E-money and safeguarded funds

What is e-money?

Electronic money is monetary value stored electronically, issued when money is received and accepted as payment by others, such as balances in digital wallets and on prepaid cards. In the UK and the EU, it can be issued only by banks and authorised e-money institutions, which must redeem it at par at any time and may not pay interest on it. Payment institutions that hold customers' money only briefly while executing payments have similar safeguarding duties. See fintech accounting.

How does an issuer account for e-money?

The issuer has a contractual obligation to pay cash to the holder on demand, so e-money in issue is a financial liability under IFRS 9, measured at amortised cost, which for balances repayable on demand at par is the amount owed. The money received from customers is recognised as the issuer's asset. Safeguarding does not move the funds off the issuer's balance sheet; it protects them for customers if the issuer fails, so they are usually presented separately as safeguarded funds or customer funds. See IFRS 9 classification.

E-money and safeguarded funds: an issuer's balance sheet

An e-money institution has US$ 50,000 thousand of e-money in issue. It safeguards the money received by holding 30,000 thousand in segregated accounts at banks, earning 3%, and investing 20,000 thousand in short-term government securities, earning 4%, both allowed as secure, liquid assets under its regulator's rules.

The issuer's balance sheet shows 50,000 thousand of safeguarded assets and a 50,000 thousand liability to e-money holders. The interest of 1,700 thousand a year belongs to the issuer, because holders cannot be paid interest, and it is often one of the issuer's largest sources of income when interest rates are high. The government securities are classified under IFRS 9 according to how they are managed, and are subject to expected credit losses if held at amortised cost.

Are safeguarded funds cash and cash equivalents?

Restrictions on how money can be used do not by themselves stop a bank deposit from being cash. In 2022 the IFRS Interpretations Committee confirmed that demand deposits subject to contractual restrictions on use can still be cash and cash equivalents if they meet the IAS 7 definition, with the restrictions disclosed. Many issuers nonetheless present safeguarded funds on a separate line, and explain how they are treated in the cash flow statement, because users want to see the issuer's own cash separately from money it holds for customers. See IAS 7 cash flows.

What happens to e-money balances that are never used?

Unlike a retailer's gift card, which is a contract liability under IFRS 15 and can produce breakage revenue, e-money is a financial liability. A financial liability is derecognised only when it is extinguished: when it is paid, cancelled or expires. While holders keep the right to redeem their balances, the liability stays, however long the account has been dormant. Income from dormant balances arises only if the terms or the law extinguish the holder's rights, and fees charged on dormant accounts are recognised as income when charged. See gift cards and breakage.

What changes under the UK safeguarding rules?

From 7 May 2026, UK payment and e-money firms must follow new Financial Conduct Authority safeguarding rules: daily reconciliations of the funds they must protect, monthly safeguarding returns to the regulator, a resolution pack to help return money to customers if the firm fails, and an annual safeguarding audit by a qualified auditor, separate from the statutory audit, for firms above a small threshold. The rules do not change the basic accounting, but the reconciliations and audit make errors in customer balances more likely to be found and corrected.

What about distributors and partner banks?

E-money issuers often sell through distributors, such as retailers selling prepaid cards, and hold safeguarded funds at partner banks. Money collected by distributors and not yet passed to the issuer is a receivable, subject to credit risk, and is not yet safeguarded by the issuer. Fees paid to distributors are costs of acquiring customers, capitalised only if they are incremental costs of obtaining a contract with a customer and expected to be recovered. See payment processor revenue. Mobile wallets with agent networks are covered in digital wallet revenue.

How does US GAAP differ?

US money transmitters and payment companies also recognise customer balances as liabilities and the related funds as assets, often presented as funds receivable and customer accounts. Under ASC 230, restricted cash is included with cash and cash equivalents in the cash flow statement, with a reconciliation to the balance sheet. Unclaimed balances are generally subject to state unclaimed property laws rather than recognised as income. See IAS 7 and ASC 230 compared.

This guide is general information. It is not tax or legal advice for your situation.