Author: Aditya Tripathi, Third-year student at Damodaram Sanjivayya National Law University, Visakhapatnam.
The term “Wallet” can be defined as a medium for holding money physically or any other personal information such as identity cards etc. Likewise, the term “E-Wallets” can be defined as Electronic wallet which is nothing but a software application for storing virtual money and digital information related to credit card, debit card, various coupons as well as the personal identity of the users.
E-wallet is an Internet-based payment system where the money can be transferred directly from the wallet of the holder to the account of the beneficiary without any specific requirement of a physical card, cash etc. One can transfer funds to e-wallets with the help of a credit card, prepaid card, or through a bank account. It is like a prepaid wallet. The amount stored through such medium can be used for different purposes such as mobile recharge, train tickets, purchase of groceries items, food, clothing or any other e-commerce transactions.
The exponential growth of the e-wallets industry in India
The growth of E-wallets industries has been tremendous and significant over the past few years with the growth of e-commerce companies. Nearly, 81 per cent of the existing users prefers digital payment methods over payments made through cheques or demand draft or any other non-cash payment methods.
By 2020, the digital payment industry in India is expected to contribute around 15 per cent of India’s GDP by contributing 500 billion dollars. Furthermore, the report published by Google-BCG indicated the growth in microtransactions having a value of less than Rs 100 by 50 per cent. There are various other alternative methods of digital payments including UPI, Bharat QR, payment banks which are estimated to contribute to the growth of digital payment industries by 30 per cent.
As per the Capgemini’s World Payment Report, it is expected that e-wallets will grow at an annual compound growth rate of 148 per cent and will be of 4.4 billion dollar value over the next five year by 2022.
Law governing e-wallets in India
The Payment and Settlement Act (“PSS Act”) of 2007 governs E-wallets in India. Section-18 of PSS Act, 2007 gives supervisory power to RBI to control and regulate the payment system. Thus, any banking or non-banking institutions who seek to start up their payment systems need to obtain express permission from the RBI under the PSS Act of 2007.
Various guidelines have been issued by RBI for regulation and continuous assessment of these pre-paid instruments. The master direction issued by the RBI on February 25, 2019 discusses the nature of PPIs as: “PPIs are payment instruments that facilitate the purchase of goods and services, including financial services, remittance facilities, etc., against the value stored on such instruments.” Thus, transactions carried out by digital wallets or e-wallets must have to adhere to the guidelines given by the RBI and as are covered under the PSS Act.
These master directions are applicable to all the PPI issuers, system providers as well as the system participants and for those who are operating as existing PPI issuers; they must be complied with by the revised guidelines on or before February 28, 2018.
Different types of e-wallets permitted by the RBI
RBI regulatory policy related to the banking sector has permitted only three types of e-wallets in India. The three types of e-wallets are discussed hereunder:
1) Closed wallet: a closed wallet is generally issued by an entity for its exclusive use by its consumers only. No redemption or cash withdrawal is permitted through a closed wallet. These wallets are used between the parties themselves and are not used for the third party services or payments. Thus, these types of wallets are outside the preview of the licensing regime. For example: in case of e-commerce giants such as Snapdeal, Flipkart, etc any arrangements between the customers and the company or in case of returning products the amount can be directly credited to the customer account with the company.
2) Semi-closed wallet: It allows the purchase of goods and services etc from identified merchants or payment to own goods and services by the entity. The best examples of semi-closed wallets are Paytm, Phonepay, Mobikwik etc where users are allowed to use their balance for the payment to other identified service providers such as Ola, Uber ride and for different other purposes.
3) Open wallet: Open wallet mainly used for transactions relating to purchasing of services and goods as well as it can be used for financial services like fund transfers, cash withdrawals at ATMs or banks. M-Pesa wallet is the best example of an open wallet in India.
Eligibility criteria for issuing pre-paid instruments
As per the new Master directions issued by RBI in 2019, the following is the eligibility criteria for the issue of PPIs :-
Banks which fulfil the eligibility criteria and are stipulated by the regulatory department can take approval from the RBI to issue semi-closed and open system PPIs.Non- bank entities are allowed to issue only semi-closed PPIs only after taking the due permission from the RBI. Closed PPIs are not classified under the category of PPIs requiring authentication from the RBI.
As per the earlier guidelines; the PPIs entities must have the minimum paid-up share capital of five crore rupees and have net-worth of one crore rupees to issue PPIs instruments. The new Master Directions (2019) has increased the net worth requirement of capital from Rs.1crore to Rs.5 crore for non-bank entities. There is no fixed limit for paid-up share capital. In addition to this, such entity must be able to achieve the required net capital of Rs.15 crore and the same has to be achieved by the end of the third financial year and it has to be maintained throughout the same. These changes must be adhered to by the Non-banking entities to issue PPIs on or before 31st March 2020.
Preventive measures undertaken by the RBI
1) Strict KYC norms: This KYC verification came in picture in 2016 when RBI launched Know Your Customer guidelines. According to the guidelines the following requirements must be fulfilled:-
For semi-closed PPIs (limit 10,000 or below):- there is a requirement of minimum details of the PPI holder later, the same has to be complied with full KYC, from the date of issue of the instrument before the expiry of twelve months. The following credentials are required for minimum details: verified mobile number of the users and the user ID i.e. Aadhaar card, driving license, PAN card etc. Such PPIs are restricted for transferring funds to PPI users or the bank accounts.
For semi-closed PPIs (limit up to 1 lakh):- there is a requirement of full KYC verification from the beginning.
2) Fraud and Risk management framework: earlier guidelines did not provide for detailed security standards whereas the New directions make it mandatory relating to the need for implementation of strict measures for prevention of risk and fraud. The safety and security policy of RBI includes:
2 (FA) authentications: For the security of debit and credit cards the additional factor authentication is required. This creates an additional process for security verification before the transfer of funds through PPI.
The procedure prescribed by the RBI for authorisation and change in control
According to Master Directions issued by the RBI in 2017, the entities meeting the required criteria for PPIs needs to take ‘in principle’ approval from the RBI, with a validity of six months. Also, the entities are required to submit to RBI a System Audit Report (SAR) before the expiry of six months from the grant of final authorization certificate. The entities in case failing to submit the report can further seek the extension of maximum period of six months for the submission of the SAR report.
Along with it, as per the new master directions the entities have to report to RBI in case of takeover or acquisition or change in control of the management of the non-bank entities. RBI after perusing the application can place suitable and proper restriction related to changes proposed by the non-bank entities or can reject the application in case of non-compliance of the procedure.
RBI's initiative to create interoperability between PPIs
The key reason for RBI to come up with Master Direction was to improve harmonization and interoperability of PPIs. In the first phase, all the KYC compliant wallets are to be linked with the UPI (Unified Payment Interface) before the expiry of six months starting from the date of issue of master directions. From phase second, the interoperability between wallets and bank account are created through UPI, same way the interoperability in the form of cards also to have complied in the due course. This will provide benefit to the merchants, users or entities selling goods and services. This will lead to a platform where the customers will no longer need to sign up with multiple PPI issuers.
In 2016, demonetization contributed to the growth of e-wallets and PPIs entities. Since then, there has been significant growth in the use of PPIs. Also, the promotional schemes such as vouchers, cash backs acted as catalysts. In order to make the use of PPIs conveniently, safely and securely by its users RBI has made a move by issuing master directions and at the same time promoted interoperability of PPIs. Thus, it can be concluded in a nutshell that e-wallets entities would continue to expand their scope of operation so as to make these transactions through PPIs as easy as possible for its users. However, at the same time, they also need to comply with the guidelines of RBI which if failing will lead to cancellation of their license to issue PPIs.
 https://worldpaymentsreport.com/wp-content/uploads/sites/5/2018/10/World-Payments-Report-2018.pdf last accessed on 11th july, 2019.