Banks regulator, the Reserve Bank of India (RBI), on 27 August 2021, issued the Master Directions on Prepaid Payment Instruments (‘MD PPI’) to introduce significant changes to the existing legal regime pertaining to the prepaid instruments (PPI) viz., under the Master Directions on Issuance and Operation of Prepaid Payment Instruments (‘2017 MD’).

With the outbreak of the Covid-19 pandemic, there has been a drastic increase in the number of people using digital payment systems, thus, bringing significant profitability to the digital payment and fintech industry in India.

PPIs mean instruments that facilitate purchase of goods and services, financial services, remittance facilities, etc., against the value stored therein. For example, Sodexo cards with pre-loaded value. The MD PPI has now classified PPIs into two new categories, with an aim to simplify the regulatory procedure, as compared to the three categories provided under the 2017 MD i.e., Closed Systems PPI, Semi-Closed Systems PPI, and Open Systems PPI.

The MD PPI mandates that no entity can set up and operate payment systems for PPIs without prior approval / authorisation of RBI, and banks and non-bank entities are allowed to issue PPIs only after obtaining necessary approval / authorisation from RBI under the Payment and Settlement Systems Act, 2007. The salient features of the MD PPI are brought out as below:

A. Classification of PPIs:

The two newly introduced categories of PPIs which can be issued by banks and non-banks under the MD PPI are:

Small PPIs:

• Issued after obtaining minimum details of the PPI holder for purchase of goods and services only.
• Minimum details include One Time Password (OTP) verified mobile number and a self-declaration of name and unique identity / identification number of any ‘mandatory document’ or ‘Officially Valid Document (OVD)’ or any such document with any name listed for this purpose in the Master Directions on Know Your Customer (KYC) norms.
• Small PPIs can hold cash up to INR 10,000 loaded per month, and not exceeding INR 1.2 lakh in a year.
• Maximum amount outstanding and maximum debit amount (PPI with cash loading facility) in a given month shall not exceed INR 10,000.

2. Full-KYC PPIs:

• Issued after completing Know Your Customer (KYC) of the PPI holder for the purchase of goods and services, funds transfer or cash withdrawal.
• Video-based Customer Identification Process (V-CIP) can be used to open full-KYC PPIs as well as to convert Small PPIs into full-KYC PPIs.
• Maximum amount outstanding at any point of time shall not exceed INR 2,00,000.
• Limit of INR 2,00,000 per month fund transfer in case of pre-registered beneficiaries and maximum limit for fund transfer in all other cases is INR 10,000 per month.
• RBI had used the term in earlier notifications, but this is the first time, the same is defined.

B. Interoperability:

• RBI under the MD PPI has mandated interoperability for all full-KYC PPIs, interoperability on the acceptance, and QR Codes in all modes shall be interoperable by 31 March 2022.
• Interoperability will enable a payment system to be used in conjunction with other payment systems, such as interoperability pertaining to wallets through Unified Payment Interface (UPI) and interoperability in form of cards through National Payments Corporation of India (NPCI).
• PPIs issued in mass transit systems are exempted from the requirement of interoperability, and gift PPI issuers (banks and non-banks) have an option to offer interoperability. The interoperability guidelines issued vide notification dated 19 May 2021 are now made part of the MD PPI.

C. Security measures:

• Vide the MD PPI, RBI has also introduced significant security measures to ensure safety of PPI holders. PPI issuers must disclose all the important terms and conditions to the PPI holders including details pertaining to charges and fees associated along with expiry period.
• An Issuer needs to have Two Factor Authentication for all wallet and cash withdrawal transactions.
• The PPI issuer shall put in place a formal, publicly disclosed customer grievance redressal framework, including designating a nodal officer to handle customer complaints or grievances, the escalation matrix, and turn-around-times for complaint resolution.
• In addition to the alerts to the PPI holder concerning debit/credit transactions, balance available /remaining in the PPI, MD PPI now stipulates PPI issuers to send alerts to the PPI holder in case of offline transactions also.

D. Other additions:

• For the purpose of pooling money, Non-bank PPI issuers are required to maintain the outstanding balance in an escrow account with any scheduled commercial bank, and non-bank PPI issuers that are members of the Centralised Payment Systems operated by RBI must maintain a Current Account with RBI.
• PPI issuers are now required to submit a due diligence report, in addition to the satisfactory system audit report, and a net worth certificate, for the purpose of obtaining the Certificate of Authorisation under the MD PPI.
• With the consent of the PPI holder, funds can be transferred back to source account in case of gift PPIs.

Conclusion:

Digital payment methods were already an extremely prominent way of making payments on day-to-day basis, until the pandemic hit the world and increased our dependence on these modes of payments. RBI identified PPIs as one of the major modes of payment and cash withdrawal and issued the first set of guidelines on PPIs in 2017. Vide the latest Master Directions of 2021, RBI has introduced changes to said guidelines with an aim to harmonise the process of issuance and usage of PPIs and ensure interoperability of wallet and card-based PPIs with identified payment systems.

Although the new Master Directions have further liberalised the framework pertaining to issuance and operation of PPIs by banks and non-banks, but at the same time, RBI has also ensured that usage of PPI is safe and secure by introducing security measures involving a Two Factor Authentication and message alerts to the holder of PPIs pertaining to any transaction, along with introducing provisions relating to customer protection and grievance redressal framework, to ensure transparency and awareness amongst the users of PPIs. 

[The author is a Senior Associate in the Corporate and M&A advisory practice in Lakshmikumaran & Sridharan Attorneys, Hyderabad]