What are the types of prepaid payment instruments?

Prabhat Nigam

18 Jun, 2022

For the past few years, many payment modes have been introduced and approved by RBI, which has facilitated the purchase of goods and services. One such technological development is the Prepaid Payment Instruments (PPIs). One of the biggest features of this form of instrument is that value is already stored in these instruments. Some of the examples of PPIs in India include paper vouchers, prepaid smart cards, online wallets etc.  

This article discusses the various types of prepaid instruments in India.    

What is a prepaid payment instrument?

Prepaid Payment Instruments or commonly known as PPIs, are instruments that facilitate the purchase of goods and services, enable remittance facilities, the conduct of financial services etc., against the value that is stored in them. These PPIs are generally issued by the banks or non-banks where banks need to take approval, and non-banks need authorisation before issuing such PPIs.  PPIs come in various forms such as mobile wallets, smart cards, vouchers, magnetic chips, payment wallets etc.     

Types of prepaid payment instruments in India      

Under the earlier Master Direction on Issuance and Operation of Prepaid Payment Instruments of 2017, the Reserve Bank of India (RBI)^[1] had classified prepaid payment instruments into three types, viz.

1. Closed System PPIs: These PPIs were issued by an entity to facilitate the purchase of goods and services from the same entity only. There was no provision for cash withdrawal from the same;
2. Semi-Closed PPIs: such PPIs were issued by the RBI approved Banks and also RBI approved Non-Banks for the purchase of goods and services, remittance facilities, financial services etc. for use at a group of identified merchant locations which have a special contract with the issuer or through a payment aggregator/ payment gateway to accept PPIs as payment instruments; and
3. Open System PPIs: These PPIs were issued by the RBI-approved banks to be used by any merchant for the purpose of purchase of goods and services, remittance facilities, financial services etc.

The above system of PPIs was found to be hampering interoperability and harmonisation amongst various PPIs. As a result, RBI came out with a new set of Master Directions on Prepaid Payment Instruments of 2021, laying down fresh eligibility criteria and conditions of use for payment system operators that are involved in the issuance and operation of Prepaid Payment Instruments.  

Following is the latest categorisation of Prepaid Payment Instruments according to the Master Directions of 2021:

1. Small PPIs: the small PPIs are issued by both banks and non-banks after obtaining minimum information about the PPI holder. These PPIs can only be used for the purchase of goods and services only, and that too at a group of identified merchant establishments/locations having a special contract with the issuer to accept the PPIs as payment instruments. The facility of funds transfer or cash withdrawal from such PPIs has not been permitted. Under the category of Small PPIs, there are two types of prepaid payment instruments. They are:
2. Small PPIs with cash loading facility: the total cash in these PPIs cannot exceed Rupees 10,000 a month, and the total amount during the year cannot exceed the amount of Rupees 1,20,000 in a financial year. They have the facility to load cash.
3. Small PPIs with no cash loading facility: This type of PPI has the same limit as mentioned above, but the cash loading facility is absent in these PPIs.
4. Full KYC PPIs: These PPIs are issued by the Banks and non-banks after completing the Know Your Customer (KYC) process of the PPI holder. These PPIs, however, can be used to purchase goods and services, cash withdrawals and fund transfer.

Some specific categories of PPIs have been made, such as

• Gift PPIs: In these PPIs, the maximum value of a prepaid gift instrument cannot exceed a sum of Rupees 10,000. These PPIs are not reloadable, and the facility of fund transfer and cash withdrawal is also not permitted. The PPI issuer is supposed to maintain the KYC details of the purchaser of such instrument, and separate KYC will not be required for the customers who are issued such instruments through Debit Cards to their bank accounts and Credit Cards in India. A risk-based approach, which is duly approved by its Board, will be adopted by the PPI issuer to decide the number of such instruments which can be issued to a customer, transaction limits etc. At the request of the PPI holder, these PPIs will be revalidated, including through the issuance of a new instrument. Before the first loading of funds takes place or at the time of issuance of the PPI, the features of such PPIs have to be clearly communicated to the PPI holder via SMS/ email/ any other means. 
• PPIs for Mass Transit Systems (PPI-MTS): The MTS operators issue these PPIs after the authorisation to issue such PPIs under the Payment and Settlement Systems Act, 2007. These PPIs are reloadable, and they are used at only those merchant outlets whose operations are within premises. The PPI issuer decides about the customer details required for the issuance of such PPIs. In these kinds of PPIs, the maximum outstanding value shall not exceed the limit of Rupees 3000 at any point of time. Further, cash withdrawals and funds transfers are prohibited for such instruments.

Conclusion

From the above discussion, it can be concluded that there are primarily two types of Prepaid Payment Instruments. However, RBI has created special categories where two more types of Prepaid Payment Instruments have been added viz. Gift PPIs and PPIs for Mass Transit Systems. In order to protect the holders and acceptors of PPIs from potential fraud and exploitation, RBI has made it necessary for the PPI issuer to state all the T&C for the usage of PPIs in clear and simple language.       

Read our Article:All you need to know about Pre-Paid Instruments