In this article, Anusha who is currently pursuing Diploma in Entrepreneurship Administration and Business Laws from NUJS, Kolkata, discusses Regulatory compliances to be taken care of while starting your own E-wallet.

I am sure most of you must have used an e-wallet to pay for a transaction, especially after the demonetisation. Advancement in technology, especially since the advent of ecommerce websites has brought online buying of commodities into the mainstream. The web based payment apps like paytm, freecharge, etc. allow users to pay for online purchases, travel tickets, movie tickets and even electricity bills. With payTm advertising itself with the jingle “paytm karo”, it is really evident that online payment is catching up in India.

For making online transactions easier, websites have payment gateways (in association with banks) which redirect the customer to enter their card/bank details and transfer the money to an account held in that bank. That money then is transferred to the merchant’s account. But now we don’t even need to do that because we can just store our money in an e-wallet and pay for our transactions. It won’t be inaccurate to say that internet banking, and specially e-wallets are truly making our transactions and in turn our economy, digital.

The first question that arises is: What is an e-wallet?

An e-wallet is like an online pre-paid account which enables you to store your money in it, just like a real wallet. The account is linked to your bank account from which you can easily transfer the money. The advantage of paying through an e-wallet is that it saves you from entering your card/bank details over and over again at the payment gateway, though you will have to enter the password for the e-wallet. Also, you can just enter the mobile number of the person you want to transfer money to and it’s done.

Everyone accepts payment through e-wallets now, from restaurants to the pani-puri wala and from the shopkeeper at the Sarojini Market to the autorickshaw driver. The emergence of e-wallets has made carrying cash around redundant.

With the popularity the e-wallets have nowadays and the push from the government to go cashless and digitalise the economy, there was a need for some guidelines to be put in place to regulate the e-wallets.

Statutes regulating set up and use of e-wallet

The Payment and Settlement Systems Act, 2007

• Enacted on 20^th December 2007 to provide for regulation and supervision of payment systems in India. Under the Act “payment system” includes the systems enabling credit card operations, debit card operations, smart card operations, money transfer operations or similar operations and hence covers e-wallets as well.
• Section 3 of the said Act authorises Reserve Bank of India to regulate and supervise the payment systems in India.
• Section 4 states that no person other than Reserve Bank shall commence or operate a payment system except after obtaining permission from the Reserve Bank.
• Any person may apply for the authorisation from the Reserve Bank under Section 5 and the Reserve Bank may issue authorisation under Section 7 after being satisfied of inquiry (under Section 6) and the nine considerations enumerated in Section 7 itself, like terms and conditions of operation of the proposed payment system including any security procedure, the manner in which transfer of funds may be effected within the payment obligations under the payment system, the financial status, experience of management and integrity of the applicant, etc.
• The application for authorization has to be made as per Form A under Regulation 3(2) of the Payment and Settlement Systems Regulations, 2008. The application is required to be duly filled up and submitted with the stipulated documents to the Reserve Bank.
• Under Section 25, dishonor of an electronic fund transfer instruction due to insufficiency of funds in the account is an offence punishable with imprisonment or with fine or both, similar to the dishonour of a cheque under the Negotiable Instruments Act 1881.

The RBI Master Circular “Policy Guidelines on Issuance and Operation of Pre-paid Payment Instruments in India”

Released on 1^st July, 2014 and updated in December, 2014 sets a comprehensive set of rules and regulations regarding pre-paid payment instruments in India.

• The circular identifies three types of payment instruments in the country:
• Closed system payment Instruments: These instruments are created by the entity for facilitation of payments to itself for services rendered by it. These payment instruments do not permit cash withdrawal or redemption and do not facilitate payments and settlements for third parties. Hence, they do not require approval of the Reserve Bank. Example: Ola Money.
• Semi-Closed system payment Instruments: These provide financial services at a group of clearly identified merchant locations/establishments which have a specific contract with the issuer to accept the payment instruments. These instruments do not permit cash withdrawal by the holder. Example: e-wallets.
• Open System payment Instruments: These payment systems allow fund transfer at any card accepting merchant location (point of sale terminals) and also permit cash withdrawal at ATMs. Example: Debit Cards.

Eligibility to issue prepaid payment instruments (PPI)

All banks who comply with the eligibility criteria can issue all categories of PPI. However, only those banks are allowed to launch mobile based PPIs which have been permitted to provide Mobile Banking Transactions by the Reserve Bank India.

NBFCs and other persons are permitted to issue only closed and semi-closed system payment instruments, including mobile phone based PPIs.

• Foreign Exchange PPIs are exempted from these guidelines. The use of such payment instruments is limited to permissible current account transactions and subject to the prescribed limits under Foreign Exchange Management (Current Account Transactions) Rules, 2000.

Capital Requirements

Banks and Non-Banking Financial Companies complying with Capital Adequacy requirements prescribed by Reserve Bank are permitted to issue PPIs.

All other persons should have a minimum paid up capital of Rs. 500 Lakh and minimum positive net worth of Rs. 100 lakh at all times.

Applicant companies having FDI/FII are required to meet minimum capital requirement as applicable under Consolidated FDI policy guidelines of Government of India.

• Only Companies incorporated in India are eligible to apply for authorisation from the Reserve Bank of India.
• Know Your Customer (KYC), Anti-Money Laundering (Prevention of Money Laundering Act 2002) and Combating Financing of Terrorism guidelines issued by Reserve Bank of India are applicable to persons issuing PPIs.
• Maximum value of any PPI shall not exceed Rs 50,000/-.

The following types of semi closed pre-paid payment instruments can be issued on carrying out Customer Due Diligence as detailed,

1. upto Rs.10,000/- by accepting minimum details of the customer provided the amount outstanding at any point of time does not exceed Rs. 10,000/- and the total value of reloads during any given month also does not exceed Rs. 10,000/-. These can be issued only in electronic form;
2. from Rs.10,001/- to Rs.50,000/- by accepting any ‘officially valid document’ defined under Rule 2(d) of the PML Rules 2005, as amended from time to time. Such PPIs can be issued only in electronic form and should be non-reloadable in nature;
3. upto Rs.1,00,000/- with full KYC and can be reloadable in nature. The balance in the PPI should not exceed Rs.1,00,000/- at any point of time.

Transaction Limits

Though there is no separate limit on purchase of commodities using PPIs, transaction limits and monthly caps are applicable on fund transfers under Domestic Money Transfer Guidelines.

Validity

All PPIs issued in the country have a minimum validity period of six months from the date of activation/issuance to the holder.

In the case of non-reloadable pre-paid payment instruments, the transfer of outstanding amount at the expiry of the payment instrument to a new similar payment instrument of the same issuer, purchased by the holder may be permitted.

PPI issuers shall caution the PPI holder at reasonable intervals, during the 30 days’ period prior to expiry of validity period of PPI, before forfeiting outstanding balances in the PPI, if any.

The caution advice shall be sent by SMS/e-mail/post or by any other means in the language preferred by the holder indicated at the time of on-boarding the customer (sale of PPI). Further, the information about expiry period as well as forfeiture policy should be made known to the customer at the time of sale / reload of the PPI, and should be clearly enunciated in the terms and conditions of sale of PPI. Where applicable, it should also be clearly outlined on the website of the issuer.

Data Protection

For security of data and information, the provider must have in place adequate infrastructure and systems to prevent and detect frauds. A centralized database/MIS to prevent multiple purchases of payment instruments at different locations is necessary.

Customer Protection

All PPI issuers are bound to disclose all terms and conditions in clear and simple language comprehensible to the holders while issuing the instruments. These disclosures shall include.

1. All charges and fees associated with the use of the instrument.
2. The expiry period and terms and conditions pertaining to expiration of the instrument.
3. The customer service contact details (telephone numbers and website URL).

The RBI circular has very comprehensively provided for the establishment of PPIs but does not provide for stringent security measures (as the security measures are left to the discretion of the parties). This leaves the information and data available with persons issuing PPIs open to infringement and clearly indicates that there is a need to strengthen data protections laws in India.