News Excerpt:

The Reserve Bank of India (RBI) has proposed to allow individuals to make payments from prepaid payment instruments (PPIs) like digital wallets using UPI through any third party app.

Current practice:

• UPI payments from bank accounts can be made by linking a bank account through the UPI App of the bank or using any third-party UPI application. 
• However, the same facility is not available for PPIs. 
• PPIs can currently be used to make UPI transactions only by using the application provided by the PPI issuer. 

What are Prepaid Payment Instruments?

• PPIs are instruments that facilitate purchase of goods and services, conduct of financial services, enable remittance facilities, etc., against the value stored therein.
  • They include wallets, cards, and vouchers, usable for purchase of goods and services, and fund transfers.
  • They offer convenience and security, promoting digital transactions and financial inclusion.
• RBI has introduced PPIs through powers conferred under Payment and Settlement Systems Act, 2007.
• PPIs can be issued by banks and non-banks after approval from the RBI.
• PPIs operate independently of a user’s bank account. 
• When you use PPIs such as wallets or cards to make a payment, the money is deducted from the associated prepaid account. 
• Till now, wallets could only be used to make UPI payments by using applications provided by the same PPI issuer (like PhonePe or PayTM)
• PPIs are integral to modern digital economies, facilitating efficient, accessible monetary exchanges without physical cash.

What are Closed System PPIs?

• Closed System PPIs are issued by an entity for facilitating the purchase of goods and services from that entity only. 
• These instruments cannot be used for payment or settlement for third party services or for cash withdrawals. 
• The issuance or operation of such instruments is not classified as a payment system requiring approval / authorisation by RBI and are, therefore, not regulated or supervised by RBI.
• New proposed changes will also be not applicable on closed system PPIs.

What are the proposed RBI rules for PPIs using UPIs?

• To provide more flexibility to PPI holders, RBI has proposed to permit linking of PPIs through third-party UPI applications.
• This will enable the PPI holders to make UPI payments like bank account holders.
• This will allow all Full KYC PPI Wallets to become inter-operable just like how bank accounts and RuPay credit cards operate where such instruments can be linked to any UPI App.

How will it benefit the users?

• The RBI's decision to enable PPI linking through third-party UPI apps means users can now integrate their prepaid wallets or cards with these apps. 
• Customers will be able to use any of their UPI apps to access any of their wallets, even if the wallet and the UPI app belong to different companies.
• It will ensure smooth transactions directly from their PPIs without the prerequisite of transferring funds to a bank account first. 
• This strategic move aims to boost the flexibility and efficiency of digital payments, simplifying transactions for consumers and expanding the range of services accessible through their preferred payment methods.