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Growth of Prepaid Digital Solutions Sector in India

Raghvendra Sonker

| Updated: Jul 09, 2022 | Category: Prepaid Wallet License

Prepaid Digital Solutions

With rising demand for cashless payments and changing digital landscape, the Indian Fintech sector has recorded strong growth. We have reacted fast to the new reality, which has sped up the process of building IT infrastructure, and investment to boost the potential of prepaid digital solutions. A competent and self-reliant IT infrastructure based on cloud technology has given assurance for strengthening prepaid digital solutions in India.

Why do we need Prepaid Digital Solutions?

The changing digital needs of society have opened gates for technological advancement in prepaid digital solutions. Given changing preferences,digital transformation processes can be vividly seen and rapidly spreading across sectors like education, finance,infrastructure, and society in general. These changes can reduce the rising operational cost, build competition tendencies and subsume the digital payment technologies.

Legal framework for Prepaid Digital Solutions

The government has enacted various legislations to facilitate and enable the Digital Solution Sector to mitigate challenges and perform optimally. Financial Technology has created gateways in the lending and payments sector in India. The latest development in technology and innovation combined with the Indian Government intervention has expedited the growth of digital payments solutions and development of FinTech products.

PSS Act, 2007

The Payment and Settlement Systems Act, 2007 empowers the Reserve Bank of India to be the sole regulator for granting approvals and authorising the initiation of payment systems in India. The payment systems operations include debit and credit card, fund transfers, PPIs, and QR codes& UPI payments operations etc.

RBI’s Master Direction on Prepaid Payment Instruments, 2021

This master direction has classified PPIs into two types: Full PPIs (Full KYC) and Small PPIs (loadable and non- loadable). . This master direction will have a significant impact on the regulation of Prepaid Digital Solutions as RBI has mandated the Interoperability of all the Prepaid Payment Instruments by March 31, 2022. Whereas PPIs for mass transit systems are exempted from interoperability, and Gift PPIs have an option to adopt interoperability.

Guidelines for P2P Lending Platforms

RBI’s P2P Lending Platform Directions of 2017 prescribe the lender exposure norms and borrowing limits concerning the operations of P2P lending platforms in India. This lending method has provided digital solutions for loans through online/digital platforms.

NCPI Regulations regarding UPI (Unified Payments Interface) Payments

The procedural guidelines for UPI issued by the National Payments Corporation of India (NPCI) regulate the system of UPI payments in India. According to this framework, money transfer services through UPI platforms have to be generated by the banks. Banks can engage technology providers(Prepaid Digital Solutions) to operate mobile applications for UPI payments but under the eligibility criteria and prudential norms prescribed by the NCPI.

Non-Banking Financial Companies Regulations

 The RBI Act of 1934 governs all Non-Banking Financial Companies.Under these regulations, any organization providing fintech services in India must be registered with the Reserve Bank of India. Section 45-IA of the RBI Act provides that no NBFC shall initiate or carry out business activities of a non-banking financial institution without obtaining the certificate of registration from the Reserve Bank of India.

Provision for Payment Banks

The payment banks do operate as a bank but function on a smaller scale. These banks are not authorised to issue credit cards or loans. Section 22 of the Banking Regulations Act, 1949 provides licence to the payment banks, and they shall be registered as a private limitedcompany under the Companies Act, 2013. Specific licensing conditions restrict Payment Bank from performing the activities performed by the banks, especially for accepting demand deposits and payments and settlements.

Guidelines for Payment Gateways and Aggregators

The Circular provides guidelines for regulating the Payment Gateways and Aggregators (Gateway Guidelines). A payment aggregator act as a bridge between the sender and receiver that empowers merchants/sellers by providing means to accept payments through a debit/credit card or online fund transfers on an existing bank account. Payment intermediaries are obligated to follow the norms and comply with the rules prescribed under the Gateway Guidelines. A payment aggregator platform is an essential part of prepaid digital solutionsthat require a payment gateway to receive online payments.

Penal Laws

The requirement of penal laws are to safeguard the interest of the users who are availing the digital solutions. Under this sector, the information shared by the users can be easily misused. To curb this issue government of India has framed some laws to protect personal data.

Money Laundering Laws

While providing services of prepaid payment solutions, an organisation must ensure that AML Compliance is enforced. In India, the following legislation and rules are adhered to curb money laundering activities are:

  • Prevention of Money Laundering Act, 2002;
  • Prevention of Money Laundering (Maintenance of Records) Rules, 2005;
  • RBI’s Master Direction on KYC[1] (Know Your Customer) 2005.

Data Protection Laws

During every financial transaction made by the user/customer, personal data is accessed for the facilitation of payment transfer systems. This access to critical information attracts the issue of Data Privacy and Data Protection. The plethora of information is stored and used for continuous access to prepaid digital solutions. India is yet to have a comprehensive code for regulating Data Privacy and Data Protection.

The IT Act, 2000

Information Technology (Reasonable Security Practice and Procedures and Sensitive Personal Data or information) Rules, 2011 provides regulations for storing and use of personal sensitive information. Presently, the draft of the Data Protection Bill, 2019, is under consideration and expected to become law soon. The upcoming legislation will consolidate the laws pertaining to data privacy and protection. This will consequently streamline the rules and procedures for holding sensitive information, and data localisation can be put in place to protect the vital personal information of the consumers.

The above-discussed legal framework presents a true picture of how the Indian Digital Solution sector has taken shape with time. The growth of this sector will benefit the public at large with cost-efficient technologies in easing the burden on financial transactions.

Advantages of Prepaid Digital Solutions

  • Control over finances
  • No overspending
  • No Transfer Fee
  • No overdraft fees
  • No interest charges
  • Lower processing cost

Conclusion

All the digitalization efforts across markets and industries raised the demand for experts and started to break the traditional sector and international boundaries. For long-term sustained growth, prepaid digital solutions must be holistic, proactive, and continuous.

Read our Article: Digital Payment System in India

Raghvendra Sonker

Raghvendra Sonker has completed his Graduation from Gujarat National Law University. He has a keen interest in legal drafting, writing articles, and research papers. His core interest areas are Banking and Financial Issues.

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