Tag Archives: prepaid instrument

Authorisation of New Retail Payment Systems : RBI’s Policy Paper

Reserve Bank of India (“RBI”) vide its press release on January 21, 2019 has invited comments on the Policy Paper on Authorisation of New Retail Payment Systems (“Policy Paper”). Earlier in June 26, 2018 RBI had released a Statement on Developmental and Regulatory Policies which aimed to minimize the concentration risk in retail payments systems and foster innovation and competition in the retail payments market. With this objective in mind RBI has placed this Policy Paper in public domain, inviting comments till February 20, 2019.

Existing retail payment services and operators in India

RBI is the regulator for payment and settlements systems under the Payment and Settlement Systems Act, 2007 and it ensures that the payment systems operate in a secure and efficient manner with regard to banks as well as non-bank entities. Banks have been the traditional gateway to payment systems but with the demand for varied payment systems and technological changes, non-bank entities have been granted access to the payment systems. These non-bank entities have been competing with the banks by providing retail electronic payment services. As a result, RBI has been issuing guidelines for various payment systems and granting the non-bank entities to setup and operate payment systems. It is to be noted that RBI had granted permission to eighty- nine (89) non-bank entities to act as payment system operators.

Analysis of the current landscape w.r.t retail payment system operators

Though there are many payment systems such as card networks, Prepaid instrument issuers (PPIs), ATM networks, etc. there are only a handful of payment operators in India. As a result of which, there are concerns around concentration and competition and its impact on the current financial of the country. Therefore there are a number of issues which need attention. The issues for discussion are as follows:

  1. a single operator having multiple and varied retail payment systems versus diversification across multiple operators;
  2. payments systems managed by a single operator such as Unified Payments Interface (UPI), Immediate Payment Service (IMPS), Aadhaar Enabled Payment System (AePS) ,etc. versus multiple systems with similar product features being offered by multiple operators;
  3. availability of a window for licensing operators of a payment system on-tap; and
  4. reviewing the criteria of licensing to foster innovation and competition and to broad base potential applicants.

RBI has classified the payment systems as follows:

Serial Number. Basis of Classification Particulars
1. Number of operators 1.    Single operator for a single or multiple retail payments systems

·         NPCI- National Financial Switch (NFS), IMPS, BHIM Aadhaar Pay, National Electronic Toll Collection (NETC), etc.

·         Empays-IMT

 

2.    Multiple operators for similar payment services- to name a few:

·         ATM networks- 5

·         Card Payment Networks- 5

·         Prepaid Payment Instrument (PPI) issuers- 48 non-banks and 60 banks

 

2. Type of payment services Classification on the payment service based on the end user as under:

1.    Fund transfer and merchant payments systems- IMPS, UPI, PPI, Aadhaar based payments, etc.

2.    Card based payments- Card networks, ATM networks

3.    Bulk and repetitive payments, utility payments- NACH, BBPS

4.    Toll collection- NETC

5.    MSME receivables’ financing- TReDs

NPCI has become pivotal to the operation of many critical retails payments systems in the country. By October 2018, NPCI was accounting for almost 48% of the retail electronic payment transactions (excluding paper) in volume to 15% of the value of the retail electronic payment transactions.

The advantages of having concentrated system operations with few entities are as follows: (a) leads to standardisation with uniform and tested payment systems; (b) less pressure on capital and infrastructure; and (c) a unity of approach by the regulators. Whereas the disadvantages of having a single operator are as follows: (a) absence of redundancy and fall-back arrangements may impact continued availability; (b) inadequate competition may lead to complacency with no upgradation and improvement in the product; and (c) increase of the prices at which the services are being offered with reduction in quality of service.

The Policy Paper also discusses a multi-pronged action for a more appropriate level of retail payment systems and operators.

The pros of having multiple entities which provide similar payment services would be to increase the competition. However, this may require additional investments, creation of a suitable infrastructure, and this may be achieved over phases. Also, the feature of adding inter-operability in the new payment systems would incur huge costs.

Open and keep-on-tap window for making applications

There can be an open and keep-on-tap window for making applications by all the payment systems in place. This window would permit the receipt of applications for all payment systems and would prescribe for a specific “point of arrival” metric which would allow the entities who are unable to achieve the desired capacity and scale to have a defined-time line exit.

Liberal entry norms

The Policy calls for a liberal entry norm which would require reviewing the entry point capital (net worth) requirement and an analysis of the capability potential of the entities. Finally the Policy also recommends that all payment systems should have a physical presence in the country, an impeccable track record, and shall conform to the best overall standards including those pertaining to customer service and efficiency.

The Policy also makes it clear that there should be an alignment of regulatory framework to encourage enhanced participation of both bank and non-bank entities.

Further, Annexure III of this Policy Paper lays down the authorisation criteria for non-bank payment system operators which discusses the review possibility of the financials in terms of the reduction or revision of the net worth for payment systems such as WLAOs, BBPOUs, and TReDS.

Source: https://rbidocs.rbi.org.in/rdocs/PublicationReport/Pdfs/ANRPS21012019A8F5D4891BF84849837D7D611B7FFC58.PDF

Regulatory update: Prepaid Payment Instruments (PPIs) – Guidelines on Interoperability

The Reserve Bank of India (RBI) on October 16, 2018 issued a set of guidelines for interoperability of PPIs. The guidelines are issued under Section 18 read with Section 10(2) of the Payment and Settlements Act, 2007. PPI issuers who choose to adopt interoperability shall adhere to these guidelines along with the Master Direction[1].

  1. Common requirements for achieving interoperability for wallets and cards
    • Where the PPIs are issued in form of online wallets, interoperability shall be facilitated through UPI and where PPIs is issued through a card, the cards shall be affiliated to authorised card networks. Option of interoperability has also been provided to PPI issuers operating in segment of meal, gift and mass transit system (MTS).
    • The interoperability shall be facilitated to all KYC compliant PPI account and entire acceptance infrastructure.
    • Technical Requirement: While facilitating interoperability the PPI issuer shall comply and adhere to all requirements of respective card networks and UPI, including adherence to various standards, technical requirement specific to a payment system, certification, audit and etc.
    • Further the PPI issuers will have to comply with mechanism established for reconciliation, grievance redressal and consumer protection by UPI and specific card networks.
  2. Specific Requirements for achieving interoperability through card networks
    • Card networks are allowed to integrate PPI issuers on their network. Further the non-banking PPI issuers are allowed to join card networks as members or associate members.
    • Settlement: For the purpose of settlement, Non-banking PPI issuer may directly participate in the card network or through a sponsor bank arrangement while adhering to requirements of the specific card network which it is a member of.
    • Safety and Security
  3. Non-banking PPI issuers will be issuing interoperable cards for the first time and therefore they shall make sure that the cards have an EMV chip and are PIN compliant.
  4. Banks shall ensure that while issuing new PPIs and renewing the old PPIs, the cards shall have EMV and shall be PIN compliant.
  • If a PPI issuer in the meal segment intends to facilitate interoperability, it shall also issue EMV chip and PIN compliant cards, whereas it is not compulsory for PPI issuers in the gift cards and MTS segment to have EMV chip and PIN.
  1. Specific requirements for achieving interoperability through UPI
    • PPI issuers will operate as payment system providers (PSP) in the UPI network. National Payment Corporation of India (NPCI) will provide all the PPI issuers, including non-banking PPI issuers a platform for linking their respective PPI holders/users to the platform to facilitate interoperability. The platform issued will use UPI to provide such Interoperability.
    • The PPI issuers as PSPs are only allowed to integrate their PPI holders/users and shall not on board PPI holders/users of other PPI issuers or customers of banks.
    • Any interoperable transaction will be approved as per the credentials of an individual’s online wallet before the same transaction reaches UPI network.
    • Settlement: Non-banking PPI issuer can directly settle a payment though a sponsor bank. Non-banking PPI issuers shall adhere to the requirements of sponsor bank in the UPI network and shall also comply with requirements stipulated by NPCI.

Source: https://www.rbi.org.in/Scripts/BS_ViewMasDirections.aspx?id=11142

[1] https://www.rbi.org.in/Scripts/BS_ViewMasDirections.aspx?id=11142

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.