Deposit Insurance

Overview

In countries where a deposit insurance system exists, customer funds may be covered by (i) direct deposit insurance which requires e-money issuer and/or payment banks to become members of a deposit insurance system, or (ii) pass-through deposit insurance which provides coverage through existing members.

Safeguarding Customer Funds

Approaches

Direct Deposit Insurance

Advantages

  • E-money balances insured.
  • Payout may be simpler than for pass-through insurance.

Disadvantages

  • Requires e-money issuers to become members of deposit insurance system.
  • Requires deposit insurers to reassess risk and possibly raise premiums.

Pass-through Deposit Insurance

Advantages

  • E-money balances insured.
  • No need for e-money issuers to become direct members of deposit insurance system.

Disadvantages

  • Strict requirements for payout.
  • Operational challenges for reimbursing many e-money account holders with tiny balances.
  • Requires deposit insurers to reassess risk and possibly raise premiums.

Float held at Central Bank

Advantages

  • E-money balances protected.
  • No need to address deposit insurance challenges.

Disadvantages

  • Central Banks may lack infrastructure to efficiently play role of float-holding bank.
  • This may not be an appropriate role for Central Bank.
  • Inability to promote financial inclusion and financial sector development through intermediation and distribution of interest.
Safeguarding Customer Funds

REQUIREMENTS FOR IMPLEMENTATION OF PASS-THROUGH DEPOSIT INSURANCE

Legal RequirementsOperational Requirements
Existence of custodial accountInsurer’s access to records to ID balances of each sub-accountholder
Individually identifiable sub-accountsAggregation of user accounts within one institution for purposes of applying insurance coverage limit
Customer ownership
of funds held in custodial account
Adequate insurer resources for expansion of coverage to include e-money
Safeguarding Customer Funds

OPERATIONALIZING PASS-THROUGH DEPOSIT INSURANCE FOR DFS

Issue 1

If funds are held in custodial accounts in multiple banks and one bank fails, which customer accounts are associated with the failed bank?

Possible Solution

Requiring e-money issuers to have a clear policy on how customer funds are allocated across custodial accounts could help to ensure that customer names and associated account balances can be retrieved in the event of custodial bank insolvency.

Issue 2

Can deposit insurance cover e-money accounts without requiring individual e-money customers to cash-out in the event of failure of a custodial bank?

Possible Solution

Establishing procedures to enable transfer of custodial account to an assuming bank could help to avoid any disruption to the e-money service.

Issue 3

What are the implications for customers if funds are held in custodial accounts in multiple banks?

Possible Solution

When an e-money issuer spreads the float across several float accounts in multiple banks, customers could face different risks related to the failure of different banks (when they are “mapped” to specific banks). The potential payout of insurance to only part of the e-money customers (the ones “mapped” to a failed bank) and not to other customers may cause confusion and lead to reduced trust in e-money issuers. A potential solution would be for all customers of an e-money issuer to be mapped to all float accounts. This means that the trust relationships and therefore the exposure to a bank failure risk would be equal across all e-money customers; it would not vary according to each bank holding different float accounts. However, the regulatory authority needs to understand whether this would be a legally valid option.

Safeguarding Customer Funds

Considerations Relevant to both PASS-THROUGH and Direct DEPOSIT INSURANCE FOR DFS

Issue 1

If e-money is insured, should e-money balances be covered in their totality?

Possible Solution

Generally, deposit insurance does not cover the totality of deposits to avoid moral hazard among member institutions (e.g., banks). However, in emerging markets and developing countries a large contingent of e-money customers may be low-income and with little financial capability and capacity to weather losses, while using e-money accounts as a substitute to bank deposits. In such instances, there might be a case for prioritizing protection over moral hazard concerns and insure e-money accounts in their totality. The case is reinforced by the fact that e-money accounts are often subject to low maximum balance limits, by regulation, and may present an average balance lower than such limits.

Issue 2

If e-money is insured, should the coverage limit for e-money differ from that of other eligible deposits?

Possible Solution

The coverage limit set for bank deposits is typically set at a high enough level to protect the large majority of retail bank depositors across all member institutions. This level could be significantly higher than the average balances held in e-money accounts. Setting a lower coverage limit for e-money accounts that considers such low average balances would avoid inefficiencies and costs of over-insuring e-money. The downside is that, if e-money accounts are not capped by regulation, a low coverage limit could leave some e-money customers partially uninsured, particularly when they are not able to spread their funds across multiple e-money issuers. Reduced transparency is another disadvantage of having different coverage limits in a country—customers may be confused as to which coverage limit applies to them.

Issue 3

If e-money is insured, would the existing deposit insurance fund and the deposit insurer’s target fund size need to be adjusted?

Possible Solution

This issue could be particularly important for countries where e-money has reached a significant scale and the deposit insurance system has been established only recently because e-money could lead to a sudden substantial additional coverage. Adjusting the deposit insurance fund may require a plan that, e.g., raises premiums or puts in place a special premium assessment for e-money. These measures could affect the impact of costs on existing member institutions and may require legal reforms. Also, alternatively, the direct approach to deposit insurance may enable the creation of a separate fund for e-money issuers and payment banks, with customized rules. In any case, adequate technical capacity will be needed for deposit insurers to estimate probabilities of failures, correlation of failures, exposure at failures, loss rates per failure, and other factors to determine the adequacy of the target fund size.

Safeguarding Customer Funds

Country Examples

Link to India case studies
India
Link to Colombia case studies
Colombia
Link to Kenya case studies
Kenya
Link to United States case studies
United States