banks transact fiat currency to electronic money for their customers they also hold that money in vaults at their physical locations. Since the use of electronic money is more common than physical currency, banks also deposit their cash with one of the 12 Federal Reserve banks across the nation. A primary function of the U.S. Federal Reserve and its 12 supporting banks is to manage the fiat currency in physical form. Thus, the Fed also has control over the money supply through its monetary policies and open market operations. The Fed also controls the reissuance of money and the printing of new money when fiat currency is no longer available for distribution.

Electronic Payment Processing

In the U.S. many people receive their paychecks through direct deposit, move money with electronic fund transfers, and spend money with credit and debit cards. While physical currency still has advantages in certain situations, its role has gradually diminished. Many consumers and businesses feel that electronic money is more secure because it is not easily lost or damaged and can be available for use at nearly all merchants across the U.S. Therefore, the U.S. financial market has a secure and well established infrastructure for transacting electronic money. The primary means for electronic money transactions is through payment processing networks. In the U.S. Visa and Mastercard are the two primary payment processing networks facilitating the transactions of electronic money across the nation.

Banks and financial institutions partner with electronic money networking processors to issue their customers branded network cards which facilitate the transactions of electronic money from bank accounts to merchants. Digital wallets are also available following similar transaction protocals. Electronic money is also easily transacted through e-commerce allowing consumers to shop and purchase all types of goods and services online.

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