A Look into The Prepaid Payment Instruments with special reference to India

Introduction

Trade is and was a part of our society, and so, there was always a need for payment. We have started with the barter system where goods were exchanged with goods, and then we moved towards gold and silver coins for payment and then to paper money popularly called as cash money. With an increase in technology, we even shifted to ATM cards and Debit cards. We are currently moving towards a cashless society and going to a digital world where payment is made virtually in the form of e-wallets, vouchers, etc.

Prepaid Payment Instruments: An Overview

Prepaid Payment Instrument is simply money which is stored digitally in a card or e-wallets. It could be thought of as cashless money.

It represents a stored value of money in a card or wallet which can be utilized by the holder. These cards are generally prepaid, but they may be postpaid in some cases. It can be used to buy goods and services without cash. However, it should be understood clearly that it is not free, it needs a prior recharge.

For convenience and better understanding, this meaning could be divided into three main elements, i.e. instrument, a medium of payment, instrument respectively. Some of the best examples representing prepaid payment instrument (hereinafter expressed as PPI) are smart cards, electronic wallets, mobile wallets, mobile vouchers, e- accounts, etc.

Historical Background

Prepaid Payment Instrument is the result of advancement in technology which came into existence during 70s’ decade in the USA in the form of paper gift certificates. Slowly with passing time, these methods evolved into different forms, and they were widely accepted as a means of transaction. It, however, mainly developed over all other countries in the first decade of the 21^st century, when countries in Europe, Australia and Asia widely started to use it. [1]

In India, this development took place after the Payment and Settlement System Act 2007, was passed, and Reserve Bank of India started to work in the field of digital payment to transform Indian economy into a digital economy. The Government is working with RBI to turn this dream into reality. However, our lack of technological advancement proved to be an obstacle to achieve this goal. Now, we are increasing the digitalization and reach of internet connectivity all over India. Still, the pace is slower than required because everyday we are getting new technology, and with the advent of 5G, another revolution will take place.

Features of PPI

PPI is very useful in day to day transactions for buying goods and services. There are innumerable advantages of using PPI as a method of payment over cash payment. Some of them are as follows:

Convenient – The first and foremost feature or advantage PPI system is its convenience, i.e. it is more convenient than any other method of payment. It is a feasible and more useful method of payment. It can be in the form of a card which can be kept in the wallet. No hectic amount of space is needed.
Saves Time – It is another feature of PPI that it saves a lot of time. It is fast, as well as easy. It generally helps us to avoid standing in reservation queues. This time can be utilized for another more productive work.
Minimum convention – Since, many of the PPI, are used through mobiles, there are very less complications in the process. We do not need to go anywhere, we just need to login into account and give some details, and we can use this feature. In most of the cases a simple form fill up is enough.
Manages the use of money – It helps us to manage money because we can keep an account of our expenditure as well as earning. It also avoids us from spending more.
Remote travelling – It is an advantageous method to pay while travelling because we do not need to carry much cash. We do not need to worry about change and cash.
No need to carry cash – This is the apparent feature of PPI that we do not need to carry the cash. It saves paper as well as it is convenient. [2]

Limitations regarding PPI

No technology is perfect, and so is true with PPI. There are some limitations regarding these payment methods which make people avoid this method of payment. They are as follows:

Security issues – This is the main reason that makes this feature less popular. Since most of the people are not digitally aware, many times, they become the victim or fall prey to the trap of hackers. People are always in fear that someone will hack the account and take their money. However, the Government is taking the necessary steps regarding this.
Limited Payment – People are generally given a monthly or weekly limit of payment beyond which payment cannot be made. This is a drawback over the cash payment where we can make an unlimited transaction within a time frame.
Maintenance Charges – People also needs to pay yearly charges or monthly charges to use these features. Most of the wallets take maintenance charges which are not so in the cash payment.
No interest on amount – Generally, these service providers are not giving interest to people unless it is connected to a bank account. However, many of the service providers have started to provide such profit to their customers.
Management of KYC – People also needs to maintain KYC and banks need to keep a record of it. It has to be managed in a hassle-free way, for the convenience of people. It has to be renewed again after its expiry. [3]

Types of Prepaid Payment Instruments

There are generally four types of PPI. They are as follows:

Closed System Payment Instrument – As the name suggests, it is restricted to a particular entity or institution. It has a narrow range of payment. It cannot be utilized for the payment to the third party for their goods and services. It does not allow the facility of cash withdrawal or redemption. RBI generally does not interfere in it, and there is no need for prior authorization. Some of the well-known examples are Gift Cards/ Vouchers provided by Mobile Companies or e-commerce sites, etc.
Semi-closed System Payment Instrument – Semi-closed PPIs are issues by the substance for the acquisition of merchandise and enterprises at a gathering of unmistakably distinguished vendor areas/foundations which have a particular agreement with the guarantor element. However, they also do not allow cash withdrawal. Banks and non- banks can issue them, but only after permission is granted to it by RBI. Paytm, and Phone pay, Google Pay, etc. are its best examples.
Open System Payment Instrument – It is a widely accepted system for payment which can be generally used for payment all over the country. It even allows for cash withdrawal. The main examples are the various kinds of debit cards that are issued by Banks such as Rupay, Master cards, etc.
Semi-open System Payment Instrument – This type of payment is generally accepted where there are POS machines, or Point of Sales machine is present. It can be made to those specific locations. However, they do not allow cash withdrawal. [4]

There is another type of PPI, which is known as Mobile Prepaid Instruments, which is issued generally by service providers of mobile. It is used to utlize VAS services popularly known as Value Added Services. [5]

Regulations regarding PPI in India

Payment and Settlement System Act 2007– This system was made to regulate and supervise the payment system. It gives the power as well as a duty to RBI to decide all conflicts which may arise in this regard. The Act also provides a provision to set up Board for Regulation and Supervision of Payment and Settlement Systems (BPSS). It is considered as a milestone Act which paved the way for cashless transaction in India at a broader level. [6]
RBI Guidelines– Various guidelines have been issued by RBI for better and effective management of PPI in India. These mainly include the eligibility criteria, capital requirement for issuance of the license for PPI, etc.

Qualification to give Prepaid Payment Instruments (PPI)

Banks who consent to the qualification measures would be allowed to give all classes of prepaid instalment instruments.
However, just those banks which have been allowed to give Mobile Banking Transactions by the Reserve Bank of India will be allowed to dispatch versatile based prepaid installment instruments (portable wallets and versatile records).
Non-Banking Financial Companies (NBFCs) and different people would be allowed to give just shut and semi-shut framework installment instruments; including cell phone based prepaid installment instruments.

Capital Requirements

Banks and Non-Banking Financial Companies which conform to the Capital Adequacy prerequisites endorsed by Reserve Bank of India occasionally will be allowed to issue prepaid installment instruments.
All different people, looking for authorization from this time forward, will have a base settled up capital of Rs. 500 lakhs and least positive total assets of Rs. 100 lakhs on all occasions. Essential guidelines, assuming any, for the current PPI guarantors for consistency of improved capital necessities will be told independently.
Applicant organizations having FDI/FII should meet the base capital prerequisite as relevant under Consolidated FDI strategy rules of Government of India.
Only organizations joined in India will be qualified to apply for authorization.
There are also various guidelines to whom this instrument can be issued and limitations regarding the amount of payment. [7]
Issuance and Operation of Pre‐paid Payment Instruments in India (RBI) Directions 2009– It was made with the purpose to pride a feasible framework to regulate and supervise persons operating payment systems involved in the issuance of Pre-paid Payment Instruments in India. It was also issued to develop payment and settlement system for wider access. It provides some definitions of Issuer, Holder, PPI and its various categories. It also gives us some guideline regarding PPIs that who can issue it, to whom it can be issued and process of issuance, etc. which has already been discussed. [8]

Suggestions

Following suggestions may be considered for better enforcement and large scale utilization of PPI:

The first and foremost suggestion is regarding security issues. It is the main reason that many people do not opt for such payment methods, thinking that anyone could misuse their money, and there is no use of filing a complaint. This situation needs to be changed. The Government must ensure the safety of digital payments.
In the digital payment, there are chances that we make wrong transactions, so, a competent redressal body could be setup to settle the matter effectively as soon as possible.
Limits of those cards may be increased.
These payment methods should be widely accepted by all.
The Government must make people aware of the digital transaction and ways to make safe transactions. It could be done through advertisements, nukkad nataks (street plays), campaigns, etc.
The Government must focus on digitalizing payment methods and developing other such payment techniques which could be used by non-smartphone users because there are still millions of people without Smartphone.
An authority that solely deals with issues of Prepaid Payment Instruments may be setup.

Conclusion

Payments methods have seen a revolution in the 21^st century after the advent of the internet. We are moving towards a cashless society because every day we are being provided with new ways of payments. Results though may not be so impressive because of lack of basic infrastructure regarding electricity and internet connection. Government is planning to connect all villages via broadband by 2022, which will be a milestone in digitalization.

However, people also need to come forward and adopt new technology with both hands so that we can stand ahead among other countries in the field of technological advancement. For this goal to be achieved, we need to be aware of correct and safe use of digital payments. The Government should be concerned regarding new technology which is being developed because it is said that 5G technology will completely change the world. We cannot risk standing behind and waiting for everything to happen automatically.

Frequently Asked Questions

What do you understand from the expression Prepaid Payment Instruments and explain its various types?
What are the rules and regulations that govern PPI in India?
List some features and limitations of using PPI as a mode of transaction.
Do you think that India has developed a culture of cashless payment? If no, then why and list some suggestions too.