Over two years ago, the Reserve Bank of India (RBI) put into cold storage, a Paypal-like service from by the Times of India Group called Wallet365. Wallet365 was essentially a pre-paid transaction instrument, much like Cash Card services like Itz Cash Card and Done Card, though with an Internet Wallet, you can withdraw money as well. There were concerns that you could start an account with just an email address, and Know Your Customer (KYC) norms were not being followed. More on why and how the RBI stopped the service, here.
Now RBI has finally taken up issue of “Pre-paid instruments”: they’ve published an “Approach Paper” and invited comments regarding “smart cards, magnetic stripe cards, internet accounts, internet wallets, internet purse, mobile accounts, mobile wallets, mobile purse and paper vouchers.”
We went through the Approach Paper, and noticed some issues:
— Not keen on Internet Banking? The RBI don’t appear to be very keen on Internet Wallets, though – to begin with, only banks will be permitted to transfer funds online or using mobile phone networks.
— Limiting Use Of Cash Cards: Semi-Closed System Payment Instruments (Cash Cards) up to Rs 500 may be to be issued without any KYC subject to reporting of annual/suspicious transactions. Which means cash cards above Rs. 500 will require KYC verification. Remember that the average transaction amount for railway tickets using cash cards in August was Rs. 889.96, and a large number of users who don’t have bank accounts will be affected.
— Limiting Reloading Of Cash Cards: Semi-Closed System Payment Instruments (Cash Cards) may only be reloaded by debit to a bank account or using credit cards. What works for Cash Cards is that people can buy them from vendors or reload them by paying cash.
Importance of This Regulation:
— Cash Cards account for a large number of online payments – for the Indian Railways, online, ITZ Cash Card accounted for around Rs. 44 Crores of transactions in July, and Rs. 41.6 crores in August, while Done Card accounted for Rs. 33 Crores in July and Rs. 34 Crores of transactions in August. In their current form, these guidelines will significantly reduce the usage of cash cards, and impact IRCTC revenues. Remember that Cash Cards transactions have a success rate of over 80%.
— Itz Cash Card needs the Cash Card industry to be legitimized before it can go in for an IPO. They’re the largest in this segment in the country. (do read our interview with Naveen Surya, MD of Itz Cash Card.)
Note: It isn’t over for the Internet Wallets yet. Regulation is an iterative process – after comments have been submitted, a fresh draft will be prepared and opened up for further comments. The process has only just begun. After a few rounds of negotiations and lobbying, a final draft will be released, and one just might find that Internet Wallets have been allowed, and transaction limits for Cash Cards have been increased beyond Rs. 500.
Types of Pre-paid Instruments.
1. Closed System Payment Instruments, which are not reloadable with cash and do not permit cash withdrawal (for example: phone calling, prepaid voucher and gift vouchers)
2. Semi-Closed System Payment Instruments, used at merchant locations, and which can be reloaded, but do not allow cash withdrawal (for example: cash cards and smart cards)
3. Semi-Open System Payment Instruments: these can be reloadable or non-reloadable, and can be used at any point-of-sale terminal, but they do not allow cash withdrawal. For example: gift cards issued by banks
4. Open System Payment Instruments: these can be re-loadable or non-reloadable, but most importantly, they permit cash withdrawal at ATMs. Examples of such cards are the Payroll cards and travel cards
Who can issue pre-paid payment instruments?
To start with, only NBFCs who have received RBI Approval
Reloading of cards
— Both banks and non-banks may to issue reloadable instruments. The maximum limit for such re-loadable instruments would differ based on the entity and instruments and would be prescribed by RBI from time to time.
— Reloading of closed system instruments would be permitted at the retail agents and issuers outlets against cash/debit cards/credit card. Reloading may also be permitted through ATMs, internet banking and mobile banking channels.
— The issuing entity should be able to ensure that the limits prescribed for any instrument is not breached.
Know Your Customer and Anti-Money Laundering Provisions
— Will be based on features of the instruments and vulnerability for misuse.
— Semi-open system and open system payment instruments are most susceptible to misuse. These cards which include gift cards and travel cards would be subjected to higher safeguards.
— Entities issuing pre-paid instruments should maintain a log of all the transactions undertaken using these instruments.
Only banks/NBFCs meeting the regulatory Capital Adequacy Ratio will only be permitted to issue all types of pre-paid payment instruments.
— Naveen Surya, MD Of Itz Cash On KYC Norms, GPRS vs SMS; Itz Cash Numbers
— IRCTC Does $102 Million In Online Transactions In August; Payment Trends
— RBI Updates Mobile Banking Guidelines: Txn Limit Increased, Debit & Credit Cards Not Mandatory
— M-Banking Guidelines For India Issued; Ridiculous Transaction Limit
— “A Bank Account With Every Mobile Connection”; Stakeholder Comments On M-Banking Guidelines