Payments Digest by Cashfree: April 2021

Asheeta Regidi Head, Fintech Policy at Cashfree.

Before diving into this month’s Digest, the ongoing second wave of Covid has hit harder than ever before. Do help out whoever you can, wherever you can. Cashfree on its part is collaborating with Ketto and Democracy People Foundation for ‘Mission Oxygen’ to facilitate providing over 6000 oxygen concentrators for hospitals. For every ₹1 received as donation, Cashfree will donate ₹1 upto ₹40,00,000. If you want to know more or would like to contribute, you can from here- Donate to Mission Oxygen

Via our Payments Digest, we aim to provide a view on key payments policy initiatives taken each month. Discussions for Edition 4: NEFT/RTGS membership will be opened for non-banks PSOs- what does this mean? New rules for PPIs and Payments banks- will this revive m-wallets? The RBI constitutes the Regulations Review Authority 2.0- what is to be reviewed?

PART I: NEFT/RTGS membership opened for non-banks

What does this mean for non-bank players and merchants? 

The RBI plans to allow non-banks to become NEFT/RTGS members (Centralised Payment Systems) in a phased manner. Unregulated non-bank players like fintech companies will not be eligible, but regulated non-bank ‘payment system operators’, like card networks (Mastercard/Visa), prepaid payment instruments (‘PPIs’, i.e., m-wallets/ prepaid cards), TReDS platforms, etc., will be. For these, the direct access to NEFT/RTGS leads to benefits which will eventually reach merchants: 

  1. Improved reconciliation and settlement: Reconciliation and settlement processes, will  become faster and more efficient. Some non-banks rely on NEFT/RTGS for settlement, for eg., TReDS entities use NACH, which uses RTGS. Here membership will give them more direct visibility into the systems’ functioning, allowing them to handle reconciliation and settlement directly. Normally these depend on receiving accurate, timely information from banks.
  2. Lower costs: Bank-imposed charges for using NEFT/RTGS are done away with this way. This benefit of lower costs can in turn be passed on to merchants. 
  3. Collections: Another benefit is that non-banks can offer NEFT/RTGS as a direct payment method for users, thus allowing higher value payments which were previously possible via banks alone.

NUEs and allowing innovation

The upcoming Umbrella Entities and their payment systems can also be allowed access. The promise here of innovation for new use-cases is welcome. Consider UPI, which in essence unbundled the IMPS service (UPI is a layer on IMPS) from banks and allowed third party access. RTGS and NEFT have specific advantages over IMPS in that they don’t come with an upper limit for transactions, unlike UPI/IMPS which have a limit of Rs. 2 Lakhs. For RTGS of course, there is a minimum limit- of Rs. 2 Lakhs. Thus, while UPI has revolutionised lower-value transactions, this membership may open the scope for innovation and customised solutions for typical NEFT/RTGS style big-ticket transactions as well. Previously, customers were mainly restricted to banks for such transactions.

Will PAs be eligible?

Payment aggregators are regulated players, but their position as a ‘PSO’ specifically is unclear. The RBI Payment Aggregator Guidelines issued last year require PAs to obtain authorisation, and via Form A of the PSS Regulations, which is the application form to set up a ‘payments system’. This indicates that PAs could be PSOs post authorisation. PAs themselves do use NEFT/RTGS for their settlement functions as well, and membership would allow them to bring the same benefits listed above for merchants. 


PART II: For M-wallets: Balance limits increased, interoperability mandatory

What’s new for m-wallets?

The RBI is planning to introduce some important changes for PPIs and payment banks, i.e., m-wallets and prepaid cards:

  • Balance limits are increased to Rs. 2 Lakhs from Rs. 1 Lakh (full KYC PPIs and Payments banks)
  • Interoperability will be mandatory for full KYC PPIs (banks and non-banks, earlier this was voluntary)
  • Cash withdrawal from PPIs will be allowed (banks and non-banks, earlier this was banks only)
  • NEFT/RTGS membership ( as discussed above)

What will change?

Briefly, much like from a bank account, from your wallet account you will soon be able to make UPI payments, card payments, usual wallet payments, withdraw cash and maybe even NEFT/RTGS payments (if permitted). The payments to and from a wallet can be summarised below:

Take interoperability first- All wallets will get UPI handles, allowing direct payments from any one UPI handle to another (wallet to wallet, wallet to bank account, bank account to wallet, etc.). Further, customers can use any UPI infrastructure for paying from their wallets (QR codes, online website payments, etc.). The same goes for prepaid cards, which will all be card network affiliated (Mastercard, Visa, etc.), and allowing customers to pay using any  card infrastructure. This greatly widens the scope of PPI based payments. 

Cash withdrawal will be possible via ATMs and PoS terminals, making cash more accessible and thus making wallets more liquid for customers. The increase in balance limits, introduced to incentivise conversion to full KYC, also allows wallets to better cater to the needs of MSMEs, small traders and merchants and the like. 

Together, the proposed steps in effect bring full KYC wallets on par with bank accounts for practical purposes.

What does this mean for wallets, customers and merchants?

  1. For wallets themselves- supporting innovation: Wallets will welcome the changes, since they can now act as an effective, cheaper and faster substitute for bank accounts. For this, they will need to ensure they have the PPI license (of course), and then onboard with the NPCI (for UPI membership) and with card networks (for affiliated cards). This for instance further supports the effort to tap into the potential of prepaid cards. Use cases like sub-accounts, say corporate expense cards or children’s cards linked to a parent bank account, are one form. The increased balance limits with possible CPS membership will also ease using wallets for larger value transactions (loan, salary, fees, rent, etc.). The interoperability by allowing payments via UPI/cards infra also further supports other use-cases- like linking multiple credit/debit cards to a single prepaid card. This frees customers from carrying multiple cards and securing the card numbers themselves from exposure.
  1. For customers- newer use cases will be appealing: KYC remains a challenge here, since even now the complete benefits of PPIs cannot be enjoyed without full KYC, unlike UPI based services. The steps nevertheless do make wallets more appealing for customers. This can be for specific categories of customers (parents sharing a prepaid card with children instead of opening new bank accounts or giving direct access to their own bank accounts) or for specific uses (for education, travel, etc.). For a use like Fastag- customers will have the convenience of needing to recharge it less frequently. Lastly, their scope as a bank account substitute will also make wallets more appealing for unbanked, rural and other such sectors, serving as a means of financial inclusion. Unbanked blue collar workers for example can receive salary payments in a PPI wallet provided by merchants.
  1. For merchants collecting via wallets- things ease up: Many merchants use wallets for accepting customer payments, say at PoS. The 1 Lakh limit meant that on reaching the limit the extra funds were swept into FDs by payments banks. The 2 Lakhs limit eases this, ensuring greater funds availability to merchants. Interoperability will be welcome for merchants since it allows accepting wallet payments regardless of which wallet the customer is using. Further, specific integrations with a specific wallet to accept wallet payments on a website will not be necessary, since customers will also be able to pay via UPI infrastructure (like QR codes) or card infrastructure (for prepaid cards), thus increasing the options customers have to make payments. 

Some background on m-wallets:

An m-wallet issuer may be a non-bank with a PPI license, a bank with a PPI license, or a non-bank partnering with a bank with a PPI license. The PPI authorisation essentially allows making purchases against funds stored on the instrument (like a prepaid card). In 2014, non-bank PPIs were given the option to convert to ‘payments banks’- a ‘niche banking’ model, for providing limited banking services like deposits and remittances to unbanked segments and the like. This was welcome for non-bank PPIs, since converting allowed them a little more freedom, the status of a bank and the ability to also accept demand deposits upto Rs. 1 Lakh and pay interest on them. 

M-wallets were highly successful, till they were brought to their knees by a series of damaging policy decisions- the withdrawal of eKYC, mandatory full KYC and major limitations to the business model. Ease of use, a primary benefit leading to their widespread initial adoption, was lost. Next UPI arrived in 2016- its advantages which included no KYC since a KYC-ed bank account is linked, easy use, interoperability and even cash withdrawal at PoS, completely changed the scene.

Regulatory relief for m-wallets through minimum KYC, permitting conversion to small finance banks (‘SFBs’) (which also allows lending), etc. has been coming but at a slow pace. Important steps like further easing KYC, allowing KYC sharing, or reducing the time to convert to SFBs to 3 years have not been taken so far. As a result, m-wallets have long since moved on from core wallet-to-wallet payments, now completely reinventing themselves. Being well aware of the convenience of UPI, wallets have tapped into it, allowing direct, KYC-free UPI payments. Other steps include diversifying to new services like selling insurance, lending, etc., allowing bill payments, focussing on international remittances, etc.- basically steps encouraging customers to stick to transacting within their ecosystem. 


PART III: The Regulations Review Authority 2.0: Easing the compliance burden

The Regulations Review Authority 2.0 (RRA 2.0) set up by the RBI is an important step for easing the compliance burden. Anyone working in the finance sector will have their share of issues with RBI processes- duplications and redundancies in compliance requirements, issues with the RBI website and the information available, unnecessary paper-based formalities, and so on. The RRA 2.0 aims to identify and resolve such issues over a period of one year, and will invite stakeholder responses for this. This is particularly important with the ongoing pandemic, giving stakeholders a chance to bring hindrances with going digital to the regulator’s notice. The first call has come already, inviting comments by June 15th, 2021. 

Anyone impacted by RBI regulations, payments players, merchants, fintech companies, banks, etc., thus should put together their suggestions to help make RBI regulations simple and effective.

What did the first RRA change?

To illustrate the kind of changes this envisages, one can look at the first RRA in 1999 and the changes it brought about. The issue of master circulars for instance was a major step. Others include making information available to the public via e-mail and improving the RBI website (dissemination process), allowing banks to fix their own service charges (process simplification), transferring powers to regulate money market mutual funds to SEBI (jurisdiction issues), doing away with the system of sample test checking newly printed MICR instruments at MICR cheque processing centres in the Reserve Bank (unnecessary/cumbersome procedures), etc. 

What are some changes needed now?

Changes that are needed now, for instance include:

  1. More openness with consultation processes, say following the TRAI consultation process, with steps like publication of stakeholder responses. 
  2. Further digitising KYC processes, for example:
  • Allow reliance on API based KYC document checks from the MCA portals, etc.
  • Enable digitised KYC sharing under Section 14 of the KYC Master Direction, or even via the Account Aggregator Framework. Banks, for example, mainly have physical KYC records, making digital sharing difficult.
  • Rule 10(1) of the PML Maintenance of Records Rules, requires keeping physical copies of identity records after upload onto CKYC. Change to soft copies. 
  1. Removing duplicate reporting requirements, for example, the responsibility of reporting cross border wire transfers falls onto all regulated entities, which can lead to duplicate CBWTRs say when a single transaction involves both banks and other regulated players like OPGSPs. Banks in fact take required information from the OPGSPs themselves, in order to file the report.
  2. Sharing better data on merchant fraud to help the industry tackle it. 

Others: NBBL, List of UCB/SFB applicants

  1. NPCI BBPL new entity: The NPCI has also announced the formation of its subsidiary NPCI Bharat Bill Pay Ltd. Or NBBL. This is the second subsidiary after NIPL for cross-border payments some time ago. 
  1. RBI released names of Universal Bank and Small Finance Bank applicants: Payments banks are allowed to convert to SFBs only after 5 years of operations. Despite recommendations to bring this down to 3 years, given most payments banks came into operation only in 2017/18, this change was not made. This list thus unsurprisingly did not include any m-wallets. It in fact also didn’t include any other major financial players apart from Chaitanya India Fin Credit, displaying a surprising disinterest in the banking licenses.

That’s all for this edition. Stay safe.


Bibliography

  1. Media Article by Anand J, Inside Paytm’s platform-agnostic play: wallets don’t make money, bet on insurance, FASTag, et al, Economic Times Prime, dated 4 May 2021.
  2. Media article by Tinesh Bhasin, Wallet interoperability eases loan, payments transactions, LiveMint, dated 17 November, 2020.
  3. NPCI Press release: NPCI sets up its subsidiary firm – NPCI Bharat BillPay Ltd, dated 01 April, 2021.
  4. RBI Annual Report for the year 2019-20, dated  25 August, 2020: X Organisational Matters: dated 28 August 2000.
  5. RBI Documents: List of Banks permitted for issuance and operation of Prepaid Payment Instruments in India, dated 05 April, 2021.
  6. RBI FAQs: Cash Withdrawal Facility at Point of Sale (PoS) Terminals, dated 05 May 2020..
  7. RBI FAQs: Trade Receivables Discounting System (TReDS), dated 01 January 2020. 
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  16. RBI Press Release: RBI releases Guidelines for Licensing of Payments Banks, Press Release : 2014-2015/1089, dated 27 November, 2014.
  17. RBI Press Release: RBI releases Names of Applicants under the Guidelines for ‘on tap’ Licensing of Universal Banks and Small Finance Banks in the Private Sector, Press Release: 2021-2022/61, dated 15 April 2021.
  18. RBI Press Release: RBI releases the Report of the Internal Working Group to Review Extant Ownership Guidelines and Corporate Structure for Indian Private Sector Banks, Press Release: 2020-2021/667, dated 20 November 2020.
  19. RBI Press Release: RBI releases “Guidelines for ‘on tap’ Licensing of Small Finance Banks in the Private Sector”, Press Release: 2019-2020/1356, dated 5 December 2019.
  20. RBI Press Release: RBI sets up a Regulations Review Authority, Press Release : 1998-99/1173, dated 13 March 1999. 
  21. RBI Press Release: Statement on Developmental and Regulatory Policies, Press Release: 2021-2022/17, dated 07 April 2021.
Asheeta Regidi Head, Fintech Policy at Cashfree.