FinTechNumberless Cards for Teenagers in India: An Innovative Step Towards Digital Economy

INTRODUCTION

India has always been inclined towards a cash-driven economy. However, as rightly said change remains the only constant in the universe, the financial sector aswell has undergone several diverse changes from the introduction of credit cards in the 1950s to the emergence of UPI and Numberless Card Transaction recently in the year 2020.

The constant development in technology, increase in access to the internet, the ‘Digital India’ campaign, the constant support of the Regulatory Authority i.e., Reserve Bank of India (“RBI”), India’s profound customer demand, diverse capital flows, technological development, higher tech-savvy personnel and enabling framework policy has led to the development of Digital Payment System in India.

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.

The digital payment system is a revolution in India and the move towards a cashless economy shows that there is an utmost need right now for the introduction of a payment instrument, which is secure and viable. The introduction of the Numberless Card by a Neo-Bank i.e., FamPay is a step towards that direction.

In this article, we attempt to discuss the numberless card issued for children in India, how it works, its advantages and disadvantages, and how it can be the future of card transactions in India. 

WHAT IS A NEO-BANK

Now, before entering into the discussion in detail about the Numberless Card, let us understand what Neo Bank is.

Neo-Bank is defined as a direct bank that operates exclusively online with the help of mobile application and web mechanisms and has no physical branch presence in India.

However, as a result of Master Circular on Mobile Banking Transactions, issued by RBI vide circular DPSS.CO.PD.MobileBanking.No./2/02.23.001/2016-2017 dated 01.07.2016,  the Neo-Banks,  cannot provide mobile banking services independently as they do not possess a physical presence in India, and are not yet supervised or required to be licensed by the RBI.

Therefore, the Neo-Banks have to partner up with or outsource to the Non-Banking Financial Companies (“NBFCs”), licensed banks and other financial institutions vide RBI Guidelines for Managing Risks and Code of Conduct in Outsourcing of Financial Services by Banks (“Outsourcing Guidelines”) in order to impart services.

Neo-banks signify an arrangement between a FinTech company and a financial institution or bank so as to improve customer access facility providing services.

INTRODUCTION OF NUMBERLESS CARDS FOR TEENAGERS

The digital revolution has taken the world by storm, as no other sector has witnessed a metamorphosis as has been seen in the payment and settlement arena, resulting in a plethora of payment options for the consumer, such as –

1. 12 Digit Banking Cards;
2. Unstructured Supplementary Service Data (USSD);
3. AEPS (Aadhaar enabled payment system);
4. UPI (Unified Payment Interface);
5. Mobile Wallets;
6. Point of Sale Terminals (PoS):
7. Mobile Banking; and
8. Internet Banking.

As evident from above, Digital Payment has become the new normal. The “FamPay” a Neo-Bank, in association with National Payment Corporation of India (“NPCI”) and IDFC First Bank, introduced a new category of digital payment i.e., the Numberless Card for children i.e., FamCard in the year 2020.

In India, until now there was no payment instrument present, which gave a pre-bank segment for minors to access the payment ecosystem, as a result, the concept of Numberless Card for teenagers was introduced.

Under this mechanism, parents of the child set up an account on the Neo-Bank app, wherein they transfer the money to the app, and thereafter, the child can use the amount to make online payment (UPI or P2P) or offline payment vide the Numberless Card without the need to set up a bank account.

The Numberless Card as the name suggests is a card without numbers on it, to enhance security and reduce information theft, as all the essential detail of the card is stored on the mobile application. Therefore, in case the card gets stolen or lost, the card can be deactivated, blocked, or managed with the application, within a matter of seconds.

Further, every transaction made through this card is protected by a device lock, fingerprints, pattern, and face ID authentication or by way of entering a Flash PIN which is generated especially for each physical transaction.

This mechanism also helps the parents to reduce the financial dependency, without affecting their financial security, since, the parents can track the finances and manage the maximum limit of amount, their children use for spending with the help of the application.

THE REGULATORY MECHANISM  

Since the digital payment mechanism provides a lot of ease and convenience to its consumers/users, it has brought a revolution in India and all Banks, Neo-Banks and other Financial Service Providers are entering the field, which makes it essential to have sound and robust legal guidelines to regulate it.

The responsibility of managing the payment systems is entrusted to the RBI in India, and the RBI keeping in mind the importance of a robust and appropriate regulation for the development of not only financial system but also payment system introduced Payment and Settlement System Act, 2007 (“PSS Act”) under Section 38 of the Reserve Bank of India Act, 1934.

Section 4 of the PSS Act states that any person who is desirous of providing payment services in India needs to take prior authorization from the RBI.

However, since Numberless Cards are issued by a Neo-Bank, as stated above in view of  Master Circular on Mobile Banking Transactions, they cannot provide service of Numberless Card independently as they do not possess a physical presence in India, and are not yet supervised or required to be licensed by the RBI under Section 4 of the PSS Act.

The Neo-Bank has to comply with the Outsourcing Guidelines and partner up with the regulated Banks, NBFC’s or other Financial Service Providers to provide the service of Numberless Cards in India.

ADVANTAGES

The introduction of the Numberless Card in today’s time, where digital payments are becoming the ‘new normal in the banking sector of India, especially in light of Covid-19, the unprecedented pandemic has resulted in a highly innovative strategic move for the following reasons –

• The Numberless Cards reduce the financial dependency upon a parent with the help of the creation of a secured ecosystem ensuring financial security and they can also track and control the amount of money, which can be spent by their children through this system.

• It becomes helpful especially for the younger segment of the Indian population since a sense of banking is introduced to them through this system and it bridges the gap to familiarize teenagers with the concept of money management in a fun and secure manner.

• The Numberless Card provides a highly secured financial instrument since all the essential data is available on the application instead of the physical card. Therefore, in case the card gets stolen or lost the card can be deactivated, blocked, or managed with the application, within a matter of seconds.

• Every transaction made through this card is protected by a device lock, fingerprints, pattern, and face ID authentication or by way of entering a Flash PIN which is generated especially for each physical/offline transaction.

DISADVANTAGES

Fin-Tech might be thought of as a two-edged sword. Despite its numerous advantages, these technologies can sometimes amplify existing concerns to customers, such as the potential of privacy breaches and cybersecurity issues, putting consumers who are digitally illiterate and disconnected behind in the following ways –

• The RBI has time and again issued circulars to the public indicating the fraudulent practices associated with the banking sector which are further enhanced due to digitalization. Therefore, with the use of innovative modus operandi including social media techniques, mobile phone calls, etc, cyber-crimes such as phishing, misuse of collected request feature of UPI, and existence of fake e-wallet platforms on the web, it is difficult for a beneficiary to distinguish between a genuine and a fake institution, especially for children.

• The numberless card systems make use of the biometrics of an individual as an extra layer of security for accessing the card through its apps. However, with the existence of mirroring sites, and VPN and mobile banking trojans a teenager could be easy prey of these cunning hackers.

• The unstable internet facility across the landscape of our country adds to the list of concerns associated with the use of numberless cards. Since all banking and personal credentials of an individual are stored in the app of the service provider and lack of a strong internet facility could complicate the conduct of such transactions.

• It is also to be noted that although digitalization is highly beneficial, a segment of the population expresses its skepticism towards online transactions, especially when conducted by teenagers, thereby limiting the access of such services to such segments. Even if such facilities are accepted, it is necessary for the beneficiary to possess adequate information about the system before initiating any transaction.

AMLEGALS Remarks

The introduction of Numberless Cards is a step towards the introduction of a secured financial instrument, which will help in the inclusion of teenagers in this new era of the digital economy. With the help of Numberless Card, a sense of banking and the concept of money management is introduced to them in a fun and secure manner.

Although, Numberless Card stores the information of the beneficiary in the mobile application, providing an easier and smart payment option to teenagers. However, this system is not free from its own shortcomings like the threat of cyber-crimes, information hacking, lack of trust in the service provider, etc.

India is witnessing exponential growth in the use of digital payment systems in India and the introduction of innovative financial instruments calls for an adequate legal framework. While the PSS Act had been enacted with the intention of regulating payment systems in India, it mainly deals with regulatory oversight and there still remains a lacuna for dealing with consumer protection, promotion of competition, and innovation.

– TEAM AMLEGALS, assisted by Ms. Mehar Kaur Arora (Intern)

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