India Inc is witnessing a major shift from cash driven economy to a cashless economy with a steep rise in the mobile transaction services through digital payment modes in the financial technology industry undoubtedly pushing huge pressure on cash. The payment industry is striving to become an integral part of the economy. With the evolution of online wallets, consumers are provided with simpler and more efficient method to complete online transactions across a wide variety of merchants, and are growing at a considerable rate. Prepaid Payment Instruments (PPIs) play significant role in pushing the country towards cashless economy, where transaction will be settled by way of high speed encrypted data exchange between different servers and the need to carry hard cash will be a thing of past.
Definition of Prepaid Payment Instruments
Prepaid Payment Instruments as defined in the Payment & Settlement Systems Act, 2007 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. PPI sector is regulated by the Reserve Bank of India (RBI) and as per the RBI regulations, there are three types of PPIs:
(i) Closed system payment instruments
(ii) Semi-closed system payment instruments and
(iii) Open system payment instruments (multipurpose cards)
Regulatory Aspect of PPIs
The Payment and Settlements System Act, 2007, entrusts upon the RBI, the responsibility for regulation and supervision of all payment and settlement systems in the country. Before, 2007, many cards and instruments were issued to unsuspecting consumers. With the emerging threat of financial terrorism lurking in the background, the RBI issued guidelines for the issue of these instruments in 2009. With an aim to strengthen the regulations of the (PPIs), RBI has issued the Master Directions on Issuance and Operation of Prepaid Payment Instruments in India on March 20, 2017. These directions have been issued with the view to strengthen the norms for safety and security and mitigating the risks and the potential threats posed to the customers in the era of rapidly rising services in the digital payment ecosystem transactions. The directions are presently at the draft stage and the Regulator is seeking comments on the same from the Industry latest by March 31, 2017.
Key Changes introduced by draft Master Directions
The major changes being made in the Master Directions relate to change in entry point norms, KYC requirements, rationalisation of types of PPIs, consolidation of various categories of PPIs, customer service and protection related aspects such as safety and security of the transactions as also the system, risk mitigation measures, complaint redressal mechanism, forfeiture of unutilised balances, fraud monitoring and reporting requirements, etc. The key changes highlighted in directions are innumerated below:
- All entities, seeking fresh approval / authorization from the RBI under the Payment and Settlement Systems Act, 2007 henceforth, shall have a minimum positive net worth of Rs. 25 crores as per the last audited balance sheet and the same shall be maintained at all times. Entities shall submit a certificate for compliance with the networth requirement at the time of making application for authorization and also annually by end of September as per the audited balance sheet. The Regulator has proposed to significantly increase the audited net worth criteria for launching PPIs. This regulation shall also apply to existing entities that have been provided time limit upto September, 2020 to increase their capital base, failing which they will not be able to operate. This move of the Regulator aims to limit only serious digital wallet companies to remain in the business in order to avoid defaults in payments.
- The Regulator has proposed another key change in the regulations with respect to KYC Norms wherein the prepaid payment license holders are required to convert their minimum KYC (Know Your Customer Norms) wherein one could hold upto Rs 10,000 in the account to full KYC account wherein customers can now hold upto Rs 20,000 by June 30, 2017. This move is a bit stringent for stand-alone wallet companies as their cost of acquisition will become higher. The regulator with this move intends to keep a close watch on the usage of PPIs. The amount in a PPI should not exceed Rs 1 Lakh at any point of time if the customer provides full KYC and Rs 20,000 if the customer provides minimum KYC details to the PPI issuing entity
- Another significant step taken by the Regulator in the draft directions relates to safeguarding against money-laundering by directing the PPI Issuers to maintain a log of all the transactions undertaken using the PPIs issued by them. This data shall be made available for scrutiny by the Reserve Bank or any other agency / agencies as may be advised by the Reserve Bank. The Issuers shall also file Suspicious Transaction Report (STR) to Financial Intelligence Unit – India (FIU-IND).
- While the regulator has made some norms stringent, it has also suggested an easement of rules with respect to allowance of cross-border inward remittances into mobile wallets and interoperability among mobile wallets. The draft directions say that cross-border facility shall be enabled only on “explicit request” of the customer and a transaction limit of Rs 5,000 shall apply to begin with. Interoperability will immensely benefit the wallet users who will not have to look out for merchants accepting certain wallets henceforth.
In addition to the above mentioned points, some other major announcements in these directions are enumerated below:
- PPIs shall now be permitted to be loaded / reloaded by cash, by debit to a bank account, by credit and debit cards, and other PPIs (as permitted from time to time).
- Cash loading to PPIs should be limited to Rs 50,000 per month subject to overall limit of the PPI.
- Maximum value of any prepaid payment instrument, where specific limits have not been prescribed, should not exceed Rs 50,000.
- PPIs also need to submit a yearly systems audit report carried out by a team of chartered accountants. This system audit should cover technology, hardware and compliance systems of PPIs.
- PPIs needs to stop the issuance of paper voucher by December 31,2017 move towards a complete electronic format like mobile like mobile wallets, magnetic cards or smart cards.
- PPI for mass transit system maximum value has been increased from Rs 2000/- to Rs.3000/-
- PPI issued to NRI visiting India has been discontinued altogether with immediate effect from the date of publication of these Master Directions.
- PPI issuers facilitating payment on e-commerce website shall now obtain an undertaking form the individual merchants registered on the e-commerce website (who is actually accepting payments through the PPIs of the Issuers).
- PPI issuers with zero balance in their wallets for a consecutive period of one year shall be closed automatically by the issuers, and a notice sent to the PPI holders.
- The value for prepaid gift cards reduced to Rs 20,000 from Rs. 50,000.
- PPI issuers shall obtain an undertaking along with the list of the merchants (who are actually accepting payments through the PPIs of the Issuers) from the digital marketplace and/or payment aggregator / gateway that the payment made by the Issuers is used for onward payments to the respective merchants. This undertaking and list shall be submitted by the Issuers to the bank maintain the escrow account.
- Non-bank PPI Issuers to obtain prior written permission of the Reserve Bank in respect of any takeover or acquisition of control of non-bank entity, which may or may not result in change of management or any change in the management of non-bank entity, which would result in change in more than 30 per cent of the directors, excluding independent directors.
The draft directions clearly sets out a list of detailed instructions that seeks to make PPIs safer for customers. The regulator’s clear intention through these directions is to allow entry of only deep pocketed entities in the business of issuance of PPIs. This was required to ensure the players are capable of deploying proper and secure technology to ensure integrity of the PPI system to avoid misuse of e-wallets for money laundering or fraud. The e-wallet companies may find these directions stringent and challenging to comply with. While a lot is being done by the regulators to minimise risk and facilitate smooth functioning of the business, for the exact outcome of the directions we need to wait for the reaction of the entities already into business.
by – Kirti Sharma (firstname.lastname@example.org)