Prepaid Payment Instruments (PPIs)

Why in news?

Recently, National Payments Corporation of India (NPCI) has introduced interchange fees of up to 1.1% on merchant UPI transactions done using prepaid payment instruments.

What are Prepaid Payment Instruments (PPIs)?

• PPI - Prepaid payment instruments are payment instruments that facilitate purchase of goods and services against the value stored on such instruments.
• PPIs can only be used in Indian rupees.
• PPIs can be in the form of mobile wallets, physical smart cards, secure tokens, vouchers or any other method that allows access to prepaid funds.

• Issuing PPI - Banks and Non-Bank Finance Companies (NBFC), who comply with the eligibility criteria, would be permitted issue prepaid payment instruments.
• Only banks which have been permitted to provide Mobile Banking Transactions by the RBI shall be permitted to launch mobile based prepaid payment instruments (mobile wallets & mobile accounts).
• Other entities would be permitted to issue only closed system prepaid payment instruments and semi-closed system prepaid payment instruments.

Mobile Prepaid Instruments - The prepaid talk time issued by mobile service providers.

What is PPI interoperability?

• Interoperability – It is the technical compatibility that enables a payment system to be used in conjunction with other payment systems.
• PPI interoperability through UPI - After the RBI has mandated interoperability among different PPI issuers, they tied up with National Payments Corporation of India (NPCI) for issuing
  • Interoperable RuPay PPI cards or
  • Creating interoperable wallets on UPI rails
• The user can now send/receive money to any other wallet user. Similarly, a merchant with any UPI QR code can now accept payments from any PPI issuer or mobile wallet.
• Advantages - PPI on UPI will speed up the growth of merchant transactions in rural areas and further deepen digital financial inclusion.
• It will enable universal acceptance of wallets across all UPI QR codes and devices, thus increasing the salience or relevance of wallets.

What are the recent changes made by NPCI?

• The interchange rates vary according to merchant category codes, in the range of 0.5% to 1.1%.
• The charges are applicable if the transaction is more than Rs. 2,000.
• Charges are applicable only if a person have accepted or consented to the transactions made using PPI Wallet (No charge for merchant accepting UPI payments from a customer’s bank account).
• It also include charges for UPI-wallet-loading that will be paid by wallet issuers to remitter banks or the bank accounts from which the amount is being debited.

What will be the impact of the change?

• On merchants - Smaller merchants and shopkeepers are unlikely to be impacted as it is applicable only on payments of over Rs. 2,000.
• However, MDR (merchant discount rate) is applicable on wallets on UPI in certain cases and this move may lead to higher MDRs imposed on merchants.
• This may subsequently impact merchants’ ability to absorb the higher costs.
• Currently, MDR for bank-to-bank UPI transactions is zero.
• On customers - Officially there are no charges to be paid by the customer. However, merchants may pass on the additional burden to customers by way of price increases or some other means

A merchant discount rate, or MDR, is a rate charged to a merchant for the payment processing of debit and credit card transactions.

Quick facts

References

1. The Hindu| PPI Interoperability
2. The Hindu Business Line|PPI
3. RBI | Guidelines on PPI
4. Arthapedia | PPI