Prepaid payment instruments: A new era of regulation

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Published: January 11, 2018 3:06:20 AM

The recently-issued revised master direction of RBI on Prepaid Payment Instruments (PPIs) has created ripples in the PPI space.

Prepaid, Prepaid Payment Instruments, PPIs, PPI space, RBIThe recently-issued revised master direction of RBI on Prepaid Payment Instruments (PPIs) has created ripples in the PPI space. (Image: Reuters)

The recently-issued revised master direction of RBI on Prepaid Payment Instruments (PPIs) has created ripples in the PPI space. This was definitely required in the light of the developments in the space—thanks to technical advancements and experience gained—to foster innovation and competition while ensuring customer safety and security. One may argue that, with respect to capping of wallets by value, the probability of money laundering is quite low. However, there are many who would say that, with cumulative transactions via the PPI route, the likelihood of laundering is actually very high. Before the new directives were issued, KYC documents were not collected from the customers at the time of creating a PPI.

This gap was tapped by the money-launderer who used the wallet for ‘layering’, with the actual owner’s identity being untraceable. Thus, the regulator has taken a justified step in making the collection of ‘Official Valid Document’ (OVD) at the time of the creation of the wallet mandatory.  PPI issuers have so far adopted a Business Correspondent (BC) model for their businesses, with BCs generally being small kirana shops and other small retail outlets, who neither have any fintech knowledge nor financial expertise. Thus, the reliance is on BCs who are not are equipped to perform a validation of the OVD. Since the amount held in wallets is going to be small, the PAN will probably not be asked for, and Form 60 needs to be collected physically along with other OVD.

The various anti-money-laundering steps, as suggested by the Indian Banks Associations, are not going to work effectively for PPIs, which generally have small-value businesses. There is a crying need to develop a new mechanism, perhaps by the Financial Intelligence Unit-India, for monitoring and reporting suspicious transactions via PPIs. While monitoring the transactions, the focus should be on accumulated figures rather than individual transactions. Moreover, many non-bank PPI issuers are engaged in activities such as providing BCs for banks, intermediaries for payment aggregation, etc. It is difficult to self-monitor, and ensure that there is no mingling of funds originating from other business activities with the PPI business.

The regulatory action of bringing down the monthly amount loaded from Rs 20,000 to Rs 10,000 for PPI creation with minimum details, including OTP, is also striking. Such small-value PPIs are used mostly for purchase of goods and services, not for P2P transfers. Such action can avert fraud and money-laundering. Moreover, PPI issuers have to strengthen their operations as users submitting minimum details cannot open another wallet with the same mobile number.  The regulator has been quite liberal in allowing non-banking PPI issuers to comply with a capital holding requirement of Rs 15 crore—it is much lower than Rs 25 crore proposed for all entities issuing PPIs.

The problem, however, is that existing non-bank PPI issuers, who currently can have a net-worth of Rs 1 crore, have to enhance net-worth to Rs 15 crore within three years. This means only serious players are going to remain in the PPI space. Non-bank PPI players have to genuinely mull over their capital structures and sources.  The biggest challenge PPI issuers are going to face is the conversion of existing semi-closed PPIs into KYC-compliant wallets within a deadline of just two months. In this business, more than 95% of the wallets have been opened by collecting minimum details, without any OVD collection. PPI issuers are expecting an extension of the deadline. The direction issued by the regulator is quite aligned with the banking business. Non-bank PPI issuers will have to do quite a bit to comply with the regulator’s demands.

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