The Payment and Settlement Systems Act, 2007 was introduced with the intent to regulate and supervise payment systems and designates the Reserve Bank of India (“RBI”) as the authority to do so. In furtherance of this, the RBI issued guidelines for interoperability on 16th October 2018 for all KYC-compliant Prepaid Payment Instruments (“PPIs”) such as payment wallets, smart card, magnetic chips, vouchers etc. Interoperability refers to the technical compatibility that allows a payment system to be used along with other payment systems. It enables PPI issuers, system providers and system participants in different systems to undertake, clear and settle payment transactions across systems without participating in multiple systems.
The scope of this article is to understand the effect of the guidelines and why the introduction of interoperability between PPIs was necessary.
Understanding Interoperability of PPIs and the effect of RBI Guidelines
In May 2021, the RBI issued fresh guidelines for PPIs which made interoperability mandatory across PPI Issuers. PPI Issuers are expected to comply with the guidelines and enable interoperability by 31st March 2022. It is now necessary for PPI issuers to provide interoperability to holders of full-KYC (Know Your Customer) PPIs and UPI (Unified Payment Interface) on the acceptance side as well. Hence, along with interoperability, PPIs are also expected to become completely KYC compliant.
The intent behind the move is to facilitate transfers from wallets to banks and across various wallets. In a framework devoid of interoperability, instruments such as mobile wallets were functioning in a closed route network and money flow was restricted to the network of the specific wallet only. The guidelines made a reference to Para 10 of the Statement on Developmental and Regulatory Policies dated 7th April 2021 that takes note of the fact that no significant steps had been employed by PPI issuers to establish an interoperability structure. Interoperability among wallets and cards would be extremely beneficial for customers, sellers as well as for issuing and acquiring entities including banks and non-banks. It is also important to promote optimal utilization of payment instruments.
In its ‘Master Direction on Issuance and Operation of Prepaid Payment Instruments’ issued in 2017, the RBI stated that the adoption of common standards by PPI providers would be beneficial in creating a seamless user experience. In this Direction it was also stated that interoperability would be enabled in phases The first phase would be limited to initiation of interoperability within PPIs such as mobile wallets, the second phase would see initiation of interoperability between wallets and banks and the third phase would involve interoperability for PPIs issued in the form of cards.
Interoperability can be achieved by PPI issuers through UPI, where PPIs are issued in the form of wallets and through card networks where PPIs are issued in the form of cards. As per the guidelines issued by the RBI for achieving interoperability through UPI, PPI Issuers would act as Payment Service Providers and work with the NPCI. The NCPI would assess the risk management aspects and then issue handle to the PPI issuers as per its policies. However, there is a requirement for non-bank PPI issuers to be affiliated with the sponsor bank as for the purposes of a settlement they can only participate through such sponsor banks. As for achieving interoperability through card networks, the guidelines state that card networks are permitted to take on board PPI Issuers to join their network. It would allow non-bank PPI issuers to issue interoperable cards in association with the card networks. It is also mentioned that since this has not been done before, any such cards issued should have an EMV Chip and be PIN compliant.
Why is it necessary?
The new guidelines for PPIs replace the Domestic Money Transfer-Relaxationsthat limited the scope of transfer of funds to only wallets issued by the same PPI issuer. Interoperability as a means for data exchange has been lauded and its benefits across Information Technology systems in other sectors such as healthcare have also been noted. Interoperability among information systems provides cohesive information, increases adaptability and increases productivity and control. The digital payment market in India is expected to be worth in the whereabouts of Rs. 7,092 trillion by 2025.
With the effect of interoperability, the RBI has also incentivized digital payments. In the prevalent operating system, a customer using a PPI to make a payment could only do so if the merchant was using the same instrument. However, by virtue of interoperability payments among various PPIs will be allowed. Moreover, if a merchant has signed up for a particular wallet and borne the tiring procedure of getting a KYC done, they would not be required to get it done over again for a different instrument. Ease of use can further help in greater digital payment adoption and usage.
It can be said upon a perusal of the various guidelines promoting interoperability that the intent behind them is to revive PPIs and promote non-banking entities. This is in contrast with the effect of certain operative guidelines issued by the RBI previously. Several policies implemented by the RBI have been detrimental for non-banking entities such as PPIs. Following the introduction of the UPI and guidelines for ensuring KYC compliance, many digital wallets surrendered their licenses and became inactive. A migration of digital wallet users to UPI was noticed. In the later phases, interoperability will also allow users to withdraw money stored in their digital wallets from ATMs.
Other countries have also been looking into domestic as well as cross-border interoperability in payment systems. Although currently the European Union does not have an interoperable network for payments across the continent, efforts have been made by the European Commission along with the European Central Bank to bring interoperability among payment systems. Similar efforts to explore interoperability among payment systems have been made in the United States with the Faster Payment Task Force that was created by the U. S. Federal Reserve in 2015. The objective of the Task Force is to create a “fast, safe and ubiquitous payments network” in the United States. FinTech Regulatory bodies across nations are in the search for the most effective way to facilitate easy and secure real-time transactions domestically and internationally.
Interoperability among PPIs would greatly impact the value proposition for customers who use digital wallets. As mentioned earlier, in the current system that is devoid of interoperability, digital payment transfers can only be made when the merchant uses the same wallet as the customer. This dramatically reduces the number of acceptance points where customers can transact as well as the share of each merchant’s customers that are able to pay digitally. Apart from causing inconvenience to customers who would be required to sign up for several different wallets and follow compliance for the same, it also inconveniences the merchants who are compelled to sign up for several wallets and keep up compliance for them all- which can be tedious. Hence, it can be said that decision of the RBI to make interoperability mandatory will not only be greatly beneficial in reviving PPIs but also promote ease of business.