PPI Guidelines: Has RBI changed the way wallets will work?

RBI issued a revised set of Master Directions governing pre-paid instruments and wallets (PPI). Industry has been awaiting these regulations – since November last year when the RBI announced it was undertaking a complete review of the PPI regulatory framework and had put on hold ‘on-tap’ licenses for new PPI operators.

As expected, the RBI has moved towards a full KYC requirement for wallets. The industry will need to find ways to comply with this enhanced KYC rule while still effectively managing costs. The RBI should consider permitting digital verification of KYC documents or allow a remote Aadhaar enabled KYC without requiring physical presence of the customer.

Most wallets have, so far, been issued under the limited KYC route that existed under the earlier rules (i.e. only name and mobile number verification). The RBI has now put in place a layered KYC requirement - wallets with a monthly limit of INR 10,000 may be issued with limited KYC. However, such wallets must migrate to a full KYC within 12 months. All other wallets must be issued on a full KYC basis. Existing instruments have until December 31, 2017 to be compliant.

A key positive change is the push towards interoperability. The RBI has now contemplated wallet-wallet interoperability and also wallet-bank account interoperability via the UPI infrastructure.

The regulations have increased net owned fund requirements for PPI operators from INR 1 crore to INR 5 crores initially, to be increased to INR 15 crores within 3 years. Existing wallet issuers must meet the INR 15 crore capital requirement by March 31, 2020. This is a marked increase from the current requirement of INR 1 crore and indicative of the increasing role of PPI operators.

The RBI has expressly permitted wallet payments for financial services and products. However, a corresponding change to permitted credits has not been made and it remains unclear whether dividends or other financial income can be loaded onto a wallet.

The RBI had indicated that it was considering two factor authentication (2FA) for wallets as is required for credit cards. The 2FA takes away from ease of usage and was a serious industry concern. It is unclear whether all wallet payments will now require 2FA.

The rapid changes to digital payments certainly triggered a need for a change in law. It is important for the RBI to balance regulation vs. viability; given that the PPI also furthers an important financial inclusion objective and can become a key channel for distribution of other financial products.