On 11 October 2017, the Reserve Bank of India (RBI) issued the
RBI (Issuance and Operation of Prepaid Payment Instruments)
Directions, 2017 (New Directions). The New Directions brought
about significant changes to the previous regime under the Master
Circular – Policy Guidelines on Issuance and Operation of
Prepaid Payment Instruments in India, 2016 (Previous Circular) that
regulated the issuance and operation of Prepaid Payment Instruments
(PPIs). The New Directions will now apply to all PPI issuers,
system providers and system participants. Existing authorised
PPI issuers are required to comply with the New Directions on or
before 31 December 2017, except where alternate timelines are
specifically provided.
This update highlights some of the key changes introduced in the
PPI regime by the New Directions, and provides a brief analysis of
the impact that such changes are likely to have on various
stakeholders in the PPI ecosystem.
Key Changes and Impact
1. Capital and net-worth requirements for PPI issuers
The Previous Circular had prescribed a minimum paid-up capital
of INR 50 million and a minimum positive net-worth of INR 10
million for PPI issuers.
While the New Directions do away with the minimum paid-up capital
requirement, they prescribe a minimum positive net-worth for all
non-bank entities seeking PPI authorisation as well as existing
non-bank PPI issuers. For non-bank entities seeking PPI
authorisation, a minimum positive net-worth of INR 50 million as
per the latest audited balance sheet has been prescribed.
Additionally, by the end of the third financial year from the
date of PPI authorisation, such entities must have, and maintain, a
minimum positive net-worth of INR 150 million. For existing
non-bank PPI issuers, the minimum positive net-worth requirement is
INR 150 million as on 31 March 2020.
We understand that RBI's intention in requiring PPI issuers to
maintain higher levels of net-worth is to ensure that only serious
players with sufficient financial resources can issue PPIs.
PPI issuers who are unable to meet these revised net-worth
requirements will no longer be able to issue or operate PPIs and
would have to surrender their authorisations to the RBI or merge
with larger players.
2. Full KYC obligations
Know Your Customer Guidelines, 2016 prescribed by the RBI
specify which documents can be submitted as proof of identity and
address for KYC verification.
The Previous Circular did not provide for very stringent KYC
compliance. The New Directions have, however, introduced the
requirement to complete full KYC verification of PPI holders in a
phased manner.
Semi-closed PPIs up to INR 10,000 can be issued only after
obtaining 'minimum details' of the PPI holder, which
include a mobile number verified by OTP and a self-declaration
containing the name and ID number of the passport, driving license,
PAN card, etc. Such PPIs cannot be used for transferring
funds to bank accounts and to other PPI holders and they must be
made full KYC-compliant within 12 months from the date of their
issuance.
Semi-closed PPIs of a higher value of up to INR 100,000 with a
monthly transfer limit of INR 10,000 can be issued only after full
KYC verification. Full KYC of customers is also required to
be completed before banks can issue open system PPIs.
PPI holders have been given the option of converting existing
PPIs (issued before the New Directions) to any type of PPIs
recognized under the New Directions. If existing PPIs are not
converted by PPI holders, then they will be mandatorily converted
to minimum detail semi-closed system PPIs. PPI holders will
then be required to convert such minimum detail PPIs to full
KYC-compliant PPIs within 12 months from the date of their
issuance. However, there is ambiguity in respect of whether
the date of issuance for mandatorily converted PPIs would be their
date of original issuance or the date of mandatory
conversion.
While the more stringent full KYC requirements under the New
Directions may curb fraud and misuse, they are likely to act as a
barrier for fast adoption of the revised framework. Migrant
workers, transferred employees and other PPI holders who reside
away from their permanent residential addresses could experience
difficulty in verifying their permanent address as they might not
be present at such address during the verification.
Further, the short time period within which PPI issuers need to
ensure that the KYC verification of users is complete (i.e. by 31
December 2017) is likely to put significant financial and
administrative burden on PPI issuers. PPI issuers with large
pools of customers will incur substantial costs in deploying agents
to physically verify addresses of PPI holders.
The requirement for PPI users to be fully KYC compliant to transfer
funds, irrespective of the quantum of funds involved, also
significantly reduces the utility and convenience of PPIs and is
likely to dissuade many users from using PPIs. Even though
wallet-to-wallet fund transfers are not typically a revenue
generating stream for PPI issuers, losing PPI users due to
restrictions such as these could adversely affect the overall
growth of PPI issuers.
3. Security, fraud prevention and risk management framework
Unlike the Previous Circular, which did not prescribe
detailed fraud prevention and security standards, the New
Directions require PPI issuers to implement several measures to
prevent fraud and maintain security of other system
participants.
Each PPI issuer is required to put in place a strong risk
management system and data security infrastructure to prevent fraud
and ensure customer protection. A board-approved information
security policy must also be created for safety and security of
payment systems. Further, as is required for debit and credit
cards, an additional factor of authentication (2FA) has to be used
for both physical and virtual cards, except for PPI for
mass-transit systems. The mandatory 2FA requirement (even for
transactions involving small values) may take away the ease of
using PPIs as it creates an additional process of verification
before a PPI can be operated.
The New Directions also require PPI issuers to have a 'cooling
period' for fund transfers after a PPI account has been opened,
or PPIs have been loaded/reloaded with funds, or a beneficiary has
been added. While the intention behind this move is to curb
fraudulent use of PPIs, the mandatory imposition of a 'cooling
period' could further reduce the convenience of using PPIs.
If the intention of the 'cooling period' is to curb
fraud, it may have been better to limit the applicability of this
requirement only to high value transactions.
4. Interoperability
The New Directions have introduced 'interoperability'
that will allow customers to transact across commercially and
technically independent payment platforms. The
interoperability of PPIs will be enabled in phases. In the
first phase, PPI issuers must make all KYC-compliant PPIs issued in
the form of wallets, interoperable amongst themselves through the
Unified Payments Interface (UPI), within 6 months from the
issue date of the New Directions. In the second phase,
interoperability will be enabled between wallets and bank accounts
through UPI, followed by interoperability for PPIs issued as cards.
The actual operational guidelines on interoperability are to
be issued separately.
The decision to enable interoperability of PPIs has gathered a lot
of support from various stakeholders in the industry.
Interoperability will allow users of smaller PPI issuers to
send and receive payments from the more dominant PPI issuers with
larger pools of users. Merchants, establishments and PPI
users selling goods and services will also benefit from
interoperability since the need to sign-up with multiple PPI
issuers to receive payments from customers is eliminated.
Interoperability will, no doubt, be beneficial to customers
as they will no longer be required to sign up with multiple PPI
issuers.
5. Other Significant Changes
- PPIs can no longer be issued in the form of paper vouchers except meal paper vouchers (which can only be issued in paper form until 31 December 2017).
- Only two categories of PPIs are recognised - gift instruments and PPI for mass-transit systems. Categories of PPIs that were recognized by the Previous Circular, such as PPIs issued by banks to Government organizations for onward issuance to beneficiaries of Government sponsored schemes, and PPIs issued by banks to corporates for onward issuance to their employees, are no longer recognized. This will inconvenience entities that have already issued such categories of PPIs.
Conclusion
The PPI industry has experienced a significant transformation
over the last year. While in July 2016 there were less than
100 million transactions completed through PPIs, by July 2017, this
number had risen to more than 270 million, i.e. an increase of over
300%. The catalyst behind such a sharp increase in usage was
the demonetisation drive that took place towards the end of 2016,
coupled with the plethora of promotional schemes rolled out by PPI
issuers in the form of cash backs, etc. Also, since PPIs are
extremely easy to set up and use they continue to be popular
amongst users.
While the New Directions bring some positive changes in the PPI
regulatory regime, such as the introduction of interoperability,
they also create several hurdles for stakeholders like the
requirement for PPI accounts to be made fully KYC compliant within
a very short period of time, increased minimum net-worth
requirements for PPI issuers and imposition of certain mandatory
security features.
In comparison to the PPI regulatory regime under the Previous
Circular which enabled faster adoption and ease of operation, the
stringent requirements under the New Directors may take away the
ease of using PPIs. The New Directions are geared towards
mitigating fraud and misuse of PPIs which, though a necessary
objective, may slow down the growth of the digital payments
revolution in India unless the concerns touched upon in this update
are addressed by the RBI.
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.
Round Table : FSC- FPI Meeting Part 3 (August 30, 2018) (Video)
