Introduction

Pre-paid payment instruments are stored-value electronic payment instruments that can be used for the purchase of goods and services from third-party merchants. The issuer of a pre-paid payment instrument typically has back-end arrangements with a network of merchants under which, at merchant locations, pre-paid payment instruments may be used to pay for goods and services.

The Reserve Bank of India (RBI) requires any entity issuing pre-paid payment instruments (banking and non-banking) to obtain a licence under the Payment and Settlement Systems Act 2007. Further, the RBI has put in place a regulatory framework governing:

  • the eligibility criteria for issuers;
  • how to use pre-paid payment instruments;
  • know your customer guidelines; and
  • financial limits on pre-paid payment instrument transactions (the Pre-paid Payment Instrument Guidelines).

As of November 3 2016, there were 48 authorised non-bank issuers of pre-paid payment instruments in India. Over the past few years, and more so recently, after the demonetisation of high-value currency notes in November 2016, there has been a significant increase in electronic payment transactions and use of pre-paid payment instruments in India.(1)

In a press release dated September 2 2016, the RBI stated that given the rapid changes in technology and products in the payment solutions space, it was in the process of reviewing the regulatory framework governing pre-paid payment instruments and the Pre-paid Payment Instrument Guidelines. The RBI indicated that it is likely to issue a set of revised guidelines by the end of December 2016.(2) The RBI also stated that it will not grant any fresh licences under the Payment and Settlement Systems Act for the issue of pre-paid payment instruments until the end of February 2017. The RBI clarified that this temporary suspension will not apply to applications made by new small finance banks and payment banks.

The press release also provides that until February 28 2017, changes to the shareholding or ownership of any existing licensed pre-paid payment instrument issuers will not be permitted without RBI approval (except where such change in shareholding is a result of a court order, merger, amalgamation or on account of a regulator exigency).(3)

Increased regulatory oversight

There has been tremendous growth over the last year in the payment products and solutions space in India – in particular, in terms of technology, product innovation, number of users and new market players. This seems to have triggered the need for the RBI to review the existing regulatory framework and revise the regulations to keep pace with market changes. It is expected the RBI will look to revise the operational aspects of pre-paid payment instruments and address the changing role of pre-paid payment instrument issuers in the new operating environment.

Further, the RBI is expected to create a policy in connection with M&A activity in this space. Several payment solutions providers and e-commerce players have considered acquiring pre-paid payment instrument licensed entities to strengthen their customer base and product portfolio. At present, the RBI does not regulate the acquisition of one pre-paid payment instrument licensed entity by another (or by a third party), but it is highly likely that the revised set of regulations will specifically increase regulatory oversight over acquisitions that result in a change in control or ownership of a licensed pre-paid payment instrument entity.

Comment

As the role of payment solutions and products in India will only increase, the revised regulations expected from the RBI are critical in determining the growth of this industry.

The RBI is also encouraging pre-paid payment instrument issuers to offer payment products and solutions to unbanked populations as part of its wider strategy and policy on financial inclusion. Innovative technology and the ability to meet this financial inclusion objective is likely to be a key factor in the RBI's grant of new pre-paid payment instrument licences.

For further information please contact Shilpa Mankar Ahluwalia or Suswagata Roy at Amarchand & Mangaldas & Suresh A Shroff & Co by telephone (+91 11 4159 0700) or email (shilpa.mankar@amarchand.com or suswagata.roy@amsshardul.com).

Endnotes

(1) As per the RBI's statement on electronic payment transactions in India for November 2016, in the network of eight non-bank issuers of pre-paid payment instruments in India, there was approximately 59 million transactions using pre-paid payment instruments for an aggregate value of approximately Rs13.2 billion.

(2) Statement on Developmental and Regulatory Policies Reserve Bank of India, October 4 2016.

(3) Temporary suspension in grant of Authorisations for Pre-paid Payment Instrument issuance, September 2 2016.

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