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.
In comparison to the previous PPI regulatory regime which enabled faster adoption and ease of operation, the stringent requirements under the New Directors may take away the ease of using PPIs.
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.
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