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Prepaid Payment Instruments and Risks and Regulations There under: Check Now

What are the Prepaid Payment Instruments?

PPI (prepaid payment instruments) is an online platform through which we can facilitate the purchase of goods and services from the Value stored on the instruments. Nowadays, there are many such Instruments which facilities the prepaid paid Instrument such as smart cards, internet accounts, digital wallets, Metro card paytm.

What Are the Type of Ppi’s?

RBI has classified the PPI under four Categories:

(i) Closed system payment instruments

(ii) Semi-closed system payment instruments and

(iii) Semi-opened System payment Instrument

(iv) Open system payment instruments (multipurpose cards).

Closed System Payment Instruments: These are prepaid payment instruments which allow the person/entity for facilitating the purchase of goods and services from the person who has availed the PPI Service. This instrument does not permit cash withdrawal or redemption. If the money is stored in the wallet so it can only be used to purchase from the particular Site.

It cannot be used for payment and settlement for any other party service, so they are not considered as the Payment system and RBI approval is not required in this case. It includes the bonus points walled issued by the web portal for the purchase for their customers. Like Amazon issue Bonus cared which can be used to purchase from their web portal only and it cannot be used anywhere else.

Semi-Closed System Payment Instruments: These instruments can be used in third Party Purchase and on the specific contracts between the Parties which are in contract with the issuer to accept the payment instrument. The main distinction between the open and semi-closed system payments are it can be sued for withdrawal of cash or can be redeemed. For Example Paytm

Semi-opened System payment Instrument:

These are prepaid payment instruments which can be used for the purchase of goods and services at any merchant/locations which accepts cards (POS terminals). These do not permit cash withdrawal or redemption.

Open payment Instrument: These instruments can be used for the purchase of goods and services, even financial services from any merchant. As it can be used for a multipurpose it is considered as a Payment gateway RBI Approval is required in this case.

In this case, cash can be withdrawn from the bank, ATM card. Example: Vodafone m pesa.

Regulatory:

Reserve Bank of India is the regulatory authority for PPI’s which set guidelines for Issue of Issuance of PPI’s in India.

1. Issuer:
2. The bank which provides mobile banking transactions is allowed to issue open-ended PPI’s.
3. Other persons including NBFC are permitted to use semi-closed and closed system.
4. Capital Requirement:

Reserve Bank of India has provided with the capital adequacy requirement to start the business of PPI’s.

1. Banks must comply with the capital adequacy requirements as they required for the opening of the bank.
2. For any other person, Minimum paid up capital of Rs. 5 Crores and net worth of Rs. 1 Crore.
3. Only Indian companies can register as PPI.
4. Limits of the value of PPI – The sole motive of PPIs is to reach the places where the bank cannot be reached, so they are not able to comply with the KYC guidelines. That’s why RBI has restricted them with the following limit:
5. less than 20,000 in a month
6. Rs20, 000 or less, by accepting minimum customer details and the total value of reloads must not increase Rs20, 000 in any month
7. Rs20, 001 to Rs50, 000, by accepting officially valid documents of the customer, the same must not be reloadable.
8. Rs50, 001 to Rs1 lakhs, with full KYC documents, the same may be reloadable, however, the balance shall never exceed Rs1 lakhs at any point of time.

Risk:

Every business has its own risk and benefits; the same is with the PPI business, although it is a boon to the society as it provides the society with ease of transaction along with that it is also associated with some risk and risk is high in this case as it is associated with the technology.

All the information is stored on a central server who is solely responsible for keeping the information safe and preventing its access by unauthorized personnel to execute a fraudulent transaction. The most evident risks associated with PPIs are –

1. Theft of personal data
2. Unauthorized account access
3. Server malfunction
4. Network breakdown
5. System hacking
6. Transaction reversal / Incomplete transaction
7. Debit / Credit to the wrong account

Procedure

Application for Prepaid Payment Instrument should be made to Dept. of Payment and Settlement Systems, Reserve Bank of India. The Reserve Bank of India has published the detailed guidelines, which can be accessed in RBI website.