E-Wallets and Mobile Wallets

What are mobile wallets?

The widespread use of smart phones and mobile technologies has gradually begun to affect not only our use of products and services, but also how we pay for them. What we are witnessing is the beginning of technologies that aggregate payment methods on mobile. One of the recent developments is mobile wallets, often mistaken for mobile banking. Rather than providing mobile communications merely as means to do transaction through conventional modes of payments like net-banking and credit cards, mobile wallets seek to use mobile phones as a prepaid accounts where you may store money which can be used for transactions. Currently, mostly telecom services providers are providing mobile wallet services, with other kinds of players from e-commerce and dedicated payment services providers looking to increase their presence in this segment. Given that more number of people have access to mobile technologies, than even basic things like proper sanitation, let alone internet banking and physical debit and credit cards, it stands to reason that mobile wallets offer a segment with great potential.

Laws governing mobile wallets in India

The Payments and Settlement Systems Act, 2007 is the primary law governing payments systems in India, with the RBI as the body to supervise related matters. Section 18 of the Act empowers the RBI to make such regulations as may be required, from time to time, to regulate payments systems in India. In exercise of the same, the RBI has laid down guidelines for the issuance and operation of Pre-paid Payment Instruments. A Master Circular consolidating all regulations on the same was notified on July1, 2014.

The circular defines different kinds of payment instruments that one may create. In our experience, the most common form of payment instrument that can be used as mobile wallet is a Semi-Closed System Payment Instrument, as only Banks are permitted to offer Open System Payment Instruments.  These can be used for purchase of services and goods from a set of identified merchants and services providers, but do not allow for withdrawal of the currency from the instrument. Non Banking Finance Companies (NBFC) and companies incorporated in India are eligible to apply for license to issue these instruments.

Additionally, a company (that which is not a bank or a NBFC) seeking RBI’s authorization should have a minimum paid-up capital of INR 5 crores and a minimum positive networth of INR 1 crore at all times.

The Circular specifies anti-fraud mechanisms/standards and the level of Customer Due Diligence required based on the quantum of transactions involved. KYC norms and Anti Money Laundering norms, as relevant would continue to apply to pre-paid instruments. Importantly, these regulations do not cover any cross border transaction and do not extend to any foreign exchange pre-paid instruments allowed by RBI under FEMA.

FDI in applicant Companies for mobile wallets

Companies which proposes to have foreign investment has to ensure prior government approval (FIPB approval). The FDI Circular classifies e-wallet / mobile wallets as credit cards (“Credit Card” business includes issuance, sales, marketing & design of various payment products such as credit cards, charge cards, debit cards, stored value cards, smart card, value added cards etc.) which is under the classification of NBFC and should meet capitalization requirements as a fund-based activity.

With the recent Master Circular consolidating the policy guidelines on issuance and operations of pre-paid instruments it has made the regulatory terrain easier to navigate not only in terms of eligibility requirements to obtain a license to issue pre-paid payment instruments but also the on-going compliances required by law. It is important to note that mobile wallets exist in a space which does not attract the restrictions under the RBI notifications from November, 2010 to regulate online payment gateway service providers, which affects a service provider like PayPal. This may also be an attractive payment system for parties to consider in light of the furore over the payment system used by Uber which bypassed the two step authentication which the RBI recently cracked down upon.

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