Regulations for functioning of e-Wallets in India

INTRODUCTION

In the past decade, the use of digital payments has increased immensely in India. Moreover, the demonetization in 2016 was a huge push for many people, it made them realize the power and importance of the digital transaction. For the past many years, India has seen technological advancement mainly after the emergence of e-commerce websites. Digital transactions have made peoples’ lives so much easier, now shopping, recharge, food, etc is one click away. No more carrying of cash, bills, and a chequebook was an absurd idea a few decades ago, nowadays new technology, new apps, and new inventions have made everything possible in this generation. Most of us must have used an e-wallet to pay for transactions or payment gateways that e-commerce websites provide us with. The most common e-wallet is Paytm and the way it advertises itself is catchy as well, their famous slogan “Paytm Karo” is known by every age group of people and that evidence shows the popularity online payment has gained in India. E-wallet is human-friendly, speedy, and very easy to operate. It has transformed the traditional economy into a digital economy leading to transparent transactions since it is easily traceable, and less chance of money laundering is possible with it. First, let’s discuss what an e-wallet is. An e-wallet is just like a physical wallet except we don’t need to carry an actual wallet for it, just our mobile phones or any gadget is enough to pay for anything we buy, as it acts as a wallet. This is how it works like a real wallet. Technically speaking, these wallets are connected to our bank accounts, so whenever a person has to pay, he is not required to enter his bank or card details for every transaction he chooses to perform. This is how e-wallets are distinct from the payment gateway method of transaction. It’s safer, less technical, and user-friendly. For making India go digital and cashless, the government has tried different methods including campaigning through posters, media houses, hoardings, and different schemes were introduced as well like ‘Digital India’ to make people believe in the power and importance of digital transactions. This transition from conventional method to digital method took time but it was worth it. Nowadays, various Indian e-wallets have come into existence due to an increase in the number of start-ups, leading a way forward for India to become “Atma Nirbhar”. 

STATUTES REGULATING USE OF E-WALLET

THE PAYMENT AND SETTLEMENT SYSTEMS ACT, 2007

It is an act legislated on 20th December 2007 for the management and protection of payment systems in India. This is a regulating principle that keeps an eye on all the systems relating to the payment. This consists of debit & credit card operations, operations related to the transmission of money, and other similar systems covering e-wallets. According to this act, section 3 says that the Reserve Bank of India has the authority to supervise the systems of payment in India. Further, section 4 asserts that without permission of the Reserve bank of India, no person will be authorised to start or conduct a payment system. Only after applying under section 5 to get authorisation from the Reserve Bank of India and seeking issuance of confirmation of authority to operate a payment system from RBI, can a person operate a payment system. Under Section 7, the RBI may or may not issue the authorisation. RBI conducts an inquiry under section 6 and after being satisfied, the decision to authorise takes place. Under section 7, nine requisites given are to be followed as well, including any safety procedure, how the transfer of funds may be effected within the payment obligations under the payment system, the financial status, experience of management, and integrity of the applicant, etc. As per Form A, under Regulation 3(2) of the Payment and Settlement Systems Regulations, 2008, the application to get authorisation must be filed under this. It must be accordingly filled up with the required papers to be submitted to the RBI. In the Payment and Settlement Systems Act, 2007, there is a similar provision in this act, to section 138 of the Negotiable instrument act with respect to non-transfer of money due to insufficient funds in the account. If an electronic transfer gets invalid or impossible to perform due to insufficiency of funds in the account, it will amount to an offence punishable with imprisonment or with a fine or both, under section 25 of the Act. 

THE RBI MASTER CIRCULAR ON ISSUANCE AND OPERATION OF PRE-PAID PAYMENT INSTRUMENTS IN INDIA

On 1st July 2014, this circular came into existence and it was updated in the same year in December. The circular provides for extensive guidelines and procedures to be followed concerning instruments of pre-paid payment or PPIs in India. The given circular specifies three kinds of payment instruments in India which are as follows:

  1. Closed system Payment Instruments
  2. Semi-closed system Payment Instruments
  3. Open System Payment Instruments.

Closed System Payment Instruments are a creation of an entity where it permits the aid of payment to the services they offer to the people. It is considered a closed system because it doesn’t permit any third-party transaction, moreover, they do not allow cash withdrawal or redemption as well. Example: brand-specific gift card, such cards can only be used at specific places and it doesn’t authorise transmission of funds from one account to another. Semi-Closed System Payment Instruments are payment instruments that can be used for buying goods and services, involving financial services at a group of clearly identified merchant locations/ establishments. These payment systems are utilized for third-party purchase settlements and a clear & specific agreement between the issuer and the merchant is needed for the use of these instruments. To secure higher and safer payments, standards of KYC (Know your customer) are required to be fulfilled. However, this kind of payment instrument, as well, does not permit cash withdrawal or redemption by the holder. Example: ‘Paytm’ wallets, ‘PhonePe’ wallets, etc. Open System Payment Instruments are issued by banking organisations and are used for buying goods and services and also include monetary services, cash withdrawal, remittance facilities, etc. Example: Debit cards. In this article, since we are focusing on e-wallets, it can be inferred from the above discussion that e-wallets come under the second category system of payment instruments i.e., Semi-Closed system Payment Instruments. They are reloadable instruments that can only be issued electronically.

The framework that supervises and standardizes digital payments is “Master Direction on Issuance and Operation of Prepaid Payment Instruments”. The RBI first issued it in 2009 by applying section 18 read with Section 10(2) of the Payment and Settlement Systems Act, 2007. For the first time in 2009, the non-banking organisations became entitled to issue semi-closed instruments. Subsequently, these regulations have been amended a lot since then. 

CONCLUSION

As newer and more disruptive technologies started emerging and start-ups got boosted up in the market, the whole idea of digital payment became successful in India. After-effects of demonetization that majorly constrained the flow of cash in the market, led to the emergence of alternative methods of payment. To make the functioning and operation of digital payment smooth and risk-free, the RBI had to make guidelines and procedures to be followed by the non-public entities operating these online systems of payment. Hence, the most important changes were declared in the Master Directions in 2017, after securing a response from all the concerned investors and stakeholders. These guidelines were revised further in 2019.

“Article by Ms. Vartika Srivastava, a third-year law student at Symbiosis Law School, NOIDA, under the internship of Adv. Shankarlal Raheja and updated in April 2021.

The views herein are personal, and while careful attention has been given to ensure that the information is accurate, and assume no liability or responsibility for any reliance thereon. This article is merely an information and knowledge sharing activity and is not a substitute for legal advice. We shall not be liable for any loss or damage caused due to any reliance thereof”.