India is now home to over 4,200 plus startups with almost 10-15% being fin-techs. In many of these the focus is on prepaid payment instruments (PPIs). The regulation must be enabling to help the startups thrive, as well as strong enough to keep a check on the issuers of the PPI. To do so the Reserve Bank of India (RBI) has put together an inter-regulatory working group for fin-techs and digital banking entities. The scope of services of the working group is –
• To gain a general understanding of the major Fin Tech innovations / developments, counterparties / entities, technology platforms involved and how markets and the financial sector in particular, are adopting new delivery channels, products and technologies.
• To assess opportunities and risks arising for the financial system from digitisation and use of financial technology, and how these can be utilised for optimising financial product innovation and delivery to the benefit of users / customers and other stakeholders.
• To assess the implications and challenges for the various financial sector functions such as intermediation, clearing, payments being taken up by non-financial entities.
• To examine cross-country practices in the matter, to study models of successful regulatory responses to disruption across the globe.
• To chalk out appropriate regulatory response with a view to re-aligning / re-orienting regulatory guidelines and statutory provisions for enhancing Fin Tech / digital banking associated opportunities while simultaneously managing the evolving challenges and risk dimensions.
• Any other matter relevant to the above issues.
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RBI had permitted the issuance of prepaid payment instruments in the country and the same is seen as a means to settle transaction under the Payment and Settlements Systems Act, 2007. Like all other developed nation of the world, India also launched its parallel real-time gross settlement systems (RTGS) infrastructure around the year 2007. The emergence of new mode of payments was seen as a striking opportunity by both business houses and new generation entrepreneurs and they came up with innovative ideas and solutions to combat the issues faced by the general public to transact, be it an online or a physical transaction.
Business houses started to issue gift voucher to lure more and more customers towards their products and services. This tactic was slowly picked by the small-scale retail outlets to attract customers by giving away free and pre-paid vouchers to their regular customers. The startups on the other hand came to the rescue of the dying online transactions due to the complication faced by people undertaking online transactions. They introduced the concept of e-wallets, where one could transfer money and the same could be used to settle transactions on a latter period. The issuance of prepaid payment instruments are the stepping stone to move on to a cashless economy, where transactions will be settled through exchange of information via a centralized data centre. The instruments will be the ultimate weapon against currency terrorism.
While the instruments are seen as the most powerful device for settlement of transactions, they must be closely regulated to keep checks on the use of the instruments and prevent larger mishaps. What follows is an analysis of the regulation regulating the issuance and operation of prepaid payments instruments in India.
Prepaid Payment Instruments (PPI)
The RBI guidelines define prepaid payments instruments as – “Pre-paid payment instruments are payment instruments that facilitate purchase of goods and services, including funds transfer, against the value stored on such instruments. The value stored on such instruments represents the value paid for by the holders by cash, by debit to a bank account, or by credit card. The pre-paid instruments can be issued as smart cards, magnetic stripe cards, internet accounts, internet wallets, mobile accounts, mobile wallets, paper vouchers and any such instrument, which can be used to access the pre-paid amount (collectively called Prepaid Payment Instruments hereafter). The pre-paid payment instruments that can be issued in the country are classified under three categories viz. (i) Closed system payment instruments (ii) Semi-closed system payment instruments and (iii) Open system payment instruments.”
Clearly, any instrument which can be used to access the prepaid amount to settle transaction will be classified as prepaid payment instruments. Further the prepaid payment systems can classified as –
1. Closed ended systems – The instruments, which can be used only at the issuer’s location of the instrument are called Closed System Payment Instruments. These are not recognized by third parties and the same are not classified as payment systems by the RBI. For example: metro smart cards are recognised by the metro railway only.
2. Semi-closed systems – These are recognised by a group of people/ merchants and can only be used at the establishments of the group members. For example: Payback Card
3. Open ended systems – These are equally to currency and are recognised at large by all merchants, traders and business houses. For example: traveller’s card and gift card.
Eligible entities
The following entities have been allowed to issue prepaid payment instruments under the Guidelines:
1. Banks;
2. NBFCs; and
1. Other entities, which acquire permission from the RBI to issue prepaid payment instruments – Entities having minimum paid up capital of Rs5 crore and a positive net worth of Rs1 crore and registered with the RBI can issue PPI. Further, such companies have foreign direct investment (FDI)/ foreign institutional investment (FII), the same should be in compliance with the capital requirements, as prescribed by the government, from time to time.
However, banks permitted by the RBI to provide mobile banking facilities, will be allowed to issue mobile-based prepaid payment facilities (mobile wallets).
Categories of PPI
The RBI Guidelines lays down the definition of the PPI. Instruments that qualify would be –
1. Semi closed PPI –
a. Issue of reloadable PPI up to Rs10,000 per month and the outstanding of such instrument must never go beyond Rs10,000 by accepting basic details of the holder.
b. Issue non-reloadable PPI value of which must be within Rs10,000 to Rs50,000 by accepting official valid documents of the holder.
c. Issue of reloadable PPI up to Rs1 lakh by complying with RBI know your customer (KYC) norms.
2. Prepaid gift instruments
3. Prepaid instruments for reissuance by the holder
4. Prepaid instruments for onetime/ periodic payments to customers of banks/ NBFCs
5. Prepaid instruments for cross border inward remittance
6. Prepaid instruments for reissuance by corporate to their employees
7. Prepaid instruments for foreign national/ non-residential Indians (NRIs) visiting India (traveller’s card)
8. PPI for transit systems (metro smart cards)
Use of the amount prepaid
Amount of money loaded into a PPI can be used for the purposes as directed by the RBI. The list of transaction that can be executed over a PPI are listed below:
1. Receipts –
a. Receipts of sale proceeds
b. Reload of the PPI
c. Receipts of failed/ cancelled transactions
2. Payments –
a. Payments to merchants/ service providers
b. Transfer from one PPI to another
c. Statutory payments, etc.
The amount received by the PPI issuers must be parked and disclosed in their books as permitted by the RBI-
1. Banks and NBFCs – The amount outstanding at any point on a PPI must form part of the net demand and liabilities of the entity for maintenance of reserves by the entity.
2. Other entities –
a. The amount must be held by the entity in an escrow account with a scheduled commercial bank.
b. In case of shift of the account from one bank to another, prior permission must be acquired from the RBI and the same must not affect the payment and settlement process.
c. The balance of the account must at all times be equal to outstanding values of the PPI issued by the entity.
d. The amount must only be used to make payments as per the orders received from the PPI holder.
Validity of PPIs
All issued PPIs must a minimum validity of six months and maximum of three years from the date of its issuance. In case of non-reloadable PPIs the outstanding amount at the end of its term would be forfeited if the same is not transferred by the holder to a similar new instrument acquired by the holder. In open-ended PPIs cash withdrawal is permitted up to Rs1,000 per day.
(Ameet Roy works with Vinod Kothari Consultants Pvt Ltd)
