India: RBI Guidelines For The Interoperability Of Prepaid Payment Instruments: A Boost For Digital Wallets?

Last Updated: 31 October 2018
Article by Namita Viswanath and Savithran Ramesh

1. INTRODUCTION

On October 16, 2018, the Reserve Bank of India (the "RBI") issued guidelines (the "Guidelines") for the interoperability of know-your-customer ("KYC") compliant prepaid payment instruments ("PPIs")1. These Guidelines were widely anticipated ever since the RBI had issued the Master Directions on Issuance and Operations of Prepaid Payment Instruments2 (the "Master Direction on PPIs") in 2017, which, among others, had introduced interoperability among payment instruments such as wallets with other wallets and bank accounts.

Interoperability essentially means the technical compatibility that enables a payment system to be used in conjunction with other payment systems. In the context of wallets, it refers to the ability of individuals holding a wallet issued by a particular issuer to undertake peer-to-peer payment transactions with individuals holding a wallet issued by a different issuer.

In this context, the demonetization of India's currency in November 2016, along with the push towards adopting digital payments has boosted the use of digital wallets in India. This news alert highlights the key takeaways from the Guidelines and its potential effect on the rapidly growing digital wallets space in India.

2. ANALYSIS

The Master Direction on PPIs had envisaged interoperability of PPIs in multiple phases. In the first phase, both bank and non-bank entities, which had issued PPIs ("PPI Issuers") were required to make all KYC-compliant PPIs issued in the form of wallets interoperable amongst themselves through the Unified Payment Interface ("UPI") within 6 months from the date of the directions. In subsequent phases, interoperability was to be established between wallets and bank accounts using UPI, and PPIs issued in the forms of cards.

UPI is essentially a payment system developed by the National Payments Corporation of India ("NPCI"), that allows instantaneous fund routing and merchant payments.

In keeping with the Master Direction on PPIs, the Guidelines have combined these phases and have provided a road map for implementation of the interoperability of wallets.

2.1 Manner of implementing interoperability

The first step for any PPI Issuer is to ensure that they have a board approved policy for achieving interoperability.

Companies issuing PPIs in the form of wallets are required to enable interoperability through the UPI infrastructure. The Guidelines state that PPI Issuers (for wallets) shall adhere to all the requirements of UPI including the relevant membership type and criteria, merchant on-boarding requirements, technical requirements, governance, certifications and audit requirements. Further, they shall also follow the relevant UPI guidelines for reconciliation of positions (the settlement of dues between different wallets and banks). PPI Issuers shall also follow the dispute resolution and customer grievance redressal mechanisms as prescribed by UPI. Further, PPI Issuers are required to facilitate all the basic and standard features of interoperability of UPI.

2.2 Types of wallets covered

The Master Direction on PPIs allowed PPI Issuers to issue semi-closed PPIs to users who have provided certain minimum identification details but have not completed the full KYC process prescribed by the RBI. However, such users are not allowed to load more than INR 10,000 a month or maintain a balance above INR 10,000 at any point of time. Further, the total amount debited from such accounts, are limited to INR 10,000 a month. Funds transfer from such PPIs to bank accounts and other PPIs is not permitted. Importantly, these PPIs were required to be KYC compliant within 12 months from the date of issue of the PPI.

The Master Direction on PPIs also allowed a PPI Issuer to issue a PPI with a higher balance of up to INR 1,00,000 after completing the KYC of the concerned user. The fund transfer limit is INR 1,00,000 per month for pre-registered beneficiaries and INR 10,000 per month for all other cases.

Both the Master Direction on PPIs and the Guidelines mandate PPIs Issuers to enable interoperability only among the accounts of those users for whom KYC compliance has been undertaken. This means that those users for whom the KYC process has not been completed will not be permitted to transfer funds to other wallets or bank accounts.

2.3 Settlement Mechanism

The Guidelines state that a non-bank PPI Issuer shall participate through a sponsor bank for the purpose of settlement, for which they will have to adhere to the requirements of the sponsor bank arrangements in UPI and the requirements of the NPCI. This will necessitate a PPI Issuer to enter into arrangements with a sponsor bank, which will increase the cost of doing business for wallet transactions.

2.4 Offline transactions

The Guidelines allows non-bank PPI Issuers to participate in the *99# USSD service provided by NPCI. This essentially allows individuals with a mobile connection to transact and obtain certain information even without accessing internet.

2.5 Key membership criteria and requirements for UPI

The UPI Procedural Guidelines3 specify a number of requirements to be satisfied by an entity to participate in UPI as a payment systems provider (a "PSP"). Some of the key requirements for a PPI Issuer are mentioned below.

(a) Type of Entity

Currently, a PSP should be an entity regulated by the RBI under the Banking Regulation Act, 1949 and be authorized by the RBI to provide mobile banking services for it to become a member and participate in UPI.

A non-bank entity operating as a PPI Issuer is not regulated under the Banking Regulation Act, 1949. A number of guidelines are framed in the context of banks operating as a PSP to provide mobile banking services. In light of the Guidelines expressly requiring interoperability through UPI, the UPI Procedures Guidelines ought to be revised to allow non-bank PPI Issuers to participate in the UPI infrastructure.

(b) Audit

Another requirement is that PSPs are required to provide an audit report for its application to enable the wallet (and its data center) by an auditor equivalent to a Certified Information Systems Auditor. Further audits are required to be conducted on an annual basis.

The NPCI may also audit the UPI related systems used by a member PSP as and when considered necessary. This may be undertaken either directly or through an external agency.

(c) Fees

There is also a minor switching fee levied on each transaction undertaken through UPI. While this is a very low cost per transaction, it increases the transactional costs for wallets which undertake a large number of transactions.

(d) Maximum number of transactions

The maximum number of peer-to-peer transactions that a user may undertake in a 24-hour period through UPI is limited to 10. This will curtail the number of transactions that a wallet user may undertake with other wallet users.

(e) Onboarding

Presently, the customer onboarding process under the UPI Procedural Guidelines requires linking the application to the customer or user's bank account. There is a lack of clarity on whether this means that wallets need to be linked to bank accounts to use UPI.

(f) Mergers and amalgamations

The UPI Procedural Guidelines states that the NPCI may terminate the UPI membership of a member PSP if: "the member bank is amalgamated or merged with another member bank". This could create difficulties for PPI Issuers, especially since the RBI does not have stringent conditions for mergers or amalgamations of PPI Issuers, as it does for banking companies.

(g) Authentication process

All financial transactions mandatorily require a two-factor authentication process. In the context of UPI, the first level of authentication is completed with the linking of the user's mobile number. The second level of authentication is complete by entering the M-PIN set by the user in the UPI framework.

3. INDUSLAW VIEW

The Guidelines should be seen as part of the Indian Government's recent push towards increasing digital transactions and enabling free two-way transfer of funds across wallets, issued by different PPI Issuers. In comparison to the earlier guidelines on domestic money transfer4, where an individual could only transfer funds to other wallets issued by the same PPI Issuer, this unlocks the potential for increasing the number of digital transactions. This should increase the speed, frequency and convenience of digital transactions, though the UPI limit of 10 peer-to-peer transactions in a 24-hour period may restrict the full realization of this benefit.

The downside is the increased cost of compliance for PPI Issuers which will need to be incurred for implementing the UPI technology requirements, offering the required features of UPI, undertaking audits and other transactional costs.

It is possible that some of this additional cost will be passed on to the user. For instance, any fees which are required to be paid to the sponsor bank could be passed on to the user, especially since the Master Direction on PPIs allow the PPI Issuer to debit, from the escrow account where the users' funds are held, payments made to a sponsor bank for processing fund transfer instructions. Similarly, the switching fee may also be charged to the user. It remains to be seen whether the potential for transaction growth will enable the development of this sector despite these downsides.

Further clarity is required on the interpretation of certain parts of the UPI Procedural Guidelines in relation to non-bank entities as PPI Issuers. As stated earlier, a number of requirements are specific to banks and cannot be mirrored for PPI Issuers. Clarification on the membership criteria for PPI Issuers is necessary.

The Guidelines seem to suggest that it is up to PPI Issuers to determine whether they want to allow interoperability. However, the Master Direction on PPIs seem to suggest that interoperability of PPIs is an objective of the RBI and hence a mandatory obligation for PPI Issuers. This aspect needs to be clarified.

It should be noted that there are no timelines provided for implementation. The Master Direction on PPIs had stated that interoperability between wallets had to be enabled within 6 months. This could not be complied with until now since the RBI had not issued operational guidelines. Therefore, one interpretation could be that it is to be enabled within 6 months from the Guidelines. However, considering the dependency on NPCI to modify their UPI related guidelines and circulars to enable this, a longer time frame may be necessary.

Further clarity is required on the manner in which PPI Issuers can comply with the maximum monetary cap imposed on transactions using PPIs. As stated earlier, there is a monthly limit as well as an overall limit on the amount that can be added to or used from a wallet. Complying with this becomes difficult when transactions are initiated from one wallet to another. For instance, if a transfer of INR 10,000 is initiated from wallet A to wallet B, but wallet B already has a balance of INR 95,000, then it is not clear if this transaction can be undertaken.

The Guidelines are not clear on the manner in which interoperability is to be achieved between wallets and banks through UPI. Though it does state that it seeks to enable all phases of interoperability, specific directions have not been provided for linking with bank accounts.

Another potential issue could be the two-factor authentication process required by UPI. One of the main advantages of wallets is the seamless payment to merchants. The requirement to enter an M-PIN to authenticate each transaction makes it inconvenient for users and it could affect businesses relying on automatic deduction from wallets.

Despite the above, the Guidelines seem to be a progressive move designed to benefit non-banking entities operating as PPI Issuers, giving more credibility in the market to digital wallets. It allows PPI Issuers to issue UPI handles and allows wallet users to pay to any other wallet through UPI. The Guidelines are therefore likely to increase user confidence and should help non-bank entities tap into a customer base that is not presently holding a wallet issued by them.

However, following the recent decision by the Supreme Court, the success of the Guidelines depends largely on the Government or the RBI prescribing efficient alternatives to the Aadhaar based e-KYC authentication, considering that interoperability is only available for fully KYC compliant wallets.

Footnotes

1 Available at https://rbi.org.in/Scripts/NotificationUser.aspx?Id=11393&Mode=0.

2 Available at https://www.rbi.org.in/Scripts/BS_ViewMasDirections.aspx?id=11142.

3 Available at https://www.npci.org.in/sites/default/files/UPI-PG-RBI_Final.pdf.

4 Available at https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=6750&Mode=0 . Please note that this was repealed by the Master Directions on PPIs.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Topics
 
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions