Deployment of Money Collected on E-wallets

Ashish M. Shaji

11 Jul, 2023

In this article, we will discuss the use of fund collected on E-wallets and RBI has issued certain guidelines which have to be followed by the Semi-closed wallet license holder.

Types of E-wallets or M-wallets

E-wallets are the prepaid payment instruments existing in the financial markets for enabling customers to purchase goods and services as well as transfer funds against the value stored in those wallets. Basically, the e-wallets or m-wallets are of three types:

1. Closed e-wallets
2. Semi-Closed E-wallets
3. Open e-wallets

What is the Concept of E-wallet?

The concept of e-wallets may be new in the Indian context, but its growth rate is quite high. This concept is also known by the name of m-wallet. The financial market is flooded with many products that are gradually extending their reach into all the nooks and corners of the country.

The e-wallet has arisen as a high profit and high growth proposition due to its enormous potential for value addition with the aim of making country a cashless economy and a superpower nation, ahead of China. The increased use of smartphones and the internet has further brought an upward trend in the e-wallet market. Telecom operators have gradually reduced their internet charges, thereby acting as the catalyst for the e-wallet market.

Before the demonetization drive of Prime Minister Narendra Modi in November 2016, the percentage of cash transactions in the country accounted for 96% of all monetary transactions. As a result of the drive, there has been an immense increase in the transactions done through cheques, debit and credit cards, e-wallets, or m-wallets intended to curb corruption in the country. Online transactions now account for 65% of overall business versus 15 % before the drive.

The future of e-wallets in India largely depends on the e-wallet license, which is provided by the RBI. A large number of telecom operators and third-party payment service providers, such as Pay U Money, apply for the license daily.

Obtaining a License from RBI for Wallet License

Any entity desirous of getting into the business of issuance of e-wallets to consumers shall apply to the Reserve Bank of India (RBI)¹ for the license. To bifurcate, banks are permitted to issue all categories of e-wallets after obtaining a license from RBI; however, NBFCs and other persons are permitted to issue only closed or semi-closed e-wallets.

Capital Requirements

A minimum paid-up capital of INR 500 lakh and by 2020 Rs. 2500 Lakh. at all times are required to be maintained by all persons, except banks and NBFCs, seeking authorization for the issuance of e-wallets. Banks and NBFCs shall be required to comply with the capital adequacy requirements as prescribed by RBI.

Deployment of Money Collected on E-wallets

The number of funds collected against the issuance of e-wallets at a point in time could be significant. Moreover, the revenue from funds may also be speedy. In case the settlement of funds is certain and in a timely manner, the confidence of the public and merchants, on the e-wallet system shall increase rapidly. To guarantee a timely settlement, the issues shall invest the funds collected only from the issuance of e-wallets as follow:

• The banks shall keep the outstanding balance as a part of ‘net demand and time liabilities’ for maintaining the reserves in the balance sheet which shall be calculated on the basis of the balances appearing in the books of the bank as on the date of reporting to the RBI.
• Any other entity or persons issuing e-wallets shall preserve the outstanding balance in an escrow account with any bank scheduled by RBI subject to the satisfaction of the following conditions:
• The account shall be maintained with only one bank at one time;
• In case the aforesaid account is being shifted from one bank to another, it shall be kept in mind that the process is completed in a time-bound manner and without affecting the payment cycles;
• The balance lying in the account shall always be equal to or greater than  the value of outstanding PPIs and payments due to merchants;
• The amount lying in the account shall be used only for making payments to the partaking merchant establishments and other permitted payments.

What all Constitute Credit in an Escrow Account?

•  Any payment received from sale / reload of e-wallets, also an agent location;
• Any refunds received on account of failed / dubious / returned/cancelled transactions.

What all Constitute Debt in the Escrow Account?

• Any payment made to various merchants/service providers towards repayment of claims received from them;
• Payment to sponsor bank for a dispensation of funds transfer instructions received from e-wallet holders as permitted by RBI from time to time;
• Payment of government taxes
• Refunds in the case of cancellation of transactions if an e-wallet is reloaded erroneously or through fraudulent means; in which case, the funds have to be credited back to the same source from where they were received. These funds are not to be forfeited until the clearance in the case;
• Any other payment; for instance, service charges, forfeited amount, commissions or as directed by the regulator courts/law enforcement agencies.

Conclusion

The use of e-wallets has increased significantly and this trend is expected to gain further momentum considering the various initiatives from the government with regards to Digital India.

Read our article: Prepaid Payment Instruments– Say goodbye to your cards

1. https://www.rbi.org.in/