Prepaid Payment Instruments or simply, PPIs, may sound like a mouthful, but they have become interspersed with our daily life, and indeed transformed the way we undertake everyday transactions. Without realising it, we rely on some form of PPI for paying even at the nearest kirana shop. The usage of such PPIs has been further enhanced during the pandemic as safety and the principle of least-contact became norms to live by.
With the pervasiveness of these instruments, the Reserve Bank of India (RBI) thought it prudent to issue regulations to monitor the conduct of the same, and came out with the first set of guidelines to govern the operation and issuance of Prepaid Payment Instruments in 2017. The RBI defined PPIs as "instruments that facilitate purchase of goods and services, financial services, remittance facilities, etc., against the value stored therein1". As one can infer, the RBI has sough to make the definition sweeping and all-encompassing, and in keeping with the same, PPIs constitute nearly all major methods of online payment, including debit and credit cards, digital wallets such as GPay, PayTM, Mobikwik, PhonePe, etc. and gift cards.
Under the earlier regulations, the RBI had classified the above payments systems into three categories, namely:
- Closed System PPIs: Such PPIs were issued by an entity for facilitating the purchase of goods and services from that entity only and no cash withdrawals were permitted from the same;
- Semi-Closed PPIs: These PPIs were issued by banks (approved by RBI) and non-banks (authorised by RBI) for purchase of goods and services, including financial services, remittance facilities, etc., for use at a group of clearly identified merchant locations / establishments which have a specific contract with the issuer (or contract through a payment aggregator / payment gateway) to accept the PPIs as payment instruments; and
- Open System PPIs: The PPIs herein were issued by banks (approved by RBI) for use at any merchant for purchase of goods and services, including financial services, remittance facilities, etc2.
However, to facilitate interoperability and harmonisation amongst the various PPIS, the RBI has issued fresh master directions on the eligibility criteria and the conditions of use for payment system operators involved in the issuance and operation of Prepaid Payment Instruments dated August 27, 2021 ("Master Directions/MD"). Under the new Master Directions, the RBI has simplified the classification of PPIs into two neat categories as below:
- Small PPIs: Small PPIs are issued by banks and non-banks after obtaining minimum details of the PPI holder. They are to be used only for purchase of goods and services. Small PPIs can be used at a group of clearly identified merchant locations / establishments which have a specific contract with the issuer (or contract through a payment aggregator / payment gateway) to accept the PPIs as payment instrument; and
- Full-KYC PPIs: Full-KYC PPIs are those which are issued by banks and non-banks after completing the Know Your Customer (KYC) of the PPI holder. These PPIs shall be used for purchase of goods and services, funds transfer or cash withdrawal.
While the above two systems of PPIs require the prior written approval/authorisation of the RBI to become operable, the RBI has retained the definition of a closed system PPI, and clarified that such instruments cannot be used to settle or pay for third party services and no cash withdrawal is permitted from a closed stystem PPI either. As a result, the issuance or operation of such instruments is not classified as a payment system requiring approval / authorisation by RBI and they are, therefore, not regulated or supervised by the RBI.
Under the new regulations, small PPIs (both with cash loading and no-cash loading facility) are permitted to be issued by banks and non-banks after obtaining minimum details of the PPI holder, and such PPIs shall be reloadable in nature and issued only in electronic form. However, as the name may have given away, the amount loaded in small PPIs cannot exceed Rs.10,000 in a given month, and the total amount loaded during the financial year cannot exceed Rs.1,20,000. Further, small PPIs (with cash loading facility) are to be converted into full-KYC PPIs within a period of 24 months from the date of issue of the PPI.
In contrast, Full-KYC PPIs are predictably those PPIs which are issued after completing KYC of the PPI holder, as set forth in the "Know Your Customer Direction, 2016". Under the Full-KYC PPI route, the RBI has also made an express provision for the option of cash withdrawals at Point-of-Sale (PoS) devices as well as non-bank issued PPIs, and prescribed a ceiling of Rs. 2,000 per transaction within an overall monthly limit of Rs.10,000 per PPI across all channels.
Additionally, the Master Directions confirm that only Full-KYC PPIs issued by banks possessing the requisite license would be permitted to be used in cross-border outward transactions subject to the existing FEMA restrictions. Further, no PPIs can be used or any cross-border outward fund transfer and/ or for making payments under the Liberalised Remittances Scheme (LRS)3.
In order to achieve its stated objective of interoperability, the Master Directions make clear that where PPIs are issued in the form of wallets, UPI shall be the chosen mode of interoperability and where PPIs are issued as cards, the cards shall be affiliated to authorised card networks. As a next step, all Full-KYC PPI issuers ae mandated to give interoperability to the holders of such PPIs through the card networks and UPI. To bolster the security framework surrounding the usage of PPIs, the Master Direction has also introduced Two Factor Authentication for validation in cases of wallet transactions involving debit to the wallet, including cash withdrawal transactions4.
A scrutiny of the Master Directions demonstrates the intention of the RBI to bring in a comprehensive system to create an infrastructure designed around risk management and adequate customer redressal in an integrated PPI ecosystem.
1. Paragraph 2.8, Master Directions on Prepaid Payment Instruments (PPIs), https://www.rbi.org.in/Scripts/BS_ViewMasDirections.aspx?id=12156
2. Paragraph 2.3-2.6, Master Direction on Issuance and Operation of Prepaid Payment Instruments, https://www.rbi.org.in/Scripts/BS_ViewMasDirections.aspx?id=11142
3. Paragraph 8, Master Directions on Prepaid Payment Instruments (PPIs), https://www.rbi.org.in/Scripts/BS_ViewMasDirections.aspx?id=12156
4. Paragraph 15.3, Master Directions on Prepaid Payment Instruments (PPIs), https://www.rbi.org.in/Scripts/BS_ViewMasDirections.aspx?id=12156
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