FinTechDigital Payments: Prepaid Payment Instrument – A Step Towards Future of Payments in India

INTRODUCTION

India is heading towards a cashless economy and a number of innovative technologies in the payments sector over the years have led people to change their preference from cash to digital means. In this fast-moving world, user convenience and seamlessness are shifting everything towards Digitalization.

Therefore, the Reserve Bank of India (“RBI”) in order to further the aim of making India a cashless economy introduced these Prepaid Payment Instruments (“PPIs”) vide its Master Directions on Issuance and Operation of Prepaid Payment Instruments, 2017, which were revised in February 2020. The RBI vide its Master Direction ensure building a secure payment system with the trust and confidence of its customers and services providers.

Prepaid Payment Instruments are considered as instruments that have pre-stored values in them, which can be used to purchase goods and services. The values stored in these Instruments represent the amount of money stored in them that can be used through a mode of Cash, Card, Mobile wallets, Smart cards, Vouchers, etc.

In this article, we attempt to discuss the concept of Prepaid Payment Instruments, its types, the Regulatory Framework, the Procedural Guidelines, and how it is going to revolutionize the future of payments in India.

TYPES OF PREPAID INSTRUMENTS

1. Open system PPI

These are the PPIs, which can be issued by the RBI authorized banks only. Now, these PPIs can be used at any Merchant for the purchase of goods and services, cash withdrawal, payment, remittance services, transfer of funds, etc.

These types of PPIs can be issued only in electronic forms and can be reloaded anytime, provided, the outstanding amount at any point in time cannot exceed more than Rupees. 1,00,000/-.

The PPI Issuer can transfer funds to the bank account of the PPI holder or transfer it back to the source. However, the issuer of the PPI is required to set a transaction limit considering the risk profile of the holder, other operational risks, etc.

In cases, where a person is a pre-registered beneficiary then, the maximum limit for fund transfer is Rupees. 1,00,000/- per month and in all other cases its Rupees. 10,000/- per month.

However, under this, the PPI issuer does not have the option to keep a separate limit for purchases. However, they can decide an overall limit for the transactions made through PPI.

2. Semi-Closed system PPI

These are the PPIs, which can be issued by RBI authorized Entity i.e. (Banks or Non-Banks) only for the purchase of goods and services, payment, remittance services, transfer of funds, etc.

However, these PPIs cannot be used to withdraw cash irrespective of the fact whether Banks or Non-Banking Entities have issued it. Further, these PPIs can be used only at those places, where Issuer Entity has entered into specific contracts (through a Payment Aggregator or Payment Gateway) with different Merchants to use these PPIs.

a. In the case of the PPIs up to Rs. 10,000 (with no cash loading facility) –

• The Banks and Non-banks issuers are allowed to issue PPIs with minimum details of the PPI holder and these minimum details include OTP verified mobile number, self-declared name, and unique identification number of any official document according to Rule 2(d) of PML Rules.

• The outstanding amount of PPIs at any point in time should not exceed Rupees. 10,000/-. Further, the maximum amount that can be debited in a month is Rupees. 10,000/- as well.

• The holder should convert their PPI into KYC complied Semi-Closed PPI within 24 months of their launch and if not done then, they will not be allowed to avail further credit. However, they will have the option to use the balance amount.

b. In the case of the Full KYC PPIs  –

• The Banks and Non-bank issuers are allowed to issue these PPIs once the KYC of the holder is completed. Further, the PPI issuer can transfer funds to the bank account of the PPI holder or transfer them back to the source.

• The outstanding amount at any point in time should not exceed Rs. 2,00,000/-, considering the risk profile of the holder, other operational risks, etc.

• The PPI holder can transfer funds to others provided, in case of others fund transfer limit shall not exceed Rs. 10,000/- and in case of the pre-registered beneficiary the fund transfer limit shall not exceed Rs. 2,00,000/-

c. In the case of the PPIs up to Rs. 10,000 (with cash loading facility)

• The Banks and Non-bank issuers are allowed to issue PPIs with minimum details of the PPI holder and these minimum details include OTP verified mobile number, self-declared name, and unique identification number of any mandatory or official document, under Master Direction on KYC.

• These PPIs are reloadable in nature and are issued in electronic forms, including cards. Loading and Reloading are done from a bank account or a credit card. Provided, the maximum amount, which can be loaded in one month, is Rupees. 10,000 and in a financial year Rupees. 1,20,000/-.

• Further, the outstanding amount at any point in time should not exceed Rupees. 10,000/- and these PPIs can only be used for purchase of goods and services, and not for fund transfer.

3. Closed system PPI

These are PPIs, which can be issued by any Entity for the purchase of goods and services. However, it cannot be used for any Cash transaction, Cash Withdrawal, or payment for Third Party Services irrespective of the fact whether Banks or Non-Banking Entities issued it. Therefore, these types of PPIs are not required to be authorized by the RBI for usage. Further, these PPIs are valid only against the Entity that issued them. Therefore, customers will not be able to use it against any other Entity.

4. Specific Categories of PPI

No other category of PPIs are permitted to be issued except the following –

1. Gift Instruments (Issued by Banks and Non-Banks)

• • the maximum value should not exceed Rupees. 10,000/-.

• • no separate KYC is required for customers who have been issued PPIs against their debit or credit cards.

• • the entities should decide the number of instruments or transaction limits to be issued to a customer based on risk assessment approach approved by their Board.

• • the feature of cash withdrawal, refund or funds transfer are not permitted. Further, they are not reloadable as well.

• • the PPIs can be revalidated according to the Board policy of the issuer.

2. PPIs for Mass Transit Systems (PPI-MTS)

• • These are semi-closed PPIs that are issued by mass transit system operators after authorization under the Payment and Settlements Systems Act. Further, other than the mass transit system, these PPIs can only be used for activities that are related to or carried on within the premises of the transit system

• • In these types of PPI, requirements such as escrow arrangement, customer grievance redressal mechanism, agent due diligence, reporting, and MIS requirements, etc., are also applicable.

• • The maximum outstanding amount at any time cannot be more than Rupees. 3,000.

• • Under this, features of cash withdrawal, refund or funds transfer are not permitted.

THE FRAMEWORK

1. Eligibility

Under this, if any Bank or NBFC, has complied with the eligibility criteria stipulated by the RBI it can issue PPI. Additionally, if a bank has the facility to provide Mobile Banking, it can launch mobile-based PPIs.

Now, in order to get registration, an application shall be sent to the Department of Payment and Settlement Systems (DPSS), Reserve Bank of India, Central Office, Mumbai along with a ‘No Objection Certificate’ from the respective Regulator of the entity that seeks the application to issue PPI.

Further, Banks are permitted to issue all kinds of PPIs, while NBFCs and other instruments can issue only closed and semi-closed system payments instruments if an NBFC Entity wishes to issue PPI, it must be a company incorporated in India, and registered under the Companies Act, 2013.

2. Capital Requirement 

• • Other than Banks and NBFC all other entities seeking authorization must have a minimum paid-up capital of Rupees. 500 lakh and minimum positive net worth of Rupees. 100 lakh at all times.

• • Non-Banking Entities having Foreign Direct Investment (FDI), Foreign Portfolio Investment (FPI), Foreign Institutional Investment (FII) are also required to meet the capital requirements as applicable under the extant Consolidated FDI policy guidelines of the Government of India.

• • Non-Banking Entities applying as an applicant should cover the proposed activity of operating as a PPI issuer, in their Memorandum of Association (MOA).

• • Non-Banking Entities seeking authorisation from RBI under the PSS Act must have a minimum net-worth of Rupees. 5 crores, as per the latest audited balance sheet at the time of submitting the application.

3. The Security Framework

a. Against Money Laundering

1. • RBI will apply KYC Master Directions, Anti Money Laundering (“AML”), Combating Financing of Terrorism (“CFT”) guidelines issued by the Department of Banking Regulation (“DBR”), to the PPIs issuing entities and their agents. Further, the Prevention of Money Laundering Act and Rules are also applicable to PPI issuers as they are operating a payment system. They should adopt suitable measures and comply with all these guidelines.

• • Under this, the database containing a log of all the transactions using PPIs has to be maintained for at least ten years and the RBI can advise for this data to be made available to any agency.  Further, in case the PPIs issue finds any suspicious activity, they can file Suspicious Transaction Reports (“STRs”) to the Financial Intelligence Unit- India (“FIU-IND”).

b. Fraud Management and Risk Prevention 

• • PPI issuers require a strong risk management system to meet the challenges of fraud and ensure the protection of customers and for this, the issuers need to have a proper information and data security infrastructure to prevent and detect frauds.

• • The Board will approve an Information Security Policy, which will be adopted by all issuers for the safety and security of the payment systems operated by them and to mitigate identified risks.

• • The security measures will be reviewed by the issuers on an ongoing basis, but at least once a year or after any security incident or breach has taken place or before or after a major change in the infrastructure or procedure.

4. Customer Protection and Grievance Redressal Framework 

Under this framework, all the PPI issuers must disclose all important terms and conditions, in a clear and simple language comprehensible to the holders while issuing the instruments. It must necessarily contain –

• The customer service telephone numbers and website URL.

• All charges and fees are associated with the use of the instrument.

• The expiry period and the terms and conditions pertaining to the expiration of the instrument.

a. Banks

In case of PPIs issued by Banks, customers have recourse to approach Banking Ombudsman Scheme to resolve their grievances.

b. Non-Banking Entity

In case PPI is issued by is a Non-Banking Entity, it must put in place an effective mechanism for redressal of customer complaints along with an escalation matrix and publicize the same for the benefit of customers. Besides reporting customer complaints in the format and frequency, as mandated, PPI issuers are also required to report frauds, if any, involving the PPIs issued by them on a quarterly basis.

PROCEDURAL GUIDELINES

A. Validity of PPIs

The information about expiry period as well as forfeiture policy should be made known to the customer, at the time of sale of the PPI, and should be clearly enunciated in the terms and conditions of sale of PPI. Furthermore, the following must be kept in mind –

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

• If a PPI is non-reloadable, at the expiry of the payment instrument, the transfer of outstanding amount to a new similar payment instrument of the same issuer is permitted.

B. Transaction Limits

The holder is allowed to use the PPI for these purposes within the overall PPI limit applicable, as there is no separate limit for the same. However, under Domestic Money Transfer (DMT) Guidelines, transaction caps and monthly limits on funds transfers permitted in PPIs are applicable. It is the duty of the issuer to ensure that the transfer is within the limit.

In case of failed, returned, rejected, or cancelled transactions, the refund shall be applied to the respective PPI account, immediately, even if such application of funds results in exceeding the limits prescribed for that category of PPI. Further, PPI issuers are required to keep the complete detail of such refund or rejection.

Further, PPIs issuers are required to put in place necessary systems that enable them to monitor frequent instances of refunds taking place in specific accounts and if its necessary substantiate it with proof for audit purposes to the regulator.

Further to expand the scope of PPIs in India, the RBI in December 2019, introduced a new type of PPI for small value payments, up to Rupees. 10,000/-.

This type of PPI will be very easy to use at it require minimum details and they provide option to close these PPI at any time to its customers.  However, under this PPI customers not be able to transfer funds and exceed the transaction limit of more than Rupees. 1,20,000/- in a financial year.

C. Deployment of Money Collected

The turnover of funds through PPI can be rapid. The confidence of public and merchant establishments on schemes of PPI depends on the certainty and timeliness of settlement of claims arising from the use of such instruments. To ensure the same, the issuers invest the funds collected only as provided by the guidelines of PPIs.

Now, for the schemes operated by Banks, the outstanding balance is part of the “net demand and time liabilities” for the purpose of maintenance of reserve requirements. This position is computed based on the balances appearing in the books of the bank as on the date of reporting.

Further, other Non-Banking Entities issuing PPIs are required to maintain their outstanding balance in an escrow account with any scheduled commercial bank. However in order to do so, they must note the following –

• The escrow balance must be maintained with only one scheduled commercial bank at any point of time.

• If there is a need to change the escrow account from one bank to another, it must be effected in a time-bound manner without unduly impacting the payment cycle to the merchants. The migration must be completed with the prior approval of RBI and in the minimum possible time.

• The amount so maintained in the escrow account must be used only for making payments to the participating merchant establishments and other permitted payments.

• PPI issuer is required to submit the list of merchants to the bank that is acquired by it. They must also update the same from time to time. The bank would ensure that payments are to be made only to eligible merchants or purposes.

• There must be an exclusive clause in the agreement signed between the issuer and the bank maintaining ‘escrow account’, that would enable the bank to use the money in the ‘escrow account’ only for making payment to the merchants in preference to the other creditors in the event of liquidation or bankruptcy of the issuer.

• Banks maintaining the escrow account are advised to necessarily record the charge of the holders of the PPI and the merchant establishments with the Registrar of Companies under Section 125 of the Companies Act, 1956.

• The settlement of funds with merchants should not be co-mingled with other business handled by the PPI issuer.

D. Conversion of PPI

• The PPI issuers give the option to holders of converting their existing semi-closed and open PPIs into any type of PPIs that are approved. The issuer observes due diligence on that type and converts it. The conversion had to be completed on or before 28 February 2018.

• If the holders did not take the first step, their PPI were mandatorily converted into minimum detail PPI on March 1, 2018.

• No further credit/ loading was allowed till all minimum details were obtained. However, the PPI holders were allowed to use the balance for purchases.

• PPI issuers made their customers aware of these changes and gave them a onetime option of transferring the whole amount to their bank account without a transaction limit. No charges were levied.

• For existing minimum detail semi-closed PPI, if the outstanding balance was more than Rupees. 10,000, then, loading will not be allowed until the balance is reduced.

• PPI issuers maintained all the data relating to the migration of PPIs for the perusal of RBI.

E. Redemption

The issuer of such instruments cannot dishonor customer instructions for payments or transfer of money if there is a sufficient balance outstanding against the instrument. Further, the holders of PPIs are permitted to redeem the balance outstanding within the expiry date, if for any reason the scheme is being wound-up or is discontinued, as directed by RBI. Further, in the case when redemption is provided, the redemption value shall not be in excess of the amount outstanding or the face value (loading limit) of the instrument.

F. Exemption

Any person authorized under the Foreign Exchange Management Act (“FEMA”) to issue foreign exchange PPIs, issues such instruments as participants of payment systems authorized by the Reserve Bank of India, then such person will be exempted from these guidelines.

Further, the use of such payment instruments shall be limited to permissible current account transactions and subject to the prescribed limits under the Foreign Exchange Management (Current Account Transactions) Rules, 2000, as amended from time to time.

AMLEGALS REMARKS

India is experiencing exponential growth in the use of digital payment systems in India and the growing reliance of customers on digital payment systems calls for an adequate legal framework. While the PSS Act had been enacted with the intention of regulating payment systems in India, there is a high requirement of enacting a robust regulatory framework for governing Digital Payments in India.

Therefore, the Reserve Bank of India in view of the above introduced these PPIs vide its Master Directions on Issuance and Operation of Prepaid Payment Instruments, 2017. The largest beneficiary of this move was PPI issuers as they comprise mobile wallets, smart city cards, transit cards, gift cards, meal cards, and e-toll tags.

Owing to the extensive use of PPIs, various stakeholders have approached the RBI for the rationalization of certain requirements while providing a well-regulated ecosystem. The RBI, in its Statement on Development and Regulatory Policies, introduced a new type of PPI with a limit of up to Rupees 10,000. This brought about a significant change in the PPI system.

Although the RBI is set to make timely regulations to ensure maximum safety and comfort in the Digital Payment ecosystem, regulations are likely to undergo further changes with an evolving ecosystem.

For any query or feedback, please feel free to get in touch with arushi.vyas@amlegals.com or tanmay.banthia@amlegals.com.