E-money is another type of private money that is usually created by non-bank payment market participants, such as e-money institutions. Like money in bank accounts, e-money is a claim on the issuer. But while money in bank accounts promotes economic activity in society through lending, the function of e-money is mainly limited to payments. An overarching aim of e-money is to increase the supply of payment services by enabling actors other than banks to offer such services. E-money is created when a customer makes a payment using money on its bank account and receives e-money in return. The e-money institution then uses the bank money from the customer either to make the customer's payment directly, or it is invested in safe assets such as government securities, in case the customer wants to hold e-money and make a payment later.

The idea behind e-money is that it should be used primarily for payments, not savings. This is because money in bank accounts is used to finance loans to individuals and businesses, which e-money cannot be used for because e-money institutions are not allowed to grant loans. To reduce the incentives to save in e-money, it does not bear interest and is not covered by any deposit insurance guarantee. Thus, e-money holdings do not earn interest and are not protected if the e-money institution goes bankrupt. At the same time, the regulation of e-money institutions is less extensive than for banks, as the institutions can only offer payment services and not other financial services.