The revised guidelines issued by the Reserve Bank of India (RBI) on pre-paid instruments and wallets (PPI) recently are likely to accelerate mergers and acquisitions among digital payment brands.
The RBI had issued revised Master Directions governing PPIs on October 11, overhauling the regulatory framework of the PPIs.
The current move of the central bank is likely to prompt many digital payment companies to consider mergers and acquisitions as the cost of doing business would rise exponentially, said Shilpa Mankar Ahluwalia, partner, Shardul Amarchand Mangaldas.
Net owned funds
The new guidelines stipulate that wallet operators must have net owned funds of ₹5 crore to be increased to ₹15 crore within three years. Existing wallet issuers must comply with the norm by March 31, 2020.
“This is a marked increase from the current requirement of ₹1 crore and also indicative of the increasingly significant role PPI operators play,” Ms. Ahluwalia added. She also said the push towards interoperability is tremendous. Today, it is not possible to transfer money from one wallet to another. “The RBI has now contemplated wallet-wallet interoperability and also wallet-bank account interoperability via the UPI infrastructure.”
“With India moving towards a digital-first economy, this is a welcome move by regulator by offering an interoperable ecosystem,” said R.K. Gupta, ED, Bank of Maharashtra. “This puts the consumer right on top with [the] choice of using the most convenient, hassle-free and secured product; this move also increases flexibility and convenience for users and encourages use of wallets and UPI platforms,” he added.
The RBI also moved towards full KYC (know your customer) norms for wallets. Most wallets have, so far, been issued under the limited KYC route i.e. needing only name and mobile number. The RBI has now put in place a layered KYC requirement: wallets with a monthly limit of ₹10,000 may be issued with limited KYC. However, no fund transfers are allowed and all such wallets must migrate to a full KYC within 12 months. All other wallets must be issued on a full KYC basis. Ms. Ahluwalia said movement to a full KYC policy would significantly increase costs and had been a key industry concern.
“A key concern will be the full KYC requirement,” said Ms Ahluwalaia, adding, “industry will need to find ways to achieve full KYC while still managing costs.” According to her, the regulations should ideally permit digital verification of KYC documents or remote Aadhaar-enabled KYC, neither of which will require the physical presence of the customer. “There is potential for innovation in technology to help operators manage KYC costs provided the regulations allow it.”
Further, the aggregate monthly transaction cap on a limited KYC wallet had been reduced from ₹20,000 to ₹10,000 while the aggregate monthly transaction cap on a full KYC wallet had been increased from ₹50,000 to ₹1 lakh. Given that most wallets today have been issued under the limited KYC route, this could impact usage, she said.
The RBI has expressly permitted wallet payments for financial services and products (e.g. insurance, mutual funds, and securities). However, a corresponding change to permitted credits had not been made and it remains unclear whether dividends or other financial income can be loaded onto a wallet. A wallet issued by a bank can now be used to buy goods and services from an offshore merchant.
The central bank had also indicated that it was considering two factor authentication (2FA) for wallets as is required for credit card payments. The 2FA takes away from a central feature of the wallet — ease of usage and was a serious industry concern. The new regulations require 2FA for all successive payment transactions and for all cards (physical or virtual). It is unclear what the intent is and whether all wallet payments will now require 2FA.
