Everything you should know about e-wallets, payment banks and digital money by CS Rahul Harsh


The Demonetisation of Rs 500 and Rs 1,000 notes has resulted in serpentine queues outside banks and ATMs to exchange notes and even withdraw necessary funds for daily expenses. But there are ways to reduce your dependency on paper money. As the country is now marching towards Digital Economy and changing the way we transact on day to day basis. It is important that we know the basics about What Payment Banks actually are and how they operate. This article deals with everything you need to know about Payment Banks in India.

So, first let us try to understand e-wallets.

In general, as per the RBI, there are three kinds of e-wallets—
  1. Closed wallets
  2. Semi-closed wallets
  3. Open wallets
  1. A Closed wallet is one that a company issues to its consumers for in-house goods and services only. These instruments do not carry the advantage of cash withdrawal or redemption. Several portals such as Flipkart, Jabong and MakeMyTrip offer such closed wallets. It is basically an account where money gets credited in case of a refund due to cancellation or return.
  1. Semi-closed wallets: In the payments space, firms such as MobiKwik, PayU and Paytm offer semi-closed wallets. As per the RBI, a semi-closed wallet can be used for goods and services, including financial services, at select merchant locations or establishments that have a contract with the issuing company to accept these payment instruments. Semi-closed wallets do not permit cash withdrawal or redemption by the holder as well.
  1. Open wallets, These can be used for purchase of goods and services, including financial services such as funds transfer at merchant locations or point of sale terminals that accept cards, and also cash withdrawals at automated teller machines or business correspondents. These kind of wallets can only be issued by banks. An example of an open wallet is M-Pesa by Vodafone in partnership with ICICI Bank.
Now let us discuss what Payment Banks are:

1) What is a Payments Bank?
A Payments bank is similar to any other bank except it operates on a smaller scale. The Reserve Bank of India (RBI) introduced it in 2014 to increase the scope of financial inclusion to small savings account holders, low income households, small businesses, unorganised sector entities and poor labour force.

2) What kind of services can it provide?
A Payments bank can accept a restricted deposit of up to Rs 1 lakh per customer and will pay interest on those balances just like a savings bank account. It can enable transfers and remittances through a mobile phone. It also offers services like automatic bill payments and digital purchased through the mobile phone. It provides debit cards and ATM cards that can be used on ATM network of all banks.

However, unlike our regular banks, a Payments bank cannot provide loans and credit cards to its customers.

3) Who is eligible to start a Payments bank?

Existing non-bank Pre-paid payment instrument issuers, entities like the Non-Banking Finance Companies (NBFCs), Business Correspondents (BCs), mobile telephone companies, super-market chains, companies, real sector cooperatives, and public sector entities can apply to set up payments banks.

However, the minimum capital requirement to set up this bank is Rs 100 crore. The RBI has issued that 25% of a Payments Bank's branches must be in the unbanked rural area. As per the rule for FDI in private banks, foreign share holding will be allowed in these banks.

4) Why are Payments banks so important?

Payments Banks will magnify the potential of financial inclusion in the economy. It will empower those citizens who have only transacted in cash, to head towards formal banking. India also serves as a big remittance market and with money transfers possible through mobile phones, workers and migrant labours could simply shift to Payments Bank and send their money home. Payment banks can also play a crucial role in implementing the government’s direct benefit transfer scheme, where subsidies on healthcare, education and gas are paid directly to beneficiaries’ accounts.

What a Payment Bank Can Do:

The Following are the services a Payment Bank can provide:
  • Enable transfer and payment services through a mobile phone
  • Accept demand depositsunto Rs. 1 lakh
  • Offer services like automatic payment of bills
  • Transfer money directly to banks at nearly no cost
  • Issuedebit cards and ATM cards
  • Issue forex cards to travellers, which can again be used as debit or ATM card
What they can't do?
  • Cannot undertake lending activities such as loans
  • No timed-depositssuch as FDs etc
  • Cannot issue credit cards
Why to Go Digital?

Convenience 

The ease of conducting financial transactions is probably the biggest motivator to go digital. You will no longer need to carry wads of cash, plastic cards, or even queue up for ATM withdrawals. It’s also a safer and easier spending option when you are travelling. The benefits are enormous if you leave out the low-income group You can pay your utilities and mobile phone bills, insurance premiums, book bus, movie and flight tickets, taxi rides and more without stepping out of your home or standing in a queue. In case you are short of funds, you can send an in-app request to friends and family. On the other hand, you can send money instantly to folk who are using the service.  E-wallets work like prepaid cards, so you can use them for transactions without sharing your bank details every time. They are secure, easy to operate, and are widely accepted by most service providers and e-commerce websites. 

Discounts 

The recent waiver of service tax on card transactions up to Rs 2,000 is one of the incentives provided by the government to promote digital transactions. This has been followed by a series of cuts and freebies. It’s a good time to increase your savings if you take advantage of these. Add to these are the Cash - backs and discounts promoted by Mobile Wallets like Paytm.

Lower Risk

If stolen, it is easy to block a credit card or mobile wallet remotely, but it’s impossible to get your cash back. This is especially true while travelling, especially abroad, where loss of cash can cause great inconvenience.

No Minimum Balance & Maintenance Charges

You can use e-wallets from multiple e-payment services; you do not have to maintain a minimum balance and don’t have to pay any maintenance fees. But these wallets do not pay any interest like bank accounts.

Is it Secure?

YES, Digital wallets offer an additional layer of security while making payments since you are not sharing your bank details with online or offline store. Purchase and payment information is transmitted via an encrypted SSL connection, and may also require an “mPIN” or fingerprint.
Why are they going to be a game-changer?

This is for the first time in the history of India's banking sector that the Central Government is promoting the E-Financing in such an extensive way. This move is seen as a major step in pushing financial inclusion in the country and also helps in reducing the use of Paper Money there by decreasing various associated costs and also corruption.

Author: CS Rahul Harsh from Kolkata is an Associate Member of The ICSI, Registered Expert on Experts.compliancecalendar.in and have authored various articles on different topics of Corporate Laws and Economics. He may be reached at csrahulharsh@gmail.com 

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