e-wallets

This article is written by Deepansha Vij pursuing Diploma in M&A, Institutional Finance and Investment Laws. 

This article has been published by Sneha Mahawar.​​ 

Introduction 

India was once a cash-based economy, and now it leads the world in real-time digital payments, accounting for almost 40 percent of all such transactions. The digital payment volume has climbed at an average annual rate of 50 percent over the past five years. As of June 2021, transactions more than doubled to 5.86 billion as the number of participating banks jumped 44 percent to 330. The increase in digital payments has spurred growth, especially after the COVID pandemic. One of the most commonly used platforms to make digital payments is an e-wallet which is easy to use and anyone with a smartphone can access it.

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What are e-wallets

E-wallets, as the name suggests, are wallets in electronic form. Like a normal wallet, an e-wallet is an application that also stores cash and credit/debit card information to make transactions both online and offline. The buyer’s payment information is stored in the payment system, and as a result, the same information, like an account number or debit card number, need not be provided repeatedly to make transactions. E-wallets have done away with the hassle of carrying cash everywhere, and transactions can now be made with just one click. E-wallets are a form of PPI (Prepaid Payment Instruments), which are primarily governed by the RBI’s Master Direction on Prepaid Payment Instruments. The law that authorized the issuance of PPIs and gave the RBI the power to regulate the PPIs is the Payment and Settlement System Act, 2007.

Types of e-wallets

E-wallets are generally classified into three types- open wallets, closed wallets, and semi closed wallets. This classification is based on how widely or freely the wallet can be used. A closed wallet is one in which transactions have to be made with the wallet’s issuer. This type of wallet cannot be used to enter into transactions with other entities. For example, Ola Money. The funds stored in the Ola Money wallet can only be used for making payments with Ola and cannot be used with any other entity, for example, Uber or Amazon. A closed wallet thus has a limited scope of usage. Also, unlike the other two, a close wallet does not require authorisation by the RBI as it is not identified as a payment system under the Payment and Settlement System Act, 2007.

The other type of wallet is the open wallet, which can be used to conduct transactions in any part of the world, but both the sender and receiver should have the same account on the app. They can be issued by banks or institutions partnering with other major banks. Users of such wallets can also withdraw cash through ATMs.

The semi-closed wallets allow the users to make transactions at specific merchants and locations. For undertaking transactions through these types of wallets, there needs to be a contract or agreement with the issuer. Unlike open wallets, which allow cash withdrawals, the user of a semi closed wallet cannot withdraw cash.  The most popular semi-closed e-wallets are Paytm wallet or Google wallet, which store the funds in  electronic form, and once the user makes payment, the funds are transferred from the wallet to the merchant’s account.

The Payment and Settlement Systems Act, 2007

The Payment and Settlement System Act was introduced to regulate and supervise the payment system in India. According to this Act, “payment system” means a system that enables payment to be effected between a payer and a beneficiary. “Payment System” includes the systems enabling credit card operations, debit card operations, smart card operations, money transfer operations, or similar operations, and thus includes e-wallets as well. The Act gives power to the Reserve Bank of India to regulate and supervise the payment systems in India by forming a ‘Payments Regulatory Board‘. For commencing or operating a payment system in India, the authorization of the RBI is needed, except in the case of a closed PPI.  

Firstly, an application has to be made to the RBI to obtain approval. Such an application has to be accompanied by a No Objection Certificate from the regulatory department within 30 days of obtaining such clearance. The eligibility criteria for non-banks seeking authorisation from the RBI is a minimum positive net worth of 5 crore rupees as per the latest audited balance sheet. Also, a minimum positive net worth of Rs. 15 crore has to be maintained by such a non-bank PPI issuer all the time.  The non-bank PPI issuer shall also have to submit Form A to the RBI to seek its authorisation along with the requisite application fees.

After the receipt of the application, the RBI will conduct an inquiry regarding the genuineness of the application, having regard to various considerations such as the technical standard/design of the payment system, the need for the proposed payment system, the manner in which the transfer of funds will take place, and various other considerations. The RBI will then grant approval or refuse the application if an opportunity is given to the applicant to be heard. Also, such applications received by the RBI have to be disposed of within 6 months from the date of filing. In the event of a refusal by the RBI, the applicant can appeal to the central government within 3 months of receiving such a communication.

RBI Master Directions on PPI

The RBI has issued a master direction on Prepaid Payment Instruments (PPI) under the powers granted in the Payment and System Settlement Act. The master direction provides for the authorisation, supervision, and regulation of entities that issue and operate PPIs in the country.

Prepaid Payment Instrument has been defined as instruments that facilitate the purchase of goods and services, financial services, remittance facilities, etc., against the value stored therein. Further, the master direction has classified PPIs into two kinds- Small PPIs and Full KYC PPIs.

Small PPIs can be issued by both banking and non-banking entities by obtaining minimum user details. The minimum details include the mobile number of the user verified by an OTP and Unique Identification number of any ‘mandatory document’ or officially valid document. Such PPIs can only be used for the purchase of goods and services, and transfer of funds through these PPIs is not permitted. Further, the small PPIs are classified into PPIs with cash-loading facility and PPIs with no cash-loading facilities. The amount loaded in both of these PPIS cannot exceed Rs. 10,000 in any month, while the yearly limit is Rs. 1,20,000. PPIs with cash loading facilities are reloadable via bank account or full KYC PPI cash or credit card, while the latter is not reloadable and has to be converted into a full KYC PPI within 24 hours of such issuance. 

Cross-border transactions

The Master Direction does not allow for cross-border transactions except in two cases. The first case pertains to cross border outward transactions, which can be undertaken through PPIs issued by banks with an AD-1 license only on the explicit request of the holder. Further, only current account transactions can be undertaken, such as business transactions between residents and non-residents or the payment of interest on a loan. The limit on such transactions is 10,000 rupees per transaction, and the overall monthly limit is 50,000 rupees.

The second case pertains to cross-border inward remittances. Such transactions can be undertaken through full KYC PPIs issued by banking or non-banking entities appointed as Indian agents of authorized overseas principals for beneficiaries of inward remittances. All the transactions will have to be in conformity with the MTSS Guidelines, which regulates the transfer of personal remittances from abroad to beneficiaries in India. The limit on such an amount is up to 50,000 rupees only. 

Security measures and customer protection

The directions tend to protect the interests of the user by putting various security measures in place, such as restrictions on multiple log-in attempts by way of inactivity or timeouts. Further, the directions provide for two-factor authentication. The users are made aware of any transactions undertaken through their account by sending alerts via SMS and mentioning the balance in the PPI. 

PPI holders will also have to disclose all important terms and conditions in clear and simple language to make the users understand the functioning of the PPIs and the limitations/benefits attached to their use. The purpose of this is to ensure that the users are not kept in the dark and are not exploited by the PPI issuers. The terms and conditions can include the charges, fees, and expiration of usage of such PPIs. Also, the customer care details shall be provided to the users by displaying the same on the app or the website. The complaint made by the user will have to be resolved within 48 hours of its receipt and not later than 30 days. If the consumer is still not satisfied with the response or has not received any response at all, he can file a complaint with the ombudsman within the jurisdiction of the office of the service provider. This is regulated by the Ombudsman Scheme for Digital Transactions. Some of the grounds can be failure to credit the merchant’s account within a reasonable time, failure to load the funds within a reasonable time, or any unauthorized electronic fund transfer. If the consumer is still not satisfied with the decision of the ombudsman, he can file an appeal with the appellate authority, which is the office of the deputy governor, and further to any consumer court or forum.

UPI

UPI has become one of the most commonly used digital payment platforms and is the flag bearer of India’s fintech revolution. The UPI is an instant real-time payments system that enables instant interbank peer-to-peer and person-to-merchant transactions through mobile devices. UPI was a response to the nation’s patchwork of rules and paperwork for payments. The goal was to make transfers easier and safer by allowing multiple bank accounts on the same mobile platform for individual and business use alike. It rapidly came of age. The master directions link UPI with wallets through interoperability.
Interoperability, which means the technical compatibility that enables a payment system to be used in conjunction with other payment systems. The circular mandates that where PPIs are issued in the form of wallets, interoperability shall be enabled through UPI. Further, PPI holders shall be on-boarded for UPI by their own PPI issuer only.

Limited liability of customers

The customer will not be liable if there is contributory negligence, fraud, or deficiency on the part of the PPI issuer. Also, the customer will be abstained from any liability if there is a third party breach, meaning if there is no fault on the part of the customer or the PPI issuer and the customer informs the bank of the same within 3 days of receiving the communication of such an unauthorised transaction. The liability of customers in cases of unauthorised transactions caused by third party breaches will be determined by the transaction value and the time taken by the customer to report such an unauthorised transaction. The PPI issuer shall provide a toll-free customer helpline to report the transaction. Additionally, a direct link to lodge a complaint regarding fraudulent transactions will be provided on the issuer’s app or website.

Conclusion

With the rise in digital transactions, especially through wallets, a strong regulatory mechanism becomes indispensable. The Payment and Settlement System Act gives immense powers to the RBI to control and regulate payment systems, which include wallets. The RBI has ensured proper checks on the issuers of such wallets and provided a user-friendly framework for their regulation. The master direction issued by the RBI has put several mechanisms in place, such as alerts on transactions, the filing of complaints, and zero liability for customers. The RBI has put the burden on the PPI issuers to inform and make the users aware of the terms and conditions of their usage. Also, the grant of approval/authorisation to the entity interested in issuing PPIs has been a smooth and quick process. Overall, the mechanisms put in place provide convenience to both the users and the issuers of such e-wallets. 

References

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