cyber litigation

Written by Kaushal Kumar, pursuing Diploma in Cyber Law, Fintech Regulations and Technology Contracts offered by Lawsikho as part of his coursework.  Kaushal works as Technology and Management Professional at an IT company and has a keen interest in obtaining knowledge on Cyber Security and Cyber Law.

As a result of the introduction of Payment and Settlement Systems, Act 2007, banks and non – banking financial institutions issuing prepaid payment instruments in the country and other new entrants should seek authorization from the Reserve Bank. Prepaid Payment Instruments (PPIs) are established to facilitate transactions such as the purchase, including the transfer of funds, of goods and services against the value stored in these instruments. The PPI value is the value paid in cash by the holders through a bank account, etc. There is a wide range of PPIs, including smart cards, magnetic strip cards, internet accounts, internet wallets or digital wallets, mobile accounts, mobile wallets, paper vouchers and any other tool that can be used in advance.
The Reserve Bank of India has therefore issued operating guidelines. These guidelines set out the criteria for eligibility and the basic conditions for the issuance of prepayment instruments in the country. Before understanding these criterion, let us have a look at few of the most important definitions relating to PPI.

Definitions

Issuer

Entities that issue prepaid payment to individuals/organizations. The money collected is retained by these entities and is paid directly or through a settlement arrangement to the merchants who are part of the acceptance arrangement.

Holder

Individuals/organizations that acquire prepaid payment tools for goods and services purchases.

Prepaid Payment Instruments

Prepaid payment instruments are those that make it easier to buy goods and services against the value stored on these instruments. The value stored on these instruments is the value paid by the holder, cash, bank account debit or credit card.

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Prepaid instruments can be issued as smart cards, magnetic stripe cards, internet accounts, internet wallets, mobile accounts, mobile wallets, paper vouchers and any of the instruments used to access the prepaid amount (collectively referred to hereafter as payment instruments).

The prepaid payment instruments which can be issued in the country fall into four categories viz.

Closed system payment instruments

These are payment instruments generally issued for use only in their respective establishments by business establishments. These tools do not allow withdrawal or redemption of cash.

Semi-Closed system payment instruments

These are payment instruments that can be redeemed at a group of clearly identified merchant locations/establishments that contract to accept the payment instrument specifically with the issuer. These instruments do not allow the holder to withdraw or redeem cash.

Semi-Open system payment instruments

These are payment instruments that can be used to purchase goods and services from any card that accepts merchant locations. These instruments do not allow the holder to withdraw or redeem cash.

Open system payment instruments

These are payment instruments that can be used to buy goods and services and also allow ATMs to withdraw cash.
In addition to the above, there are mobile prepaid instruments; it means that the value of prepaid speaking time issued by mobile service providers can also be used to purchase ‘ value-added service ‘ from mobile service providers or third – party service providers.

Eligibility

  • Banks and Non- Bank Finance Companies (NBFC), which meet the eligibility criteria, could issue all categories of prepayment instruments.
  • Only banks can launch mobile prepayment instruments (mobile wallets and mobile accounts) with mobile banking transactions.
  • Other entities may only issue prepaid payment instruments for closed systems and prepaid payment instruments for semi-closed systems.
  • Mobile Prepaid Value: Mobile service providers may issue a prepaid mobile value. In addition to the talk value, the use of such prepaid value as a payment tool shall be limited to the purchase of digital content/services that are for use on mobile phones only. The use of mobile prepayment is not permitted for the purchase of other goods and services.

Exemption

  1. Entities issuing closed system Prepaid payment instruments shall be exempt from the scope of the guidelines and shall not seek authorization from the Reserve Bank of India for the issuance of the following payment instruments:
  • Only the maximum value of a closed system payment instrument is Rs 5000/-.
  • These instruments cannot be used to purchase another prepaid payment instruments.
  • The amounts collected under the scheme shall be exempt from the deployment provisions provided that the value of the outstanding instruments does not exceed Rs 50 lacs or 10 percent of the net owned funds of the issuers, whichever is lower.
  • Entities issuing these instruments must inform RBI when such schemes begin to operate.
  • A half-yearly audited statement shall be submitted by such entities to the Reserve Bank indicating the total value of the instruments issued during the period and the outstanding value at the end of the period.

2. Foreign Exchange Prepaid Payment Instruments: Entities authorized under FEMA to issue prepayment instruments for foreign exchange are exempted from the scope of these guidelines. The use of such payment instruments shall be limited to allowable transactions in the current account and subject to the FEMA limits.

3. Mobile Prepaid Instrument: Under the following conditions, mobile prepaid instruments are exempt from the guidelines:

  • In addition to the talk-time value, the use of such prepaid instrument shall be limited to the purchase of only those added value digital content/services that can be used on mobile phones.
  • The use of mobile prepayment instruments for the purchase of other goods or services is not allowed.
  • Such prepaid instruments are not allowed to be cashed.

Capital requirements

Only banks and non – bank finance companies that comply with the capital adequacy requirement laid down from time to time by the Reserve Bank of India are allowed to issue prepaid payment instruments.
All other entities shall have at least Rs 10 lacs owned net funds.

Safeguards against money laundering KYC/AML/CFT provisions

The Know Your Customer / Anti-Money Laundering / Combating Financing Guidelines issued by the Indian Reserve Bank to banks from time to time apply to all entities issuing prepayment instruments. In order to ensure compliance with these guidelines, necessary systems should be introduced.
The use of prepaid payment instruments for cross-border transactions is not allowed except for the above-mentioned (Section 4(b)) payment instruments.
The maximum value of any prepayment instrument (where there are no specific limits) shall not exceed Rs 50,000/-.
The KYC requirements are only available in the following cases for exemption/relaxation form:

  • System Payment Instruments up to Rs 1000/-may be issued without any KYC (not more than one per person) subject to annual turnover / suspicious transactions reporting.
  • Payment instruments prepaid up to Rs. 5000/-may be issued by accepting as proof of identity any ” Government issued identity cards. ” Such instruments shall not allow cash withdrawal.
  • Semi-closed prepaid payment instruments that only allow payment of utility bills / essential services up to a limit of Rs 10,000/-may be issued without the issuer’s KYC. The entities that issue such an instrument can ensure that these instruments are only acceptable to institutions that maintain the customer’s identity.
  • Utility bills / essential services shall only include electricity bills, water bills, telephone bills / mobile phone bills and insurance premiums, gas cooking payments, Internet / Broadband connections ISPs, cable / DTH subscriptions and citizens ‘ services provided by government or government bodies.
  • Entities issuing prepaid payment instruments to institutions/companies for further issuance to their employees or other beneficiaries by these institutions/companies may ensure that these institutions/companies keep full details of the employees or beneficiaries to whom such payment instruments are issued. The value of each payment tool shall not exceed Rs 5000/-. Such instruments shall not allow cash withdrawal.

Entities issuing prepayment instruments shall keep a log of all transactions carried out using these instruments and file a Suspicious Transaction Report (STR) with the Financial Intelligence Unit–India (FIU-IND).

Deployment of money collected

The outstanding balances for schemes operated by banks and non – bank financial companies are part of the net demand and time liabilities for the maintenance of reserve requirements. This position is calculated on the basis of the balances in the bank’s books as of the reporting date.
Other entities issuing payment instruments are required to keep their outstanding balance with any scheduled commercial bank in an escrow account (non – interest bearing).
Entities that have been in business for at least ONE YEAR and whose accounts have been properly audited for the full accounting year can keep a substantial portion of these funds in an interest account. The quantity of the core is the bank’s satisfaction. However, no loan can be granted against this deposit.

Issuance and reloading of Prepaid Payment Instruments

All prepaid payment instruments issuing entities may issue reloadable or non-reloadable prepaid payment instruments.
The reloading of closed system payment instruments in cash/debit cards/credit cards to retail agents and issuers ‘ outlets would be allowed.
Banks and NBFCs may issue and reload such payment instrument in their branches against cash/debit payment to bank account/credit cards.
Banks are allowed to issue and recharge such payment instruments by their business correspondents appointed in accordance with the guidelines issued by the Reserve Bank in this respect.

Validity

All prepaid payment instruments issued in the country shall have a minimum period of validity of six months from the date of activation/issue.
In the case of non-reloadable prepaid payment instruments, the outstanding amount for a new similar payment instrument of the same issuer may be allowed at the expiry of the payment instrument.
The balance sheet in any instrument of payment shall not be terminated immediately upon expiry of the instrument. The value can be reduced by 10% of the outstanding value per month. The holders may also be warned adequately in advance regarding the expiry of the payment instrument’s validity.

Redemption

The issuers of such instruments shall not dishonor the customer’s payment/transfer instructions at approved locations if the balance is sufficient against the instrument.
Holders of prepaid payment systems other than open-system payment instruments are also allowed to redeem the outstanding balance within the expiry date if, for any reason, the scheme is terminated or directed to be discontinued by the Reserve Bank.
If redemption is provided as above, the value of the redemption shall not exceed the outstanding amount or the face value (loading limit) of the instrument.

Fraud prevention and Security standards

The issuers of prepaid payment instruments must establish adequate information and a central database and security infrastructure, as well as fraud prevention and detection systems.

Customer Protection Issue

All issuers of prepaid payment instruments shall disclose in a clear and simple language all important terms and conditions, including:

  • All charges and fees for the use of the instruments.
  • The expiration period and the terms and conditions associated with the instrument’s expiry.
  • The phone number and the website URL for the customer service.

The entity issuing prepaid payment instruments must establish an effective mechanism for the redress of customer complaints.

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