RBI bats for full interoperability for pre-paid instruments

By Shilpa Mankar Ahluwalia and Himanshu Malhotra, Shardul Amarchand Mangaldas & Co

The Reserve Bank of India (RBI) on 19 May 2021 issued a notification prescribing guidelines for mandatory interoperability for full KYC pre-paid payment instruments (PPIs). The notification is in line with the announcement by the RBI on 7 April 2021, through the Statement on Development and Regulatory Policies, of a policy move towards full interoperability.

Shilpa Mankar Ahluwalia, Partner, Shardul Amarchand Mangaldas & Co
Shilpa Mankar Ahluwalia
Shardul Amarchand Mangaldas & Co

This move represents a shift from the earlier position of the RBI under the Master Directions on Issuance and Operation of Pre-Paid Instruments of 11 October 2017 and the Pre-paid Payment Instruments (PPI) – Guidelines for Interoperability of 16 October 2018 (2018 interoperability guidelines) which spoke of interoperability but left the decision to PPI issuers whether they should implement and bring into operation full interoperability. Mandating full interoperability improves customer choices, reduces systemic risk and also introduces a certain standardisation of services across all PPIs.

Key provisions

The notification sets out three key changes:

(a) mandatory interoperability for full KYC PPIs;

(b) enhancement of maximum limits for full KYC PPIs; and

(c) permission for cash withdrawal using full KYC PPIs issued by non-banking entities.

The notification observes that no substantial progress had been made in increasing interoperability between PPIs pursuant to the 2018 interoperability guidelines, and therefore in the interests of increasing ease of access to digital payments, it is important to introduce interoperability for full KYC PPIs on a mandatory basis.

Consistent with the 2018 interoperability guidelines, PPI issuers must allow interoperability for full KYC customers through authorised card networks for PPIs issued in the form of cards, and the United Payment Interface network (UPI), in the case of electronic wallets. PPI issuers must enable interoperability on full KYC PPIs issued by them by 31 March 2022, and this is also mandatory on the acceptance side.

While interoperability for gift PPIs is optional, PPIs issued for mass transit systems, such as metro rail services, are exempted from the interoperability requirements.

Himanshu Malhotra, Associate, Shardul Amarchand Mangaldas & Co
Himanshu Malhotra
Shardul Amarchand Mangaldas & Co


The notification read with the earlier circular of the RBI dated 22 October 2020 on Digital Payment Transactions – Streamlining QR Code Infrastructure (October 2020 circular), which prohibits authorised payment system operators from issuing new proprietary QR codes, that is, non-interoperable QR codes, and permitting only interoperable QR codes such as UPI QR and Bharat QR, demonstrates the increased focus of the RBI on ensuring greater interoperability in digital payments.

Following the implementation of interoperability, it will be possible for customers of a particular PPI issuer to transfer funds to customers of another PPI issuer by leveraging the UPI network. As opposed to the existing peer-to-peer transfer facility enabled for customers through payment service provider banks who are members of the UPI, interoperable peer-to-peer transfers for PPI customers will be enabled through UPI for the PPI wallets of customers without the requirement to link a bank account with the UPI ID to receive UPI payments. Customers will now be able to link their PPI wallets to UPI IDs and directly receive interoperable peer-to-peer transfers through UPI in their PPI wallets.

The RBI has also introduced one other important policy change via the Statement on Development and Regulatory Policies dated 7 April 2021, enabling non-bank payment entities such as PPI issuers and card networks to participate in centralised payment systems such as real time gross settlements and national electronic fund transfers. This feature, together with the permission around cash withdrawals through full KYC PPIs issued by non-banks, subject to limits of ₹2000 (US$27) per transaction and ₹10,000 per month, allows for a greater level playing field between non-banks and banks in the payments space. The move by the RBI to allow non-banks to offer quasi-banking features linked to their small value payments products will certainly push the usage and penetration of digital payments, and allow for a new wave of innovation in digital payment products.

Shilpa Mankar Ahluwalia is a partner and Himanshu Malhotra is an associate at Shardul Amarchand Mangaldas & Co

Shardul Amarchand Mangaldas & Co

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