An interesting subject. Firstly I consider regulation that disallows interest to be paid on e-money account balances in principle to be wrong. But even if they could I would not expect too many e-money issuers to pay interest.

Typically an e-money account is designed to support a high transaction rate. The maximum balance is often restricted and the balance itself is likely to fluctuate significantly over short time cycles.

An e-money account because of the higher transaction levels, sourced from multiple delivery channels are for any issuer a high cost product to support. Obviously transaction fees charged to the account holders enables the issuer to recover both a high proportion of these costs and also association account maintenance costs not directly charged.

Interest earned on the deposits by the issuer is another source of revenue that can be offset against costs.

Legitimately the issuer is entitled to make a profit.

If an issuer was able to pay interest then they are likely to off set the loss in revenue by increasing transaction fees or by introducing new fees.

In emerging markets where the intent is to develop the banking infrastructure to support banking the unbanked fees are likely to be more of a barrier than interest is likely to be an incentive with respect to enticing new banking customers. I have noticed in many emerging markets banks do not charge transaction fees, anyway.

In markets where fees are charged banks with their transactional accounts often reduce transaction fees or do not charge fees for customers who maintain a minimum balance in their accounts.

Not being able to pay interest, the e-money issuers and their account holders are probably not disadvantaged. The assumption being the account holder is probably paying low or no fees.

I couldn’t agree with you more. In fact, if the business model works and risks are manageable, people could always be given the option to earn interest on their money wherever they pool it and regardless of how much they have pooled. But, for the sake of discussion, what about the “objection” that regulators are already too overwhelmed dealing with the challenges associated with the existing class of institutions (as you point out when you make the point about fraud). Given those challenges, adding another (limited services bank) makes no sense. If the choice is between a new class of institutions and banks “downscaling” (an unfortunate word for banks reaching a new segment), wouldn’t you prefer banks downscaling as a regulator? It seems that the lesson today on regulation is that conservatism pays off when managing a financial system and conservatism might call for dealing with a small set of institutions that you are quite intimate with as a regulator.