Prepaid payment instruments allow users to store funds that can be used for transactions and include items like smart cards, magnetic strip cards, internet accounts, and mobile wallets. They provide convenience compared to cash and allow for e-payments. The Reserve Bank of India regulates prepaid payment instruments in India and classifies them into closed systems only usable with one company, semi-closed systems usable at identified merchants, and open systems usable anywhere with cash withdrawal. Non-bank companies can only issue closed and semi-closed instruments while banks can issue all types and interest is earned on funds depending on the system and agreements. As mobile phone usage exceeds bank accounts in India, prepaid payment instruments and mobile wallets are becoming increasingly important for digital

1. PREPAID PAYMENT INSTRUMENT: A prepaid payment instrument may be defined as those instruments which permit
transactions for value stored in them. Prepaid Payment Instruments are payment instruments where value for use is
stored in advance, such as, smart cards, magnetic strip cards, internet accounts, internet wallets, mobile accounts,
mobile wallets, paper vouchers, etc. meal vouchers, loyalty cards are also species of these instruments.
Prepaid payment instruments enhance convenience as a mode of payment in lieu of cash. Also, this facilitates
e-payment for goods/services purchased/availed through internet/ mobile. The maximum loss on account of fraudulent
use of the card is limited to balance available on the card.
As said earlier, the RBI is the regulatory body responsible for issue and supervision of domestic prepaid
payment instruments in India. Under section 18 of the, RBI is empowered to lay down the policy relating to the
regulation of the issue and operation of prepaid instruments in India.
What Is PPI
Utility Bill payments
Booking Tickets
Online Shopping
Recharge
Medicine Purchase
Dinning

2. To provide a framework for the regulation and supervision of persons operating payment systems involved in
the issuance of Prepaid Payment Instruments (PPIs) in the country and to ensure development of this
segment of the payment and settlement systems in a prudent and customer friendly manner.
Classifications
1. Closed system payment instruments
2. Semi-closed system payment instruments and
3. Open system payment instruments
In Detail
1. Closed System Payment Instruments: These are payment instruments issued by a person for facilitating
the purchase of goods and services from him/it. These instruments do not permit cash withdrawal or
redemption. As these instruments do not facilitate payments and settlement for third party services, issue
and operation of such instruments are not classified as payment systems. Companies such as Flipkart,
Jabong and Makemytrip offer closed wallets. Mostly these function as an account where money gets
credited in case of a refund due to cancellation or return of a product or service.
Purpose

3. CONT…….
2. Semi-closed system payment instruments: These are payment instruments which can be used for purchase of goods
and services, including financial services at a group of clearly identified merchant locations/ establishments which
have a specific contract with the issuer to accept the payment instruments. These instruments do not permit cash
withdrawal or redemption by the holder. Oxigen Services India Pvt Ltd, Citrus Payment Solutions Pvt Ltd and Paytm
offer semi-closed wallets. This wallet can be used not only at multiplexes such as PVR and Inox but also to recharge
direct-to-home services.

4. CONT…….
3. Open System Payment Instruments: These are payment instruments which can be used for purchase of goods and
services, including financial services like funds transfer at any card accepting merchant locations (point of sale
terminals) and also permit cash withdrawal at ATMs / BCs. These kinds of wallets can only be issued by banks. M-
pesa by Vodafone India Ltd in partnership with ICICI Bank Ltd. Vodafone also offers M-pesa as a semi-closed
wallet.
Eligibility: Banks who comply with the eligibility criteria would be permitted to issue all categories of prepaid
payment instruments. However, only those banks which have been permitted to provide Mobile Banking Transactions by
the Reserve Bank of India shall be permitted to launch mobile based prepaid payment instruments (mobile wallets &
mobile accounts). Non-Banking Financial Companies (NBFCs) and other persons would be permitted to issue only closed
and semi-closed system payment instruments, including mobile phone based prepaid payment instruments.

5. Benefits
 Easy to get started.
 Ease of use without having to enter your debit/credit card details for every online transaction.
 For some sites there is no minimum amount and you can deposit a small amount.
 You can pass on the benefits of your e-wallet to your friends and family as well.
 There is no chance of a decline of payment since e-wallet is a prepaid account.
Here is a quick grid for understanding
Closed Wallet Semi-Closed Wallet Open Wallet
Where the Money goes?
To the Company’s account To Escrow account To Bank account
What happens to the money?
The company earns
interest on it till the
customer uses the money
to make a purchase.
There is either no interest
earned or interest is
earned based on the
average balance
calculation approved by
RBI.
It earns interest, which is
shared between the
payment service provider
and the bank depending
on the agreement.

6. CLOSED SEMI-CLOSED OPEN

7. Money in the wallet
Treatment of money stored in these payment options depends on the type of wallet.
 In closed wallets, the associated merchant allows you to transact only on one website. “The money sits as a liability
on the books of the company and there is no interest earned on it. When a customer makes a purchase, the money
moves to revenue in the books,”.
 Some companies earn a small interest on the money lying in closed wallets. “There are two ways in which customers
can get a refund—they can either get the money back, or it can be put in credit,”. If money comes into the wallet
due to a refund, it earns a minuscule interest, but the interest will be triggered only after a minimum amount is
reached.
 With closed wallets, companies don’t need an RBI approval to launch such accounts.
 In case of semi-closed wallets, the money is managed by payment companies. These wallets are handled by non-
bank entities. As per regulations, we need to keep the money in an escrow account.
 Does this money earn interest? Yes, but how much depends on the agreement between the bank and the payment
company.
 Some payment service providers, however, said the interest earned on money in semi-closed wallets can be higher.
It can earn more than 6% on the average balance and in the range of fixed deposit rates.

8.  Merchants don’t get any benefit from the money lying in wallets. They don’t get any monetary benefit from the
payment companies when a consumer uses his/her wallet at nearer outlet. However, companies such as Paytm give
offers such as Rs.50 cash back on transaction to consumers.
 In case of open wallets, the banks manage the money. The bank is the legal entity while the infrastructure is taken
care of by the payment service providers.
 According to RBI’s guidelines, for schemes that are operated by banks, the outstanding balance has to be part of the
“net demand and time liabilities” for the purpose of maintenance of reserve requirements. This position will be
calculated on the basis of the balances appearing in the books of the bank as on the date of reporting.
“Depending on the agreement between the bank and the payment company, an interest is shared and it can vary,”.
Companies offer electronic wallets as a convenience for customers. So, the next time you use a wallet, keep in mind the
terms that will apply to your money parked there.
CONT…….

9. Conclusion
In India, where people have more mobile phones than bank
accounts, mobile wallets are the future of cash. This also
means the physical wallet is one step closer to becoming
redundant. So brace for a cashless world as we accelerate
towards becoming a digital nation.