RBI’s New Rules May Help Fatten Digital Wallets
A customer inspects a wallet inside an MCM Holdings AG store. (Photographer: SeongJoon Cho/Bloomberg)

RBI’s New Rules May Help Fatten Digital Wallets

There was a time when digital wallets were the rage. The idea that you could keep aside a little bit of money via your bank account or your card and make hassle-free small payments sounded great. Then came the unified payment interface and a bunch of regulations, including know your customer requirements, which made wallets a bulky proposition. Digital wallets went into a slow decline.

Now, the Reserve Bank of India is trying to give digital wallets, also known as pre-paid instruments, new life with a set of changes announced this week.

Soon, customers of these wallets will be able to store larger amounts of money—up to Rs 2 lakh, and withdraw cash from them even if they aren’t linked to a bank. All wallets will have to become interoperable so you can transfer funds from one to the other. Also, non-bank wallets will have access to the real-time gross settlement and the National Electronic Fund Transfer, which are the backbones of the payment system.

The idea, RBI Governor Shaktikanta Das said, is to help expand the reach of digital payments across smaller towns.

“The move directly benefits non-bank prepaid payment service providers and fintech firms that have an edge over banks in terms of their digital capabilities and wallet offerings,” said Ashish Garg, managing director and senior partner at Boston Consulting Group. “It also allows firms offering wallets (PPIs) to develop use cases for customers who don’t want to use their primary bank account online or store their bank account details with any third party provider,” he said.

In some small way, wallets can almost become an alternative to no-frill bank accounts, particularly in far-flung rural areas. Almost, because while they can accept deposits and now give cash, they still can’t pay interest.

“The current and savings account facility provided by banks aren’t suitable for micro-enterprises, gig- and low-income category workers due to requirements of the minimum account balance. But that gap can be filled by digital wallets, which may act as quasi-bank accounts with similar functionalities at zero to low maintenance costs,” said Vivek Belgavi, partner and fintech leader at PwC India.

Besides, non-bank entities can cross-sell value-added services on e-wallets without the need for opening bank accounts, he said. The ability of digital wallets to interact with the overall payments infrastructure also allows mutual funds, insurers and neo-banks to sell targeted products through the PPI network, Belgavi said.

Sameer Nigam, founder and chief executive officer at PhonePe, agreed.

Making wallets interoperable with the digital payments ecosystem will not just bring ease of transacting for customers, but also give them the status of payment system providers that was earlier reserved for banks.

"It allows PhonePe to connect directly with networks like UPI, Visa and Mastercard and improve payment success rates," Nigam said.

Satish Gupta, chief executive of Paytm Payments Bank, said raising the deposit limit to Rs 2 lakh from the current Rs 1 lakh may make it more worthwhile for customers to complete KYC requirements needed to access the full range of wallet services. The introduction of these KYC norms in 2019 had hurt usage.

Paytm and PhonePe are among the largest non-bank digital wallets in India.

Theory Vs. Practice

In theory, the new rules can make digital wallets more useful. In practice, there may still be issues.

According to Belgavi, the KYC requirements will remain a hindrance. Why do KYC for another account when you can use UPI to transfer directly from your bank account?

Garg agreed. “While all these changes are welcome for customers, the business case for third-party prepaid instruments—stored value wallet service providers—remains challenged as stand-alone entities. It remains to be seen for how long third-party PPI products will remain relevant in the context of the UPI boom and proposed NUEs (new umbrella entities), unless they can innovate and offer additional services to their customers,” he said.

Besides, the premise that a digital wallet is now closer to a bank account isn’t complete until the former can pay interest on deposits.

“It remains to be seen whether customers will be allowed to earn interest as they do with deposits in bank accounts, or if cash withdrawals would be free. It is very important for the customer to have enough incentive to switch to e-wallets, especially for small-ticket transactions that are anyways facilitated via UPI,” said Rishi Gupta, chief executive officer at Fino Payments Bank.

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