Ranking second highest in Asia Pacific for digital payment adoption, India is set to account for 71.7% digital payments of its total payments volume by 2025. Leaving cash and cheque transactions at 28.3%, according to a report by a US-based payment systems company. The guidelines in Master Directions on Prepaid Payment Instruments (PPI) for issuing prepaid instruments apply to both bank and non-bank entities.
TYPES OF PPI
In the Master Directions, RBI has laid down the types of PPI that banks and non-bank entities may issue to customers –
- Small PPI – these are issued after obtaining the minimum details of the PPI holder. They shall be used only for the purchase of goods and services. Not permitting Funds transfer or cash withdrawal.
- Full-KYC PPI – Issued after completing KYC of the PPI holder. These PPI shall be used for purchasing goods and services and allows funds transfer, or cash withdrawal.
Earlier, PPI were categorised as Closed, Semi-closed, and Open PPI. The classification has been modified, and they are now categorised under Small PPI and Full-KYC PPI, with the difference being KYC requirement, fund transfer, and cash withdrawal, optionality.
A digital wallet is an electronic version of your traditional wallet that allows for transactions to be made with or without having the bank account details of the receiver.
Accessing a digital wallet by a mobile application tops the usage, but it can also be accessed by other means, such as a website or a desktop application.
ADVANTAGES OF MOBILE WALLETS
Mobile wallets offers interoperability through UPI to all KYC-compliant PPI. Other advantages of wallets include:
- One-click payment solution – A mobile wallet takes the information of your debit/credit card, making it easy to add money to the wallet or directly make payments.
- Accessibility – Using Near-field communication (NFC)-enabled technology or QR code technology, mobile wallets are accessible anytime and anywhere through stable internet connection.
- Multi-usage –It can be used for transfer of money between users, utility bill payment, and online shopping support.
- Secured privacy – with two-factor authentication and data encryption, mobile wallets offer a secure transaction interface.
- Usage Benefits – Usage offers cashbacks, vouchers, loyalty points, etc.
Banks and non-bank entities can issue PPI with requisite approvals, and comply with KYC / AML / Combating Financing of Terrorism (CFT) guidelines as set out by RBI in Master Direction – Know Your Customer Direction, 2016.
Prevention of Money Laundering Act, 2002 (PMLA) and Rules apply to the issuing entities in the context of AML
The PPI issuer has to maintain a log of all transactions for ten years, for RBI scrutiny, and also file Suspicious Transaction Reports (STRs) to Financial Intelligence Unit-India (FIU-IND).
In our previous article, we also detailed why RBI banned issuing credit lines on PPI without approvals.
DEPLOYMENT OF MONEY
The Master Direction on PPI states that a Non-bank PPI Issuer has to maintain an outstanding balance in the escrow account with a scheduled commercial bank to ensure timely settlements. In contrast, banks issuing PPI shall record the same under net demand and liabilities. But, regulation 7 states that the PPI Issuer shall not pay any interest on the PPI balance.
Regulation 12.4 allows an exception where the non-bank PPI issuer can enter into an agreement with the bank maintaining the escrow account to transfer the “core portion” of the amount, in the escrow account to a separate (interest payable) account subject to the following:
- The bank should be satisfied that the amount deposited represents the “core portion” after due verification of documents;
- The amount shall be linked to the escrow account
- The issuing entity is in business for at least 1 year, and its accounts are audited for the full accounting year and be eligible for this facility
- No loan is permissible against such deposits
- The core portion shall be calculated separately for each of the escrow accounts. It will remain linked to the respective escrow account. These balances shall be clearly disclosed in the auditor’s certificate submitted to RBI
The average balance computed as per the guidelines represents the “Core Portion,” which is eligible to earn interest.
When compared with ever-popular bitcoins, there is an option to earn interest against the bitcoin wallet; for instance, Zebpay pays interest on cryptocurrency deposits where the minimum earnings paid is 1 Satoshi per coin (a Satoshi is the smallest unit of a Bitcoin, equivalent to 100 millionth of the token).
On the other hand, UK-based Cashaa, a next-generation banking platform, gives loans against its crypto balance.
How the new regulation on crypto assets will impact the ability to pay interest or offer loans is something to watch. With the convenience offered by e-wallets, customers feel less attracted to aspects of earning interest on the wallet balances, and hence, the guidelines allowing the PPI issuer to deposit money in the escrow account seem a reasonable profit for running the business.
This is only for informational purposes. Nothing contained herein is, purports to be, or is intended as legal advice and you should seek legal advice before you act on any information or view expressed herein. Endeavoured to accurately reflect the subject matter of this alert, without any representation or warranty, express or implied, in any manner whatsoever in connection with the contents of this. This isn’t an attempt to solicit business in any manner.