As the name suggests, Prepaid Payment Instruments or PPI are devices by which an individual can pay for the products he wants to purchase or services he wishes to avail without physically paying cash. The amount gets deducted from his account.
Prepaid Payment Instruments are also known as Electronic Wallets (E-Wallets). It is regulated by the Reserve Bank of India(RBI) under the Payment and Settlement Act, 2007.
The amount outstanding at any time in time in these instruments cannot exceed Rs. 10000.
The amount is utilized for purchasing goods and availing services.
Prepaid Payment System by two major Companies Examples
Some of the other digital wallet companies include MobiKwik, Itzcash, Ola Money and Freecharge have all experienced an adequate amount of growth in their respective businesses as they were successful in the elimination of the non-availability of physical currency.
Swiggy too recently launched a Prepaid Payment Instrument with the name Swiggy Money. It is powered by ICICI Bank.
The reason for the introduction of a Prepaid Payment Instrument, also known as PPI, is the shortage of physical cash at the time of payment.
PPI has proved to be beneficial by various means –
- Less time consuming
- Minimal demand for Physical cash
- Safe and Secure
- Offers and discounts provided by different companies
- Option of transferability
- Initiates cashless transactions
Ways it can be issued
The payment instruments can be issued in different forms.
- Magnetic stripe cards,
- internet accounts and wallets,
- Paper Vouchers,
- Mobile accounts,
- Smart cards
These are some great examples and offered by banks or non-banking finance entities.
- Closed Prepaid Payment Instrument OR Closed E-Wallet System
- Semi-closed Prepaid Payment Instrument OR Semi-Closed E-Wallet System
- Open Prepaid Payment Instrument OR Open E-Wallet System
- Semi-Open Prepaid Payment Instrument OR Semi-Open E-Wallet System
Closed Prepaid Payment Instrument (PPI) OR Closed E-Wallet System
A closed PPI is issued by businesses and can only be used on the outlets of that particular business. For instance, gift cards or vouchers, on most of such vouchers the outlet is mentioned, which means it can be redeemed only the outlets specified. The business issuing such instruments are exempted from fulfilling the legal formalities of RBI but, they need to inform RBI regarding the issuance.
Semi-Closed Prepaid Payment Instrument OR Semi-Closed E-Wallet System
A group of businesses offers these form of payments to the individuals who can use it for the purchase of goods and services. These can be used only at locations that accept cards. The businesses and the issuer entered into a pact for this purpose. E-wallets such as Paytm and Mobikwik are great examples that follow a semi-closed e-wallet system.
Semi-Open Prepaid Payment Instrument OR Semi-Open E-Wallet System
Semi-Open Prepaid payment instruments are the same as Semi-Closed E-wallet system. They, too, can be used at any retail outlets that accept payment through cards. These do not allow cash withdrawal or redemption of cash.
Open Prepaid Payment Instrument OR Open E-Wallet System
The banks only issue e-wallets that fall into this category. These wallets can be used to purchase goods as well as services at any retail outlets or establishments that have a contract with the issuer. Banks are required to offer cash withdrawal facilities alongside such e-wallets.
Conditions for the issuance of PPI
- The maximum validity of the gift instruments must be a minimum of 3 years.
- Instruments cannot reload.
- Cash withdrawal is not possible in such instruments
- Full KYC of the purchases of the instruments will be maintained
- The maximum value of such instruments should not exceed Rs. 50000
- The issuer must maintain the details of the persons to whom the instruments are issued.
Prepaid Wallet license eligibility requirements
The issuance of the prepaid wallet license in India depends on the type of entity.
- Licensed / Scheduled Banks and Registered Non-Banking Financial Companies (NBFCs) are required to obtain authorization from the Reserve Bank of India(RBI)
- Newly incorporated entities are required to submit a certificate from their Chartered Accountants mentioning the current net worth along with the balance sheet.
- Applicant companies having FDI/FII are required to apply for the license as per the minimum capital mentioned in the Consolidated FDI policy guidelines.
- Only banks and Non-Banking Financial Companies (NBFC) that comply to the minimum capital requirements proposed by RBI.
- Non-bank entities applying for authorization that are incorporated in India and registered under the Companies Act 1956 / Companies Act 2013 and the Memorandum of Association (MOA) of the applicant entity shall cover the proposed activity of operating as a PPI issuer.
- Financial entities that re looking for payment wallet authorization from the RBI must have a minimum positive net worth of 5 crores.
- Entities authorized under Foreign Exchange Management Act, 1999 (FEMA)for the purpose of issuing foreign exchange prepaid payment instruments are exempted from the guidelines.
Steps to apply
Setting up the company under the Company Act, 2013 by applying through the Registrar of Company.
Application filing for the approval in Form A as mentioned in Regulation 3(2) of the Payment and Settlement System Regulations, 2008. Fees is to be paid to the Reserve Bank of India for the grant of License. Documents are to be submitted at this step.
- Name of the applicant
- The applicant’s Constitution
- Address proof of the registered office
- Certificate of Incorporation
- The main business of the company
- information about the management, the total number of employees, their designations
- Information about the Legal auditor of the Company
- Audited balance sheet.
- Names and addresses of the bankers of the Company
- Other essential documents as per the requirements
- Source of funds
The screening process is conducted by RBI to ensure that the applicants are eligible.
The next step is to meet the eligibility criteria for which Reserve Bank of India(RBI) issues an ‘in-principle’ approval. The validity of in-principle approval issued by RBI will be six months from the date of granting the in-principle approval.
The company is then required to submit a reasonable System Audit Report to RBI within six months. If the company fails to submit the report, the in-principle approval will lapse automatically. The entity can take a one-time extension of six months by making an appeal in writing in advance with valid reasons.
After the completion of all the above steps by the individuals, final approval is granted. The business is required to start within six months after securing the Certificate of Authorization.
With the success of the E-wallet system and the introduction of new and interesting features launched by companies very often, it is proving to be quite a profitable business for the companies and a major source of income for those that have recently launched the system in the market.
About the Author: Mahiya Ahmad is a PR Associate & Content Creator working for Enterslice Private Limited, Noida. Enterslice is a law firm and a legal technology company that specializes in Business Registration, Fintech Licenses and provides support in essential business activities.