1. Introduction
E-wallets1 a rare breed of financial product where the RBI has permitted non-banking entities to accept 'deposits'- an activity typically relegated to banks. The RBI took a flier by allowing non-bank entities to issue e-wallets. And it paid off. E-wallets contributed immensely to India's digital payments story2. Especially post demonetisation when e-wallets saw a meteoric rise. Over the years, however, the value proposition of e-wallets has dwindled. This resulted from the double whammy of the RBI mandating KYC for e-wallets and the Supreme Court's decision in the Aadharcase which barred non-bank e-wallet issuers (like Ola, Phonepe) from conducting Aadhaar OTP based e-KYC. Then there was competition from the Unified Payment Interface or UPI which brought in easy direct bank account transfers and therefore threatened the core use-case of e-wallets: frictionless payments. However, post-pandemic, e-wallets have made a resurgence and are seeing a renewed market interest. In this blog we take a closer look at the value proposition of e-wallets.
What are 'e-wallets'?
E-wallets are prepaid digital wallets that allow users to securely store and spend money. E-wallets can be issued by banks or licensed non-bank prepaid payment e-wallet service providers. The fundament features of these instruments are:
a. Prepaid: As the name suggests, e-wallets are 'prepaid'. So, the user must 'load' funds to her wallet before she uses it to transact. As opposed to a credit card or a pay-later option (like Simpl or LazyPay) where the customer avails a short-term loan to make a payment.
b. No-interest: E-wallets are non-interest bearing. Unlike a savings account, PPI holders do not earn interest on funds in their e-wallets.
c. No two-factor authentication (2FA): E-wallets do not require 2FA (like an OTP) to authenticate every transaction (except if they are issued as virtual or physical cards)3. Although, every payment (made using an e-wallet) needs the explicit consent of the e-wallet holder.4 As a result, e-wallets do not typically offer an auto-debit facility. However, for transactions below Rs. 2000 customers can set up standing instructions on e-wallets.5
d. Bank and non-bank issuers: Except open e-wallets (more on this later), non-bank entities can also issue e-wallets.
The value proposition that e-wallets offer is simple – convenience. Much like cash in a physical wallet, e-wallets offer easy access to funds which are ideal for small ticket transactions. The holder of a physical or e-wallet, forgoes interest earnings in exchange for convenience.
The introduction of UPI, however, eroded the appeal of e-wallets. UPI allows users to make peer-to-peer transfers (P2P) transfers directly through their bank accounts. It cuts the intermediate step of loading money into the e-wallet. Since it allows bank to bank transfers, customers do not lose out on interest earnings. In March 2018, stringent KYC requirements were introduced for e-wallets as a result of which many customers switched to UPI (which does not require fresh KYC). UPI also has the advantage of being an interoperable system, so users can send and receive money across banks. The RBI allowed similar interoperability between e-wallets (through UPI) in October 2018 which has helped in their adoption.
2. What are the different types of e-wallets?
The RBI has classified e-wallets into three categories: (a) closed e-wallets; (b) semi-closed e-wallets and (c) open e-wallets. Here are their features.
a. Closed e-wallet: An entity can issue a closed e-wallet to its customers to facilitate purchase of goods and services from itself6. A closed e-wallet cannot be used to pay for third-party goods or services. For instance, an M&S gift card is a closed e-wallet and it can only be used to buy M&S merchandise. Since there is no 'third party' settlement, the issuer of a closed e-wallet does not need RBI authorisation7.
b. Semi-closed e-wallets: Semi-closed e-wallets can be used to purchase goods and services from the merchants that the issuer has onboarded contractually8. Paytm, MobiKwik, PhonePe e-wallets are examples of this type of wallet. Both banks and non-banks can issue semi-closed e-wallets. A non-bank entity however requires RBI authorisation before it issues semi-closed PPIs (PPI License). 9 Semi-closed e-wallets can be sub-categorised as:
i. Min-KYC semi-closed e-wallet10: The advantage of this type of e-wallet is that it can be issued without conducting 'full KYC'. It can be issued by accepting 'minimum identity details' of the user.11 On the flip side, these e-wallets do not allow P2P transfers12. These wallets can be loaded from a bank account or a credit card, but they do not permit cash loading. This type of e-wallet also has a loading limit of Rs. 10,00013 (at any given point), and a financial year limit of Rs. 1,20,00014. These e-wallets need not be upgraded to full KYC semi-closed e-wallets. This type of wallet effectively replaced the old 'minimum-detail semi-closed e-wallet'15, which although could be loaded through cash, had a financial year limit of Rs. 1,00,00016 and had to be upgraded to a full KYC semi-closed e-wallet within two years of its issuance.17
ii. Full-KYC semi-closed e-wallet18: This type of e-wallet requires the same level of KYC as a bank account or an open e-wallet, conducted as per the RBI's KYC Master Direction19. They have a loading limit of Rs. 1,00,00020 (at any given point) and allow P2P transfers21.
c. Open e-wallets: These e-wallets issued by banks22 which can be used to purchase goods and services from any establishment23. Unlike the other two, open e-wallets can be used to withdraw cash24.
3. What are the features of the different types of e-wallets?
These are the key features of each e-wallet category:-
| Feature | Closed e-wallet | Semi-closed e-wallet | Open e-wallet |
| Who can issue? | Banks, non-banks.25 | Banks, non-banks.26 | Banks.27 |
| RBI authorization/PPI license | Not needed.28 | Banks don't need a PPI license. Non-bank entities need a PPI license.29 | Banks do not need a PPI license.30 |
| Person to merchant spends | Allowed only with one merchant i.e. the closed e-wallet issuer.31 Eg. Wallets on gaming platforms like Dream11 | Allowed only with merchants that the issuer has on-boarded contractually.32 Eg. MobiKwik, PhonePe. | Allowed with all merchants.33 Eg. FamPay. |
| KYC | Not needed.34 | Min-KYC semi-closed e-wallet 35: minimum details of the user.Full KYC semi-closed e-wallets: full KYC required.36 | Full KYC required.37 |
| Limits | Not provided. | Min-KYC semi-closed e-wallet: Rs. 10,000 outstanding limit. Rs. 1,20,000 financial year limit.38 Full KYC semi-closed e-wallet: Rs. 1,00,000 outstanding limit; financial year limit not provided.39 Fund transfer limit: for pre-registered beneficiaries, not beyond Rs. 1,00,000 per beneficiary. In other cases, not beyond Rs. 10,000.40 | Rs. 1,00,000 outstanding limit.41 Fund transfer limit: for pre-registered beneficiaries, not beyond Rs. 1,00,000 per beneficiary. In other cases, not beyond Rs. 10,000.42 |
| Peer-to-peer transfers | Not explicitly prohibited. Permissibility is unclear and will depend on the type of transaction. | Allowed for full KYC semi-closed43. Not for min-KYC semi-closed e-wallets44. | P2P transfers are permitted to other open e-wallets, debit cards, and credit cards.45 |
| Cash withdrawals | Not permitted.46 | Not permitted.47 | Permitted.48 |
| Interoperability | Not applicable. | Interoperability is allowed only for full-KYC semi-closed wallets.49 | Interoperable.50 |
4. Does acquiring a PPI license or partnering with a bank (to issue a co-branded e-wallet) make sense for your business ?
It depends. For most businesses, acquiring a PPI license (to issue their own e-wallet) or partnering with a bank (to issue a co-branded e-wallet) will not make sense. Instead, you could simply integrate with a payment aggregator/gateway (like PayU or Razorpay) to offer a bouquet of payment options (including third party e-wallets).
Having said that, there are some business models where issuing your own e-wallet or a co-branded (bank issued) e-wallet, may be feasible. For instance, platforms which enable high frequency small ticket transactions, where any payment friction - like OTP or UPI PIN - destroys the user experience. The Ola Money Wallet offered by Ola to book rides is an example of this.
Issuing your own or co-branded e-wallet also gives you greater control over the payment flow and transaction user experience (as opposed to integrating with payment aggregator/gateway). It allows you to create a loyal and captive user base. For instance, a refund or cashback to the Amazon Pay wallet (Amazon has a semi-closed e-wallet license) can only be used to make purchases on Amazon or with merchants they have onboarded.
Footnotes
1. E-wallets are a type of 'prepaid payment instrument' (PPI). For clarity, a PPI may take many forms including physical/ virtual cards, wallets, or any other form which can be used to access the PPI and to use the amount in it. See FAQ 31 of the PPI FAQs here. However, the most popular form of PPIs are e-wallets, and we shall be restricting our discussion of PPIs to e-wallets in this blog post.
2.India's digital payments story is well documented here by The Ken (Paywalled).
3. Paragraph 15.3 (d), PPI Master Directions, available at https://www.rbi.org.in/Scripts/BS_ViewMasDirections.aspx?id=11142.
4. Paragraph 15.3 (c), PPI Master Directions.
5. RBI Notification, Processing of e-mandate on cards for recurring transactions, dated 21 August 2019, available at https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=11668&Mode=0.
6. Paragraph 2.4, PPI Master Directions.
7. Paragraph 2.4, PPI Master Directions.
8. Paragraph 2.5, PPI Master Directions.
9. Paragraphs 3.1 and 3.2, PPI Master Directions
10. Paragraph 9.1 (iii), PPI Master Directions.
11. Paragraph 9.1(iii)(b) PPI Master Directions.
12. Paragraph 9.1(iii)(f), PPI Master Directions.
13. Paragraph 9.1(iii)(e), PPI Master Directions.
14. Paragraph 9.1(iii)(d), PPI Master Directions.
15. Paragraph 9.1 (i), PPI Master Directions.
16. Paragraph 9.1(i)(c), PPI Master Directions.
17. Paragraph 9.1(i)(i), PPI Master Directions.
18. Paragraph 9.1 (ii)(a), PPI Master Directions.
19. Paragraph 9.1 (ii), PPI Master Directions.
20. Paragraph 9.1(ii)(c), PPI Master Directions.
21. Paragraph 9.1(ii), PPI Master Directions.
22. Paragraph 2.6, PPI Master Directions.
23. Paragraph 2.6, PPI Master Directions.
24. Paragraph 2.6, PPI Master Directions.
25. Since no RBI authorisation is required to issue a closed e-wallet, paragraph 2.4 of the PPI Master Directions can be interpreted to mean that both banks and non-banks can issue closed e-wallets.
26. Paragraph 3, PPI Master Directions.
27. Paragraph 2.6, PPI Master Directions.
28. Paragraph 2.4, PPI Master Directions.
29. Paragraph 3, PPI Master Directions. Banks only require "approval" and not "authorisation" which is a much more lengthy process.
30. Paragraph 3, PPI Master Directions.
31. Paragraph 2.4, PPI Master Directions.
32. Paragraph 2.5, PPI Master Directions.
33. Paragraph 2.6, PPI Master Directions.
34. Since no RBI authorisation is required to issue a closed e-wallet, paragraph 2.4 of the PPI Master Directions can be interpreted to mean that no KYC is required to issue closed e-wallets. Further, there is nothing in the PPI Master Directions that stipulates that closed e-wallets need to do KYC.
35. Paragraph 9.1 (iii) (a) and (b), PPI Master Directions.
36. Paragraph 9.1 (ii) (a), PPI Master Directions.
37. Paragraph 9.2 (a), PPI Master Directions.
38. Paragraph 9.1 (iii) (d), PPI Master Directions.
39. Paragraph 9.1 (ii) (c), PPI Master Directions.
40. For Full KYC semi-closed wallets, see Paragraph 9.1 (ii) (f) and (g), PPI Master Directions.
41. Paragraph 9.2 (c), PPI Master Directions.
42. Paragraph 9.2 (f) and (g), PPI Master Directions.
43. Paragraph 9.1 (ii) (g), PPI Master Directions.
44. See paragraphs 9.1 (i) (g) and 9.1 (iii) (f), PPI Master Directions.
45. Paragraph 9.2 (h), PPI Master Directions.
46. Paragraph 2.4, PPI Master Directions.
47. Paragraph 2.5, PPI Master Directions.
48. Paragraph 2.6, PPI Master Directions.
49. Paragraph 18, PPI Master Directions.
50. Paragraph 18, PPI Master Directions. This is because open e-wallets are full KYC instruments.
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.
