India has always been cash dominated economy. More than 90% of people prefer to pay in hard cash. Of late, this trend has been changing thanks to new generation, who belongs to the digital era. This new generation is very much excited about the new disruptive platforms. More and more people are using different digital platforms for doing transactions.
Even though, the share of online transactions is only at around 10%, the overall numbers are quite astonishing. According to PwC report, the number of annual online transactions is around 11.2 billion and 74% of these transactions are done by debit and credit cards. In India, when we talk about digital transactions, there are 3 ways through which people transact. They are:
- Credit Card
- Debit Card
Of late, people have started using 4th route for transaction, it is mobile wallet. Although it is from quite some time now in India, but in the last year or two the awareness has been raised in the market. We have got big players like MobiKwik and Paytm who have been searching new disruptive ways to get more and more customers and gain more and more market share.
Currently, there are around 10 companies who are offering mobile wallet services in India. According to RNCOS, the market size of Indian mobile wallet is around Rs. 350 crore (as of September 2015) and could reach to Rs. 1,210 crore by 2019 which are very good numbers. Even from number of customers using mobile wallet perspective, we can estimate that there can be around 25-30 million active customers in India.
There has been little or no awareness among people related to the usage of mobile wallets or the way these companies operates. For e.g., what kind of different services or products these companies could offer to their customers. Let’s take this example little further, when we talk about operations of mobile wallet companies, they can offer two main different products to their customers:
- Pre-Paid Payment Instrument
- Payment Bank
Pre-Paid Payment Instruments
Under Payment and Settlements Systems Act, 2005, RBI has defined Pre-paid Payment Instruments as payment instruments that facilitate purchase of goods and services, including funds transfer, against the value stored on such instruments. The pre-paid instruments can be issued as smart cards, magnetic stripe cards, internet accounts, internet wallets, mobile accounts, mobile wallets, paper vouchers and any such instrument which can be used to access the pre-paid amount.
RBI has broadly classified the PPIs into three categories:
Closed System Payment Instruments:
In this kind of payment instrument, companies issue it to their customers with sole purpose that they can buy their products or services. It is not for cash withdrawal purpose. It also not allows facilitating payment and settlement for third party services, hence RBI approval is also not required.
Semi-Closed System Payment Instruments:
In this kind of payment instrument, customers can use it for buying products or services as well as can use at any registered vendor (particularly with same issuer) for buying any products. Even in this PPI, cash withdrawal is not allowed.
Following are the guidelines by RBI for the various limits:
- upto Rs.10,000/- by accepting minimum details of the customer provided the amount outstanding at any point of time does not exceed Rs. 10,000/- and the total value of reloads during any given month also does not exceed Rs. 10,000/-. These can be issued only in electronic form;
- from Rs.10,001/- to Rs.50,000/- by accepting any ‘officially valid document’ defined under Rule 2(d) of the PML Rules 2005, as amended from time to time. Such PPIs can be issued only in electronic form and should be non-reloadable in nature;
- upto Rs.1,00,000/- with full KYC and can be reloadable in nature. The balance in the PPI should not exceed Rs.1,00,000/- at any point of time.
Open System Payment Instruments:
This payment instrument is kind of similar to semi-closed, with the facility to withdraw money at ATMs. Cash withdrawal at POS is also available but only upto a limit of Rs. 1,000/- per day.
The “Payment Banks” term is quite new and it is specifically created for Indian market. RBI has only issued “in-principle approvals” to 15-20 companies. Basically the simplest way to define Payment Banks would be “a bank which can only receive deposits and provide payments but cannot lend money”. So we can say that Payment Banks can provide debit cards but cannot issue credit cards to their customers.
RBI in its guidelines mentioned “the objectives of setting up of payments banks will be to further financial inclusion by providing (i) small savings accounts and (ii) payments/remittance services to migrant labor workforce, low income households, small businesses, other unorganized sector entities and other users.
Scope of activities as per RBI:
- Acceptance of demand deposits. Payments bank will initially be restricted to holding a maximum balance of Rs. 100,000 per individual customer.
- Issuance of ATM/debit cards. Payments banks, however, cannot issue credit cards.
- Payments and remittance services through various channels.
- BC of another bank, subject to the Reserve Bank guidelines on BCs.
- Distribution of non-risk sharing simple financial products like mutual fund units and insurance products, etc.