Buying ringtones and games on mobiles using premium-rate SMS (PSMS) services seems innocent enough. But this booming teenage economy - estimated to be worth £1bn in Europe this year - is fuelling a big debate about the future of money on mobile phones.

The key issue is that when users buy things that are not directly consumed on the phone - such as tickets and music - they are deemed by the UK's Financial Services Authority as buying with e-money. This makes the operators subject to the rules of the EU's e-money directive.

This has three major implications. First, under the directive, the operators are required to keep the unspent money in walled-off trust accounts. Second, the funds must be refundable if required. Third, operators must know who the subscribers are. As 50-70% of pre-pay is currently used for purchasing ringtones and games, it is a significant issue affecting the growth of non-voice services on mobile networks.

Discussion over what is something of an intriguing test of the directive comes to a head on Tuesday, with the deadline for consultation on the so-called Application of the e-money directive to Mobile Operators.

To avoid new costs, many of those benefiting from this booming industry are arguing that pre-pay cannot easily be classified as e-money. They say that pre-pay funds are complicated by the fact that those subscribers normally only spend a small fraction of their pre-pay accounts on such products - the bulk goes on airtime and is therefore not spent like e-money. They are also keen to ensure that close auditing of pre-pay subscribers - something that is part of the e-money directive to reduce money laundering - is not made mandatory because of the considerable back office burden it would introduce.

Mobile operators can and do get around this problem completely by selling these services exclusively themselves. But in fact, there are often two other parties involved in the sale: the aggregators who provide infrastructure services linking to the operators, and the content providers.

The aggregators are in a unique position, because they manage the flow of traffic going to the operators, as well as the flow of money and settlement going between operators and the content providers.

Steve Proctor, chief executive of aggregator iTagg, expresses the concerns of many. "Overnight the entire ringtone industry could die. I am not convinced the operators are doing enough to stop this."

Vodafone says it is consulting with all players - notably the Financial Services Authority in the UK and the European Commission - saying that it hopes for a solution that is "reasonable, proportionate and workable". It will not say exactly what this solution might be, but stresses that the current directive was formulated when the mobile payments market was not envisaged.

"It came as something of a surprise that the e-money directive applied to pre-pay," says Susie Lonie, Vodafone's senior product manager for m-commerce. She says Vodafone is looking at a solution where the operator becomes the factoring company - effectively taking the debt of the third parties involved - as is being applied in Germany.

mBlox, one of the largest aggregators, with operations in the US and Europe, believes the EU is keen to find a compromise. "At first, we all thought it was a car crash and we would just have to cut our own way out. Now we are realising that the EU is trying to be helpful and is, in fact, trying to cut us out, not kill us off," says mBlox's chairman, Andrew Bud.

Bud believes the problem could be largely solved if the industry were to estimate the amount of pre-pay used for PSMS by a typical user - a figure he puts at 2-5% (eg 25p out of a £10 card). This sum could then be subject to e-money regulations without a major burden on the industry. He also believes that a waiver allowing payments totalling £10m should be in place for contractual arrangements between operators and aggregators to ensure the current structure of the industry is allowed to continue to flourish.

But some operators are also pinning their hopes on a new payment system. Four operators - Orange, T-Mobile, Vodafone and Spain's Telephonica Movile - have clubbed together to create Simpay, a kind of clearing network that would link third parties directly to payment from the participating operators.

A key aim of Simpay is to reduce the number of contractual relationships needed between operators and merchant third parties. In theory, one contract would allow transactions to take place between all members of the Simpay system. Its first test will be the launch of a live service slated for early next year.

Simpay's chief executive, Tim Jones, says one of the thorniest issues is what is known in the industry as KYC - know your customers. Anti-money laundering legislation requires KYC, but he believes it would create huge problems for the pre-pay industry.

"Yes, we have customers called Mickey Mouse or Donald Duck, but what is wrong with that? If you had to know them all, you would lose thousands of customers: that would be a big deal." But Jones ducks the question of e-money, saying it is up to the operators to sort out.

The idea that your mobile will replace your wallet looks set to remain on the drawing board for some years yet.