By Probir Roy Chowdhury and Archana Tewary
As the deadline for mandatory requirement of completing KYC compliance for all users of e-wallets approaches, it has left many to ponder if this would be the end of the road for several e-wallet companies in India, and puts the users of e-wallets in a quandary.
The requirement of completing full KYC can be traced back to October 2017, wherein RBI issued a circular mandating all e-wallet entities to complete full KYC of their wallet users by December 2017. However, several prepaid payment instruments issuers expressed their difficulty in complying with this requirement and RBI accordingly extended the deadline to February 28, 2018. Now, as a final extension, RBI has made it mandatory for all prepaid payment issuers to complete full KYC of all its customers before February 28, 2019, failing which customers’ e-wallets would become non-operational. While the deadlines have been extended, little has been done to address the issues raised by e-wallet issuers.
This mandatory requirement poses a threat to e-wallet issuers, especially small players among the e-wallet participants, in terms of continuity of business. After the Supreme Court’s judgment on ‘Aadhaar’ in Justice KS Puttaswamy and Ors. v. Union of India, corporate entities are no longer allowed to use Aadhaar’s biometric identification for KYC verification and RBI is yet to provide an alternative method for e-KYC. As a result of this, e-wallet issuers are finding it very onerous to complete KYC verification, since the only available method now to complete KYC of customers is by conducting physical verification. Companies with resources to do so are rushing to comply with the deadline by relying on physical verification. However, for the small players in the e-wallet market, pursuing physical verification on such a large-scale, would not only be difficult but also very expensive. This could result in these small players exiting the market on account of huge costs.
Further, physical verification of KYC creates several limitations on the collecting entity, some of which include incorrect details being updated into the system and documents being misplaced. Additionally, India is yet to implement stringent measures to tackle issues pertaining to privacy and security breach of data. A full KYC verification would mean collecting customers’ personal data and subjecting such data to the risk of being compromised.
It is also likely that customers will be hesitant to complete their KYC with each e-wallet company separately on account of the process being cumbersome. This may result in existing e-wallet customers to only maintain accounts with a few e-wallet companies (preferably with the big players) instead of holding multiple e-wallet accounts, which may cause small players to exit the e-wallet market. Further, several smaller wallets are often ancillary to the services provided by e-wallet issuers and offer operational convenience to users of those services. Such users could also benefit from discounts or other operational conveniences provided by such companies which have integrated e-wallets into their application. Suspension of e-wallets could thus have a broader impact on users as well.
E-wallet players also have the additional worry of customers choosing UPI over e-wallets as a digital form of payment. In 2016, the National Payment Council of India introduced UPI, a system which enables bank account holders to transfer funds through the Immediate Payment Service (IMPS) using a virtual payment address. UPI does not have to comply with full KYC requirements of customers since banks have already completed the KYC verification of its customers. In this regard, customers are slowly moving towards making digital payments on UPI rails due to ease of transferring funds and non-requirement of additional KYC verification. Considering this change in market preference, e-wallet players will be compelled to integrate UPI as one of their payment systems, in order to remain relevant in the market.
For an economy which is increasingly moving towards digital transactions, it is critical for laws to support and nurture fintech companies since, otherwise, the smaller companies will have no option but to shut shop. An example of this was when several P2P lending platforms in China shut operations as these entities found it difficult to comply with the strict regulations imposed by the government. Therefore, in order to encourage healthy competition and provide options to customers, RBI must either remove the stringent requirement of full KYC compliance or provide for a cost-effective method to complete full KYC. Is the government driving out competition and creating a monopoly by ensuring that the UPI platform is the preferred platform? We believe it is time for the regulators to sit up and act.
Written with inputs from Kavya Katherine Thayil, an associate at J Sagar Associates.
Authors are partners at J Sagar Associates