In this article, Nritika Sangwan pursuing Diploma in Entrepreneurship Administration and Business Laws from NUJS, Kolkata discusses on Issuance and Operation of Prepaid Payment Instruments in India.

One of the greatest impacts that Demonetization had was on the Prepaid Payment Instruments business. The aim to achieve a cashless economy and the aspirations of a digital India lead the Prepaid Payment Instruments ecosystem to witness a massive growth in the later months of 2016. The Reserve Bank of India introduced the New Directions for the Issuance and Operation of Prepaid Payment Instruments with effect from October 11, 2017. These brought in various changes in the guidelines that were followed under the previous regime. These changes have been discussed hereunder.

Introduction

Prepaid Payment Instruments or ‘PPI’ as they are commonly called, are instruments which can be used to pay for transactions by parties and the  value of the same is prepaid to the issuer. According to the Reserve Bank of India, PPIs are instruments which facilitate the purchase of goods and services, inclusive of transfer of funds by using the value stored on such instruments. The value is equivalent to the value of cash debited to the bank by the party. Instruments like smart cards, online and mobile accounts, magnetic stripe cards, food cards and internet wallets are examples of Prepaid Payment Instruments.

The Government’s agenda of ensuring a cashless economy and a digital India has made many companies; specifically, NBFCs seek approval from the Reserve Bank of India (RBI) to set up business in Prepaid Payment Instruments (PPI).  India has witnessed the greatest traffic with respect to issuance of PPI post demonetization and in such a scenario, it is important to understand the functioning and laws governing the same.

Background

Reserve Bank of India is the governing authority entrusted with framing of regulations pertaining to the issuance and operation of PPI in India. The Issuance and Operation of Prepaid Payment Instruments before 2017 was regulated by the Master Circular-Policy Guidelines on Issuance and Operation of Prepaid Payment Instruments, 2016. Recently significant changes have been brought about by the Issuance and Operation of Prepaid Payment Instruments Directions, 2017 which was enacted by the RBI on October 11, 2017. These New Directions are now applicable to all the Prepaid Payment Instruments issuers, system providers and participants. The existing issuers have to comply with these new rules and directions on or before 31st December 2017.

Types of PPIs

According to RBI, there are 3 types of PPIs –

1. Open System– The payment instruments which can be used for purchasing goods and services along with transfer of funds at any location accepting card payment and facilitating with withdrawal of cash.
2. Closed System– These payment instruments are used in the purchasing of goods and services from only the issuing bank. Cash withdrawal and redemption is not facilitated by these and nor are payments and settlements made to third parties.
3. Semi-Closed System– These are made of instruments which can be used for the purpose of purchasing and selling goods and services only to certain locations under contract with the issuer. Moreover, the withdrawal and redemption of cash is not catered for.

General Guidelines for the Issuance of PPIs

The Reserve Bank of India, under the Policy Guidelines on Issuance and Operation of Pre-paid Payment Instruments in India, 2017 (See here) have prescribed certain guidelines with respect to the issuance of PPIs in India. They have been briefly summarized as follows:

1. All permitted authorities can issue reloadable and non-reloadable PPIs under the permissible categories.
2. It is imperative that the issuer has set rules and policies approved by the Board governing the issuance.
3. It is to be ensured that the name of the company for which the PPI has been authorized is visible along with the PPI brand name.
4. No interest shall be accorded on the balance in a PPI.
5. There must be permissibility to reload the PPI by cash, debit to an account by credit or debit card.
6. PPI must be issued after due diligence of the customers.
7. The loading of cash should be limited at 50,000/- per month.
8. The mode of loading and reloading must only be made in Indian National Rupee Currency.
9. The customer would be responsible for the PPI after issuance and the agents would only be responsible for acts of omission or commission on their part.
10. There must be a Grievance Redressal Mechanism in place.

Guidelines for Issuance of Specific Types of PPIs

Certain guidelines are in place for specific types of PPIs. These can be summarized as follows-

• Issuance of Semi Closed PPIs

Appropriate banking and non banking entities can issue PPIs of semi closed nature after abiding by the due diligence method. The following are the types of semi closed nature PPIs they can issue-

• Up to INR 20,000 by the acceptance of minimal details

• The outstanding amount, as well as the monthly reloading or loading, is to never go above 20,000 INR.  
• The PPI is to be issued in an electronic form
• Requirements for minimum details are to include a One Time Pin, a verified mobile number and a self declaration of the person’s name, gender, address and date of birth.
• They are to be converted into full KYC PPI after a time of 60 days having elapsed. On the failure of doing so, crediting to the PPI would be halted and merely the balance would be up for usage.
• The issuers are to make sure that no person avails the same PPI against the same number and address again.
• The issuers would have authority to ascertain the limit for transfer of funds to the source bank or the customer’s own account.
• The customer has the power to close and transfer the said PPI at any point of time.

Up to INR 1,00,000 along with complete KYC

• The outstanding amount and the monthly loading and reloading can never go above 1,00,000 INR.
• The issuance is to be in electronic form only.
• The issuers would have authority to ascertain the limit for transfer of funds to the source bank or the customer’s own account.
• There must be a provision for the appointment of ‘pre-registered beneficiaries’ by the customer and this is to be taken care of by the issuer. The holder is to provide the bank details and details of PPIs issued by the same issuer to the beneficiary, to the issuing entity.
• The limit for the transfer of funds by the pre beneficiary remains the same.
• In case of transfer in any other scenario, the limit is ascertained at 10,000 INR per month.
• The customer has the power to close and transfer the said PPI at any point of time.

Issuance of Open System PPIs

1. The banks are to be the only entities with authority to issue open system PPIs subject to complete KYC.
2. Such PPIs are to be available with the option of reloading and in electronic form like cards.
3. The outstanding amount and the monthly loading and reloading is to never go above 1,00,000 INR.
4. The cap on the transfer of funds would be equivalent to that of a semi close system PPI along with complete KYC.
5. There should be provision for transfer of funds from any such PPI to another alike open system PPI as well as debit and credit cards.

Changes brought by the New Directions, 2017 and their Impact

• Changes in Paid-up Capital and net-worth requirements

According to the Previous Circular, the mandate prescribed to the PPI issuers was a minimum paid-up capital of INR 50 million and an individual minimum positive net-worth of INR 10 million.  The New Directions have provided for an all-inclusive definition of “net-worth” and the requirement for minimum paid-up capital of INR 50 million has been done away with. However, they have prescribed a minimum positive net-worth for all non-bank entities seeking PPI authorisation as well as existing non-bank PPI issuers. It is mandatory for all the non-bank entities which have sought authorisation to have a minimum positive net-worth of INR 50 million in accordance with the latest audited balance sheet on day one and by the end of the third financial year after receiving PPI authorisation, such entities must achieve a minimum positive net-worth of INR 150 million. Existing non-bank PPI issuers are required to meet the minimum positive net-worth of INR 150 million by 31 March 2020. Further, in case the PPI issuer is a bank, it needs to meet the necessary capital requirements applicable to banks.

The purpose behind necessitating the maintenance of higher levels of net worth is to make sure that only those entities which possess sufficient finances are allowed to issue PPIs. Therefore, the impact of such change is that that those issuers who do not comply with the new net-worth requirements will no longer be eligible to issue or operate PPIs. They would either have to surrender their authorisation to the Reserve Bank of India or would have to merge with larger players. This would ensure that only serious players are allowed to issue and operate PPIs.

• Interoperability

One of the significant changes brought by the New Directions has been the introduction of provisions for harmonization and interoperability of PPIs in a phased manner, to allow the customers to carry out transactions across commercially and technically independent payment platforms seamlessly. All KYC-compliant wallets are required to be made interoperable via the Unified Payments Interface, within 6 months of the issuance date of these New Master Directions in Phase 1. The second phase requires interoperability to be enabled between wallets and bank accounts through UPI, followed by interoperability for PPIs issued in the form of cards. It is mandatory for the PPI issuers to comply with the technical and operational requirements for the interoperability; but, the actual operational guidelines on interoperability are issued separately.

This alteration enabling interoperability of PPIs has garnered tremendous support from the stakeholders of the PPI ecosystem. By virtue of such interoperability, users and customers of smaller PPI issuers will be permitted to send and receive payments from larger PPI issuers having a greater number of users.  Those entities selling goods and services are also going to be beneficiaries such interoperability as the need to sign-up with multiple PPI issuers in order to receive payments from customers is now done away with. Interoperability will also benefit the customers as they will no longer need to sign up with multiple PPI issuers.

• Stringent Know Your Customer compliance norms

The Know Your Course Guidelines prescribed by the Reserve Bank in 2016 listed the documents which can be used as the identity proof and address proof for verification but these guideline did not present directions for a strict KYC compliance.  However, the New Directions now require complete KYC verification of PPI holders. This verification is done in a phased manner.

There is likely to be significant financial as well as administrative inconvenience for the PPI issuers to ensure the completion of KYC verification in such a short time period, i.e. by 31 December 2017. The costs incurred in deploying workers for the physical verification of addresses of the holder will substantially increase.

The stringent full KYC requirements were put in place to curb fraud and misuse; however they may now act as an obstruction for quicker implementation of the revised framework. It is likely to create great difficulty for the employees who have been transferred, the workers who have migrated as well as other holders in the physical verification of their permanent address. Further, it is mandatory that PPI users are fully KYC compliant to transfer funds, irrespective of the amount of funds involved.  This reduces the utility and ease of PPIs considerably; this is likely to dissuade many users from using PPIs, thereby affecting the overall growth of PPIs.

Provisions for risk management, ensuring Security and preventing fraud

The RBI with the objective of fostering innovation and competition, safety, security, and customer protection has, by virtue of the New Directions, put in place several guidelines for prevention of fraud as well as for the maintenance of the security of the system participants. There was no presence of any previous prescription of standards in the pre-existing circular which might have helped in the prevention of fraud and the assurance of security at the same time. It is now that the issuing authorities have to come up with and ensure the maintenance of a risk management system in place along with provisions for the security of data under the purview of consumer protection. There has also been established a requirement for a policy to secure the information and for ensuring safety of payment systems. It is imperative that this policy be approved by the board as well.  

Another addition to the authentication process and verification is the inculcation of 2FA that is to be applicable to the physical as well as virtual cards and the only exception being the PPIs meant for mass transit system. This diminishes the convenience of using PPIs as an additional step has been added before the PPI can be operated.

Moreover, an arrangement for the need of a certain ‘cooling period’ on the transfer of funds upon the opening, loading and reloading or addition of a beneficiary to the PPI has been brought about. While this has been introduced with the intention of cutting down on fraud, this change too will lead to inconvenience in the use of PPIs. The goal could have been achieved by merely restricting the said introduction to high value transactions.

Authorization Process

The New Master Directions require the issue of an ‘in principle’ approval by the RBI, with a validity of 6 months which is conditional on the entities fulfilling the eligibility requirements and all other prescribed prerequisites. To receive the final authorization, these entities need to submit an SAR, i.e. a Satisfactory System Audit Report to the RBI within these 6 months. On the failure to submit the SAR, the ‘in principle’ approval will automatically lapse. However, there is a provision wherein the entities can request for a one-time extension for a maximum period of 6 months for submission of SAR.  

Categories of recognised PPIs

The New Directions recognize only two categories of PPIs:

1. Gift instruments and
2. PPI for mass-transit systems.

The Previous Circular recognized various other categories of PPIs, such as PPIs issued by banks to Government organizations for onward issuance to beneficiaries of Government sponsored schemes, and PPIs issued by banks to corporates for onward issuance to their employees. Such categories of PPIs are no longer recognized. This is likely to cause inconvenience to those entities which have already issued PPIs falling in the category previously recognized.

Conclusion

As a result of Demonetization, the business of Prepaid Payment instruments experienced a significant growth over the last year. The number of transactions carried out through PPIs had increased by a magnificent amount. Fewer than 100 million transactions were carried out via PPIs in July 2016. However, by July 2017, this number had risen to more than 270 million. Various promotional schemes advertised by PPI issuers in the form of cash backs, etc. coupled with the ease of setting up and using PPIs proved to be a catalyst for the success of the digital payments revolution.

The New Master Directions of 2017 have undoubtedly brought in a number of some positive changes in the PPI regulatory regime which include the introduction of interoperability, fraud prevention mechanisms, the steps to mitigate misuse of PPIs, better consumer protection framework etc. However, these have also introduced several obstructions for the stakeholders; reducing the ease and convenience of using PPIs by introducing the stringent KYC compliance requirement for PPI accounts to be completed in such a short period of time, the substantial increase in the minimum net-worth requirements and various mandatory security requirements to be fulfilled are some of the reasons because of which the PPI industry may witness a downfall.