In this blog, we will uncover the concept of PPI interoperability. We also try to explore what it could mean to Indian merchants AND the masses.
After demonetisation, the prepaid payments instruments (PPI) industry saw some massive growth.
However, there were too many players in the market. Moreover, funds could only be transferred between two wallets of the same issuer. (Paytm users can only send money to another Paytm wallet, not a Mobikwik wallet)
This was until PPI interoperability came into the picture, of course. 🤷♀️
But before we dive into that, let’s look at the basics.
What Are Prepaid Payment Instruments (PPIs)?
As the name suggests, Prepaid Payment Instruments or PPIs are cards or digital wallets that allow users to,
- Purchase goods and services
- Enable remittance facilities
- Conduct financial transactions
- Transfer funds to family and friends
They’re also called PPI digital wallets or PPI e-wallets.
These instruments are typically preloaded with funds in order to enable a user to make payment. Paytm, PhonePe, Mobikwik, etc. are some popular examples.
The companies offering these wallets as offerings are called PPI Issuers. They permit users to add funds to their app wallets and use them for various transactional purposes.
Over the last couple of years, Prepaid Payment Instruments have become quite popular in the Indian market as they’re a convenient alternative to cash transactions.
What Is PPI Interoperability?
In basic terms, interoperability means enabling products or systems to work together and use each other’s capabilities to strengthen the entire ecosystem.
Interoperability of PPIs works on the same principles.
It gives consumers with full-KYC accounts the ability to use their digital wallet(s) to
- Make a payment at any POS (point-of-sale) site that has the facility to accept online payments
- Withdraw cash from ATMs and POS terminals
- Transfer money from one wallet to another, irrespective of their nature
This also comes regardless of who issues the payment instrument. So, a customer could transfer money from a Paytm wallet to a Mobikwik wallet instantly.
The basic idea behind making PPIs interoperable came after the RBI tested the same mechanics on UPI. One platform to unify different payment modes? It was a recipe for success.
On the hypothesis tested, they’re now confident that by making PPI interoperable in nature, all the respective stakeholder levels including consumers, merchants, banks, and issuers, everyone will enjoy the following benefits.
All in all, while the term PPI interoperability is quite the tongue twister, it will simplify payments just the same.
Regulations Issued by RBI On PPI Interoperability
The RBI has been stressing on making PPIs interoperable amongst the issuing and acquiring entities given the,
- Feeble usage of payment instruments such as cards and e-wallets by the Indian citizens
- Presence of an inadequate payment acceptance infrastructure in the country
To address these issues and make PPIs an integral part of India’s larger financial services ecosystem, here’s what the RBI’s PPI interoperability mandate states.
- PPIs used for transportation such as metro or other public transport cards, will not come under interoperability
- Entities issuing gift cards, meal cards, and MTS can choose whether or not to make their cards interoperable
- PPI Interoperability will be applicable to only those customers with complete-KYC accounts
- Customers with minimum or partial KYC will not be able to take benefits of interoperability
- PPI issuers will have to adhere to all the requirements as stated by the card networks/UPI including
- Type and criteria of membership
- Merchant on-boarding
- Adhering to various standards
- Rules and regulations applicable against certain payment systems
- PPI issuers will have to handle all the dispute resolutions and set up customer grievance redressal cells to provide solutions
- Card networks can onboard PPI issuers to join their network
- Non-bank PPI issuers can only participate as members or associate members of authorised card networks
- PPI issuers can facilitate all the basic UPI interoperability features
- PPI issuers will act as Payment System Providers (PSP) in the UPI ecosystem. They will be issued a handle by the NPCI in line with its predefined policies/guidelines
- PPI holders can only be onboarded by their own PPI issuer for UPI. PPI issuers as PSPs cannot onboard customers of any bank or other PPI issuer
What Are The Perks Of PPI Interoperability?
PPI interoperability is expected to be the next game-changer for the payments industry. In fact, it may propel the payment ecosystem to be more innovative and competitive.
The key impact of PPI interoperability on different stakeholders is as follows.
Accept More Wallet Payments
At present, mobile wallet service providers need to constantly add more merchants to their network to get more consumers to use their wallets in various instances. With PPI interoperability, all UPI-accepting merchants would be able to accept payments via their wallets. This means,
- More consumer-onboarding
- Enhanced transaction volume
- Higher business revenue
Greater Digital Payment Adoption
Looking at the current economics, it’s quite evident that the interoperability of PPIs will lead to a greater digital payment adoption and usage in India. This will also boost the value and utility of the payment instruments among users. Resultantly increasing the merchant’s customer base.
Less Cash Management
Since all transactions will commence between wallets or wallet-to-bank accounts, the need to manage cash and keeping a track of transactions is significantly reduced.
Small merchants can easily reconcile their accounts using the PPI apps and avoid the need to regularly manage and deposit the collected cash in the bank.
Related Read: Reconciling Your Payments as a Merchant
Effective Substitute To Bank Accounts
The very nature of PPIs, especially prepaid cards and e-wallets, is quite similar to that of bank accounts. Only that these PPIs are far more effective, cheaper, and a faster substitute for bank accounts.
Merchants can conveniently use these bank-account-like-alternatives to commence many basic business activities. Some of them are as follows.
And the list goes on!
Increased Limit From 1 Lakh to 2 Lakhs
Many merchants today use wallets to accept payments from customers. However, the earlier wallet limit of INR 1 lakh restricted them from using the wallets to their maximum potential. Moreover, many wallets swept the extra funds into FDs at the payments bank’s end.
Now, the limit has been extended to INR 2 lakhs (for full-KYC PPIs). This not only ensures that merchants can accept more payments from consumers including high-ticket transactions.
No Need For Multiple Wallet Integrations
With interoperability in the picture now, small merchants (or one-man businesses) don’t need to integrate specific wallets to accept payments. They can now accept payment in any wallet of their choice from any wallet that a consumer uses.
Naturally, it is not feasible for medium or large businesses to accept payments like that.
For starters, they need to accept payments from various payment modes like cards and net banking too. On top of that, they need easy-to-use reconciliation and settlement services.
A payment aggregator like Cashfree Payments accepts payments from multiple wallets. Cashfree allows merchants to accept payment from 120+ payment options with utmost ease and comfort.
The payment gateway also,
- Collects funds from all digital sources on behalf of the merchant
- Sends collated funds into merchant account
- Reconciles accounts and ensures seamless accounting
- Offers additional payment acceptance sources like payment links, forms, QR codes, etc
From a consumer’s point of view, PPI interoperability will offer higher payment convenience with less restrictions.
Consumers will have the liberty to easily and swiftly transfer funds across different wallets irrespective of the issuer.
Higher Financial Inclusion And Penetration
With PPIs becoming interoperable, they’ll be at par with a bank’s savings account. This will, in turn, make PPIs more appealing to the citizens of India and encourage more digital penetration. Looking at the scope this will effectively benefit the unbanked and underbanked section of the population.
To give you an example, with PPI interoperability coming into the picture, consumers will be able to
- Avail small value loans
- Blue-collar workers could receive salaries/wages directly into their PPI wallets
- Do micro-savings and achieve life goals
- make small-ticket size payments, both online and offline
The concept will also help women become more financially independent. They’ll have access to useful and affordable financial products and services that will help them make sound financial investment decisions and make small-ticket purchases without anyone’s help.
Encourage More Innovation
As the Fintech market innovates and ships new and better prepaid payment instruments in the Indian market, more consumers will benefit in the process.
They’ll have access to more innovative financial products and better means to manage their finances.
Seek Quick Redressals From Issuers
With the introduction of PPI interoperability, consumers will now be able to seek redressal against any issues faced directly by the issuer. And, in the same mechanics as defined by the card network(s) or National Payments Corporation of India (NPCI)
The RBI mandates this in their recent report defining the guidelines that follow PPI Interoperability in India.
Higher Use Cases
By making prepaid payment instruments interoperable in nature, consumers will have more power to leverage PPIs and enjoy more financial freedom.
For PPI Issuers
With the introduction of PPI interoperability, PPI issuers have become quasi banks in terms of payments. Meaning, they’ll be able to offer many, if not all, banking services to consumers along with many additional benefits.
Better Access To Payment Infrastructure
PPI issuers will enjoy better access to the Indian payments infrastructure. Moreover, their dependency on the bank (for many minor and major services, such as access, settlement, etc.) will also reduce significantly.
Additional Sources Of Revenue
Interoperability brings additional sources of revenue to the plate for PPI issuers.
They can gain significantly in terms of interchange for UPI and prepaid cards, transaction costs, and via other similar methods.
However, they’ll need to infuse additional investment to set up the necessary infrastructure to benefit from these additional revenue sources.
Challenges PPI Players Need to Watch Out For
While advantages are plenty, many challenges come along the way.
Provide Satisfying Customer Support
Owing to the RBI guidelines, PPI players will need to build a robust customer support system that entertains even the tiniest of customer complaints.
If not done properly, one bad experience is enough to scare customers off to cash transactions and steer them from coming back.
Easy Onboarding Processes
Every financial segment today is innovating its onboarding process.
Owing to this, it is extremely necessary that even PPI players build a faster and easier onboarding process.
This will keep potential customers from considering other online financial options, especially opening digital accounts offered by neobanks.
Improve And Simplify KYC Processes
Even though the KYC process today has improved manifold, there still exists a huge scope to upgrade and build a much better KYC process. PPI players need to tap into this space and build better and faster KYC solutions.
For instance, provide a quick, two-step online KYC process that helps onboard customers in a matter of seconds.
Boost To Digital Payments And Greater Financial Inclusion
Here’s how interoperability will transform the overall payments ecosystem in the coming future, causing the below-mentioned changes, for good.
- Provide easy access to payment instruments such as cards, wallets, and UPI to the unbanked and underbanked population of the country
- Increase financial inclusion and adoption of digital payment methods throughout the nation
- With NPCI making UPI 2.0 live, peer-to-merchant transactions will significantly increase, even in tier 2 and 3 parts of India
- The entire payments ecosystem will become more competitive, creating a larger playing field for the merchants and PPI players
Interoperability is the Road To The Future
As cards and wallets become more functional and feature-rich in nature, thanks to the implementation of interoperability in PPIs, it’s only a matter of time to see the PPI industry see a boom in its usage as UPI.
The regulators and stakeholders are confident that this move will build a more secure, reliable, and robust payments system that will not only play a bigger role in the financial services ecosystem and benefit all the players involved.