Types of Prepaid Payment Instruments (PPI) Issued in India

Prepaid Payment Instruments (PPI), also known as Digital Wallet and electronic-wallet (e-wallet) in common parlance, is a concept of the new digital era. In the light of developments in the field, a high increase in the number of PPI issuers, ensure safety and protection of funds of customers, etc. RBI has been regulating PPI transactions since its inception. A number of circulars and regulations have been issued so far on the issuance and operations of PPIs. Leading examples of PPIs in India are Paytm, MobiKwik, PayU, etc.

RBI has issued a Master Directions on Issuance and Operations of PPIs vide Circular No. RBI/DPSS/2017-18/58 Master Direction DPSS.CO.PD.No.1164/02.14.006/2017-18 dated 17th October 2017. Prepaid Payment Instruments are governed by provisions of the Payment and Settlement Systems Act (“PSS”), 2007

In this article, a detailed discussion has been carried out about what is PPIs and types of PPIs are issued in India:

1. What is Prepaid Payment Instrument (“PPI”)

• PPI can be understood in common parlance as a Wallet, in digital/electronic form, which is used for purchase of goods and services out of the money stored in such a wallet. Therefore, e-wallet/PPI is as good as a hard wallet with the only difference that money is stored in PPI in digital/electronic forms.
• Such e-wallet can be used for other payments such as Financial Services, remittances to other wallets etc.

2. How does Prepaid Payment Instrument work

• In case of PPI, there are following 3 parties are involved in the entire transaction namely:
  • PPI Issuer: Entities operating the payment systems issuing PPIs to individuals / organisations. PPI issuers have acceptance arrangements with different merchants who accept the funds transfer/remittance through PPIs issued by such PPI issuer.

• Holder: Holder is an Individuals / Organisations who obtain / purchase PPIs from the PPI issuers and use the same for purchase of goods and services, including financial services, remittance facilities, etc.

• Merchants: These are establishments who have a specific contract to accept the PPIs issued by the PPI issuer (or contract through a payment aggregator/ payment gateway) against the sale of goods and services, including financial services.

• Example:
  • A has a paytm wallet in his phone and he adds an amount of INR 5,000 to his paytm wallet. A utilised INR 5,000 for purchase of clothes from lifestyle. 
  • Paytm Wallet is a “Prepaid Payment instrument”.
  • One97 Communications Limited is the company which operates a payment system using Paytm wallet. Therefore, it is a “PPI Issuer”
  • Lifestyle is a “Merchant” who had a specific contract with One97 Communications Limited for acceptance of PPIs issued by it against sale of clothes.
  • A is a “Holder” who has obtained paytm wallet from PPI issuer and used it for purchase of clothes.

3. How many types of Prepaid Payment Instruments are being issued in India

PPIs that can be issued in the country are classified in following 3 parts:

1. Closed System PPIs
2. Semi-Closed System PPIs
3. Open System PPIs

3.1 Closed System PPIs

• Closed system PPIs are issued by an entity for facilitating purchase of goods and services from that entity only which has issued such PPI.
• Value stored in such PPIs can’t be used for purchase/settlement from a third party.
• Also, no cash withdrawals are allowed for value stored in such a wallet.
• E.g. of Closed System PPIs are Metrorail cards as same can be used for purchase service of Metro rail and can’t be used for purchase from third party.
• As these instruments cannot be used for payments for third party services, the issuance and operation of such instruments is not classified as payment systems requiring approval / authorisation by the RBI.

3.2 Semi Closed System PPIs

• These PPIs are used for purchase of goods and services, including financial services, remittance facilities, etc., at a group of clearly identified merchant locations / establishments.
• There PPIs can be used for payment or remittance with those third parties which have a specific contract with the PPI issuer to accept the PPIs as payment instruments.  Such a contract can be entered through a payment aggregator or payment gateway and does not need to be directly between PPI issuer and merchant..
• However, These instruments do not permit cash withdrawal.
• Semi closed System PPIs are issued only by banking institutions which are approved by RBI or non-banking Institution authorised by RBI.
• Paytm Wallet is an example of Semi-Closed System PPIs. Balance lying in paytm wallet can be used for purchase of goods from such a third party which is registered with Paytm as merchant.

3.3 Open System PPIs

• Open system PPIs are issued only by banking institutions authorised by RBI.
• Such PPIs can be used at any merchant for purchase of goods and services, including financial services, remittance facilities, etc. 
• Also, Banks issuing such PPIs shall also facilitate cash withdrawal at ATMs / Point of Sale (PoS) / Business Correspondents (BCs).
• E.g. of Open System PPIs are Debit Cards or Credit Cards.

4. Who is Eligible to issue PPI

• Eligibility to issue PPI completely depends upon the type of PPIs being issued.
• Following is a summary of institutions which are allowed to issue different types of PPIs.

Closed System PPIs	Semi-Closed System PPIs	Open System PPIs
It Can be issued by any non-banking institution and no prior approval or authorization from RBI is required.	It can be issued by: Banking institutions approved by RBI; Non-Banking Institutions which are authorized by RBI.	It can be issued only by banking institutions approved by RBI.

• Apart from this, all entities (banking and non-banking) applying to RBI for approval or authorisation need to fulfil capital and other eligibility criteria.

5. What is the eligibility criteria for authorisation or approval of PPI

All entities (banking or non-banking) applying to RBI for approval or authorization need to fulfill the following eligibility criteria

5.1 Banking Entities

• Banking entities, regulated by any of the financial sector regulators, applying for approval from the RBI under the PSS Act, shall file an application to Department of Payment and Settlement Systems (DPSS) and RBI, Central Office, Mumbai.
• Application shall be accompanied by ‘No Objection Certificate’ from their respective Regulator.
• Application shall be filed within 45 days of obtaining such clearance.

5.2 Non-Banking Entities

• Non-bank entities applying for authorisation from RBU must be a company incorporated in India and registered under the Companies Act 1956 / Companies Act 2013..
• In case where an entity is having Foreign Direct Investment (FDI) / Foreign Portfolio Investment (FPI) / Foreign Institutional Investment (FII), such entity shall also meet the capital requirements as applicable under the extant Consolidated FDI policy guidelines of Government of India.
• The Memorandum of Association (MOA) of the applicant entity shall cover the proposed activity of operating as a PPI issuer.
• Net Worth Requirement:
  • Non-bank entities must have a minimum positive net-worth of INR 5 crore as per the latest audited balance sheet at the time of submitting the application. For this purpose, non-bank entities shall also submit a certificate from their Chartered Accountants (CA) alongwith application to evidence compliance with the applicable net-worth requirement.
  • The application shall be processed by RBI based on this net-worth which shall be maintained at all times. 
  • Thereafter, by the end of the third financial year from the date of receiving final authorisation, the entity shall achieve a minimum positive net-worth of Rs. 15 crore which shall be maintained at all times. 
  • E.g.
    • Date of issuance of final authorisation: March 1, 2018,
    • Entity must achieve minimum positive net-worth of Rs. 15 crore as on March 31, 2020. 
    • If, Date of issuance of final authorisation: May 1, 2018, 
    • Entity must achieve minimum positive net-worth of Rs. 15 crore as on March 31, 2021. 

• Subsequently, the audited balance sheet and net-worth as on 31st March shall be submitted to RBI within 6 months of close of financial year, failing which the entity may not be permitted to carry out this business.
• Newly incorporated non-bank entities shall submit a Chartered Accountant certificate regarding the current net-worth along with a provisional balance sheet.
• All existing non-bank PPI issuers (at the time of issuance of this Master Direction) shall comply with net worth requirements as on March 31, 2020. This shall be reported to RBI, along with CA certificate and audited Balance Sheet, by September 30, 2020. 
• Thereafter, the minimum positive net-worth of Rs. 15 crore shall be maintained at all times. Till such time, the existing PPI issuers shall continue to maintain the capital requirements applicable to them at the time of their authorisation.

• Similar to banking entities, Non-Banking entities applying for authorisation from the RBI, shall file an application to Department of Payment and Settlement Systems (DPSS) and RBI, Central Office, Mumbai alongwith ‘No Objection Certificate’ from their respective Regulator.
• Application shall be filed within 45 days of obtaining such clearance.

* For the purpose of meeting eligibility criteria, Net-worth shall consist of:

1. Paid up equity capital, 
2. preference shares which are compulsorily convertible into equity capital, 
3. free reserves, 
4. balance in share premium account and 
5. capital reserves representing surplus arising out of sale proceeds of assets but not reserves created by revaluation of assets’ adjusted for ‘accumulated loss balance, book value of intangible assets and deferred revenue expenditure, if any’.