Future of e-wallets under RBI’s new guidelines

By Jayashri Ramesh Sundaram

(Image Courtesy: LiveMint)

In February 2019, bringing relief to digital wallet companies, the Reserve Bank of India (RBI) extended the deadline for them to meet the Know Your Customer (KYC) norms. KYC guidelines help prevent fraudulent activities like money laundering and risks that may arise in the light of expanding technology. An emerging market dealing with money, especially in the digital space, is prone to risk and this attracts warnings by the RBI. Hence, it should be of no surprise seeing the RBI taking measures to prevent fraud via digital wallets. But what has come to everyone’s surprise is the announcement of deadlines to meet KYC with only a non-descript regulation without stating a clear road map. Along with this, RBI specifying on the subject of interoperability mandates the incorporation of Unified Payment Interface (UPI) into the application for the feature to be enabled in respective e-wallets.

This post will examine the future of the wallet business for a digital economy mindful of the recent RBI guidelines in the context of UPI.

Digital wallets can be categorised into four types. (1) Open wallet that allows a user to buy goods and services, withdraw cash at ATMS or banks, transfer funds, and send money to any mobile number bank account (2) Closed wallet, where money is restricted to use for merchandise. The wallet can be used to get cash back, avail gift cards or refunds. (3) Semi-closed wallet that does not permit cash withdrawal or redemption, but allows users to buy goods and services at the listed merchants (4) Device-specific wallets that work based on a combination of software and hardware.

Wallet business has come to be seen as having the potential to disrupt the status quo of the payment structure of India that is transpiring to become a cashless economy. The digital economy of India, according to a report by Business Today, is at 8 per cent of the GDP and is expected to grow further in the upcoming years. Estimates show that the mobile wallet transactions alone increased 40 times in the past five years.

There is no doubt that regulatory and monitory policies are necessary to ensure smooth working of platforms to reduce the disruption of the economy. However, currently, KYC norms for these prepaid instruments cannot be undertaken with biometrics as per the Justice K S Puttaswamy (Retd) vs Union of India judgment. Extending deadlines alone to give time for operators to complete physical KYC (or strategise new efforts) will not suffice. To make security a reality, unintended consequences faced by wallet companies and users have to be addressed.

One of the important aspects to aid the e-wallet business is the provision of interoperability. Interoperability is one of the essentials for any business dealing with money to work. RBI’s “Vision Statement On Payments & Settlement" for 2018 recognised the need to promote interoperability as the basis for a seamless payment experience. Although the Central Bank did address the issue, e-wallet companies are still caught in an unfavourable position since interoperability, as per the regulations, can be added as a feature only if they adopted UPI.

Is UPI then the elephant in the room? Assuming that UPI is a killer of e-wallets, usage of BHIM, a mobile payment application developed by the National Payments Corporation of India, should have increased and the usage of e-wallet apps should have decreased. In contrast, UPI has taken a lead over mobile wallets and the usage of BHIM has fallen as shown in the Figure.

^{Source: National Payments Corporation of India}

This signals that there has been dissatisfaction in using an application that provides only a single interface -- UPI. By adopting UPI, leading platforms use it as an opportunity to grab the market. This can also help broaden their customer base that looks for options. Illustrating this, BHIM that had enjoyed over 40 per cent of the share in UPI till August 2017, saw Phonepe taking over BHIM’s share and soon becoming the highest contributor of UPI transactions.

In a nutshell, instead of killing mobile wallet companies, UPI has created a potential opportunity for them to develop strategies that offer multi-use payment needs instead of operating as a standalone UPI app.

(Jayashri Ramesh Sundaram is a Research Intern at CPPR Centre for Strategic Studies. Views expressed by the author are personal and need not reflect or represent the views of Centre for Public Policy Research)