Wallets on the wane as Unified Payments Interface and regulations take over

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It’s been termed as a David versus Goliath fight ever since it started. With the entry of prepaid wallets in the payments ecosystem, the Reserve Bank of India (RBI) ushered in a new era where small transactions were no longer dependent on heavy paperwork or two-factor authentication. Then came demonetisation and Indian payments wallets turned billion-dollar entities riding on the wave of digital transactions. But, all that seems to have come to a halt.


On October 2017, the central bank issued a master circular directing prepaid instruments issuers (PPIs) to make sure their customers comply with full know-your-customer (KYC) norms by February 2018. But wallets seem to be floundering to get even a fraction of their users to do their KYCs. While giants such as Paytm have tried to offer incentives, the industry as a whole hasn’t managed to reach a double-digit percentage of KYC-compliant users even in the second week of March, insiders say.


“The figure of KYC-compliant wallets rests at around 8-9 per cent by all estimates. Even the RBI was told about this in a representation in February but there’s no response from the central bank,” said a payments industry professional who didn’t wish to be named on account of being a part of the deliberations. As a result of the KYC norms, people cannot load more than Rs 10,000 a month in their wallets and are barred from transferring the amount to a bank account or sending money to others.


“The challenge is that there’s a temporary glitch in digital payments in the country,” said Navin Surya, chairman, Payments Council of India. Surya said digital payments grew about 30 per cent and wallets 100 per cent last year and this was sustainable only if norms supported non-banking entities such as PPIs.


“With interoperability and KYC coming upfront, they are putting a pressure on the industry for at least a year,” he said.


This has resulted in a steep fall in PPI transactions and some estimates suggest the business is down almost 50 per cent.


Surya provided estimates of the business volumes and said there was almost Rs 100 billion of remittances a month, Rs 20 billion of e-wallet transactions and another Rs 20 billion of meal coupons business a month. After the norms came into effect, the hit was about Rs 8 billion a month on the PPI business. 


Meanwhile, a representation made to the RBI last week by payments industry representatives called for interoperability to be started among wallets soon. The RBI had promised interoperability to arrive by April 1 for wallets and later for all bank and non-banking entities in the space. The catch, however, is that the central bank wants all participants to be fully KYC-compliant.


“Everyone has to follow the same rules especially if you want to be a part of the interoperable platforms. We are hearing that interoperability for mobile wallets is also going to come soon — perhaps by the next financial year. But wallets need to be full KYC to participate,” said Ritesh Pai, chief digital officer, YES Bank. He said private banks have already pivoted their own wallet products in the light of the new rules. With 150 million transactions a month, Unified Payments Interface (UPI) is emerging as the preferred mode of payments and it’s the banks which are cashing in because prepaid wallets can’t provide UPI as standalone entities without partnering with a bank.


“Even if interoperability comes and PPIs are able to do UPI in partnership with banks, there’s no business use case yet which can make money for these wallet companies unless RBI allows UPI for cross-border transfers, which is unlikely to happen,” said a payments industry consultant.


He said PPIs were now a “sunset business” which needed to morph into either full-fledged banking or services such as wealth management in order to survive. And the morphing has begun with Paytm launching its wealth management services recently.


Amol Kulkarni from CUTS International blamed disproportionate rules in the industry for the upheaval.


“The KYC regulations are affecting non-bank entities and in a broader perspective, it is a case of disproportionate regulations as it is mandated without any link to the amount deposited in the wallets,” he said.


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