Technology Law Analysis
December 07, 2017
Revamped Prepaid Payment Instrument Law focuses on KYC, Interoperability, Consumer Protection and Data Security
The Reserve Bank of India (“RBI”) recently issued a new Master Direction on Issuance and Operation of Prepaid Payments Instruments1 (“Master Direction”). Given that the Master Direction was effective from the day of its release, existing issuers of prepaid payment instruments (“PPIs”) have been given time to comply with the new rules on or before December 31, 2017. The Master Direction supersedes previous RBI guidelines dealing with the issuance and operation of PPIs.2
The Master Direction follows from a public consultation process that the RBI had conducted earlier this year where in March, 2017, it had released the draft form of the Master Direction on Issuance and Operation of Prepaid Payments Instruments (“Draft Direction”), inviting comments from stakeholders and the general public. Nishith Desai Associates had also submitted its comments on the Draft Direction.
In this hotline, we discuss the significant changes introduced by the RBI in the Master Direction.
Eligibility and authorization process
1. Types of PPIs
The rules relating to each type of PPI have been made more detailed, and each type of PPI is now regulated in a more distinct fashion.
2. Other Instruments
The Master Direction has done away with many different categories of PPIs that were in existence and has provided that in addition to the above, PPI issuers can only issue PPIs of the following two categories:
Another addition worth noting is that cross-border outward transactions have now been permitted under the Master Direction. KYC-compliant reloadable semi-closed and open system PPIs (INR denominated) issued by authorised banks are permitted to be used in cross-border outward transactions. This will be only for permissible current account transactions under the Foreign Exchange Management Act, 1999 i.e., purchase of goods and services, and not for cross-border outward fund transfer or for remittances under the Liberalised Remittance Scheme.
The Master Direction provides for interoperability amongst PPIs5 and essentially prescribes that interoperability should be enabled in phases. In the first phase, PPI issuers (both banks and non-bank entities) should make all KYC compliant PPIs issued in the form of wallets interoperable amongst themselves through the Unified Payments Interface (“UPI”)6 within 6 months from the date of issue of the PPI Direction. In subsequent phases, interoperability should be enabled between wallets and bank accounts through UPI.
4. Conversion of existing PPIs
PPI issuers would need to give PPI holders the option to convert the existing semi-closed and open system PPIs issued to them into various types of PPIs based on KYC requirements, and after conducting applicable due diligence, on or before December 31, 2017. In cases where such conversion is not opted for by PPI holders, such PPIs should be mandatorily converted into minimal KYC PPIs.
5. Other Important Provisions
The Master Direction significantly increases the compliance burden on PPI issuers on various fronts: data security, KYC, audits, disclosures and grievance redressal. Some commentators have questioned whether the PPI regime will result in e-wallets losing their edge over traditional financial offerings.9 This is because many of the new requirements resemble those required for banks and NBFCs.
However, given the increase in the use of PPIs in India, consumer protection concerns seem to warrant increased regulation. The RBI November 2017 Bulletin disclosed that as of September 2017, PPI volumes stood at 240.29 million (as opposed to 97.07 million in September 2016), and PPI values stood at INR 109.77 billion (as opposed to INR 56.28 billion in September 2016).10 Mr. R. Gandhi, former RBI deputy governor, was recently quoted as saying, “if you don’t insist on the same type of terms for banks and wallets, then there is clear arbitrage, and it is tantamount to picking a winner. If RBI doesn’t lay terms of security and KYC, then wallets will be at a clear advantage.”11 This statement appears to echo the rationale behind the revamped rules in the Master Direction.
We see the Master Direction as a welcome move. By facilitating a level playing field, it pushes for a regulated environment where there is uniformity and certainty. By increasing entry barriers and compliance requirements, the RBI is seeking to protect consumer interests and prevent systemic risk, considering the increased funds at stake. The move to promote interoperability amongst PPIs and bank accounts may also go a long way in promoting a cashless and digital economy in India by facilitating payments between PPIs and other PPIs and between PPIs and bank accounts.
– Aaron Kamath, Kartik Maheshwari, Jaideep Reddy & Karan Kalra
You can direct your queries or comments to the authors
1 Circular dated October 11, 2017. Available at https://rbi.org.in/Scripts/NotificationUser.aspx?Id=11142&Mode=0. Last accessed: December 5, 2017.
2 Tables 1 and 2 of the Master Direction set out the circulars which have been fully and partly repealed. Significantly, the Policy Guidelines on Issuance and Operation of Pre-Paid Payment Instruments in India, 2009, as amended and consolidated from time to time, stands repealed.
3 If the PPI issuer is a bank, they would need to meet the necessary capital requirements applicable to banks.
4 This category of PPI now cannot be used for purposes other than the purchase of goods and services. Therefore, unlike earlier, peer-to-peer payments would not be permitted unless they are for such purchases.
5 The Master Direction states that separate operational guidelines will be issued on interoperability.
6 See http://cashlessindia.gov.in/upi.html. Last accessed: December 5, 2017.
7 Circular on Customer Protection – Limiting Liability of Customers in Unauthorized Electronic Banking Transactions, dated July 6, 2017. Available at: https://rbi.org.in/Scripts/BS_CircularIndexDisplay.aspx?Id=11040. Last accessed: December 5, 2017.
8 Note: Banks will continue to be regulated by the RBI Circular on Cyber Security Framework in Banks, dated June 2, 2016.
9 See https://the-ken.com/rbi-kicked-off-shark-fight-wallet-users/#. Last accessed: December 5, 2017.
10 https://rbidocs.rbi.org.in/rdocs/Bulletin/PDFs/RBIBNOV17ABB2DE5EA76F428980F42BE602988E90.PDF Last accessed: December 5, 2017.
11 https://the-ken.com/rbi-kicked-off-shark-fight-wallet-users/#. Last accessed: December 5, 2017.
The contents of this hotline should not be construed as legal opinion. View detailed disclaimer.