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Introduction to Prepaid Payment Instruments

Narendra Kumar

| Updated: Jan 11, 2018 | Category: Prepaid Wallet License

ppi

PPI (Pre-paid Payment Instruments) is one of the payment instruments that enable the transactions like buying of goods & services, comprising of funds transfer, in contradiction of the value stored on such instruments. The value stored on PPIs signifies the value paid by the holders by cash through a bank account etc. There are a huge variety of PPIs comprising of smart cards, magnetic stripe cards, internet accounts, internet wallets or digital wallets, mobile accounts, mobile wallets, paper vouchers & any such instrument which can be used to access the pre-paid amount. PPI sector is regulated by the RBI and as per the RBI regulations, there are three types of PPIs:

Closed system payment instruments

Semi-closed system payment instruments

Open system payment instruments (multipurpose cards)

PPI’s are the payment instruments that enable buying of goods & services, comprising of funds transfer, against the value stored on such instruments. The value stored on such instruments represents the value paid for by the holders by cash, by debit to a bank account, or by credit card & such instruments which shall be selected as internet accounts, internet wallets, mobile accounts, mobile wallets, paper vouchers, smart cards, magnetic stripe cards, & any such instrument, which can be used to access the pre-paid amount (collectively called Prepaid Payment Instruments hereafter).

  • Eligible entities

The following entities have been allowed to issue prepaid payment instruments under the Guidelines:

  • Banks
  • NBFCs;
  • Other entities, which acquire permission from the RBI to issue prepaid payment instruments Entities having a minimum paid up capital of ₹ 5 crores and a positive net worth of ₹ 1 crore and registered with the RBI can issue PPI. Further, such companies have a foreign direct investment (FDI)/ foreign institutional investment (FII), the same should be in compliance with the capital requirements, as prescribed by the government, from time to time.

However, banks permitted by the RBI to provide mobile banking facilities will be allowed to issue mobile-based prepaid payment facilities (mobile wallets).

  • Categories of PPI

The RBI Guidelines lays down the definition of the PPI. Instruments that qualify would be –

  • Semi-closed PPI

The issue of reloadable PPI up to ₹ 10,000 per month and the outstanding of such instrument must never go beyond ₹ 10,000 by accepting basic details of the holder.

Issue non-reloadable PPI value of which must be within ₹ 10,000 to ₹ 50,000 by accepting official valid documents of the holder.

The issue of reloadable PPI up to ₹ 1 lakh by complying with RBI know your customer (KYC) norms.

  • Prepaid gift instruments
  • Prepaid instruments for reissuance by the holder
  • Prepaid instruments for onetime/ periodic payments to customers of banks/ NBFCs
  • Prepaid instruments for cross-border inward remittance
  • Prepaid instruments for reissuance by corporate to their employees
  • Prepaid instruments for foreign national/ non-residential Indians (NRIs) visiting India (traveler’s card)
  • PPI for transit systems (metro smart cards)
  • Use of the amount prepaid

Amount of money loaded into a PPI can be used for the purposes as directed by the RBI. The list of transaction that can be executed over a PPI are listed below:

  • Receipts

Receipts of sale proceeds

Reload of the PPI

Receipts of failed/ canceled transactions

  • Payments –

Payments to merchants/ service providers

Transfer from one PPI to another

Statutory payments, etc.

The amount received by the PPI issuers must be parked & disclosed in their books as permitted by the RBI-

  • Banks and NBFCs – The amount outstanding at any point on a PPI must form part of the net demand and liabilities of the entity for maintenance of reserves by the entity.
  • Other entities –

The amount must be held by the entity in an escrow account with a scheduled commercial bank.

In case of a shift of the account from one bank to another, prior permission must be acquired from the RBI and the same must not affect the payment and settlement process.

The balance of the account must at all times be equal to outstanding values of the PPI issued by the entity.

The amount must only be used to make payments as per the orders received from the PPI holder.

  • Validity of PPIs

 All issued PPIs must a minimum validity of six months and maximum of three years from the date of its issuance. In case of non-reloadable PPIs, the outstanding amount at the end of its term would be forfeited if the same is not transferred by the holder to a similar new instrument acquired by the holder. In open-ended PPIs, cash withdrawal is permitted up to ₹ 1,000 per day.

  • Closed System Payment Instruments

These are payment instruments issued by a person/entity for facilitating the purchase of goods and services from him/it. These instruments do not permit cash withdrawal or redemption. Being very simple type, these instruments cannot be used for payments and settlement for third party services and hence these PPI are not classified as payment systems. RBI approval is not obligatory for issuing the closed system payment instruments.  In the real world, closed system payment instruments include bonus point like wallets issued by web portals for online purchases /shopping for their customers. Mobile prepaid cards also come under this category.

  • Semi-Closed System Payment Instruments

However, such payment instruments which can be used for procurement of goods & services, comprising financial services at a group of clearly identified merchant locations/ establishments. These PPIs can be used for third-party purchase settlements and the specific contract between the issuer and the merchant is needed for the use of these PPIs. The semi-closed system payment instruments can’t be used for cash drawing or reclamation by the holder. For higher payments, KYC norms are required. Illustration of semi-closed system payments is PayTM wallets.

  • Open System Payment Instruments (multipurpose cards)

These are payment instruments can be used for the purchase of goods and services, including financial services like funds transfer at any card accepting merchant locations (point of sale terminals) and also permit cash withdrawal at ATMs / BCs. An important feature of these PPIs that they can be used for limited cash transfer and cash withdrawals. During the time of demonetization, the RBI raised cash withdrawal limit of these PPIs to ₹ 20000. These PPIs can be issued only by banks. Illustration for open system payment instrument is Vodafone mPesa.

Only banks can issue open system payment instruments. On the other hand, Closed and Semi-Closed System Instruments can be issued by NBFC and other entities who avails a license from the RBI.

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Narendra Kumar

Experienced Finance and Legal Professional with 12+ Years of Experience in Legal, Finance, Fintech, Blockchain, and Revenue Management.

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