Digital / Electronic Wallet (e-wallet)
“Wallet“ in the conventional sense of the term, refers to a purse or folding case for safely holding money or personal information such as identity card. Digital or Electronic Wallet (e-wallet) refers to an electronic, internet based payment system which stores financial value as well as personal identity related information. Such electronic payment systems enable a customer to pay online for the goods and services, including transferring funds to others, by using an integrated hardware and software system. Hardware can be a mobile or computer. Communication between the buyer and the seller may happen over the internet or blue tooth or on mobile network. Thus, e-wallet is nothing but an online money account which does not require the use of a physical card for undertaking transactions/remittances. Unlike savings bank accounts, they, at present, do not offer any interest for keeping money in it, but rewards the holders through cash-backs for making purchases through it. Unlike credit cards, e-wallets are pre-loaded money. Hence, it resembles more to a debit card.
E-wallet is a component of the payment system. The word “payment system” is defined in India to mean a system that enables payment to be effected between a payer and a beneficiary, involving clearing(wherein the payment service provider acts as a counterparty between the buyer and seller by calculating the obligations between them and guaranteeing its settlement), payment (act of paying or transacting) or settlement service (the final act of changing the records of ownership of the asset transacted, either after netting all the cross obligations or on gross terms) or all of them. A “payment system” as understood in India, can include the systems enabling credit card operations, debit card operations, smart card operations, money transfer operations or such similar operations.
In India, e-wallet comes under the legally recognized term - “Pre-paid Payment Instruments”. Pre-paid Payment Instruments (PPIs) are defined in the RBI Guidelines issued under the Payment and Settlements Systems Act, 2005 as payment instruments that facilitate purchase of goods and services, including funds transfer, against the value stored on such instruments. The value stored on such instruments represents the value paid for by the holders by cash, by debit to a bank account, or by credit card. The pre-paid instruments can be issued as smart cards, magnetic stripe cards, internet accounts, internet wallets, mobile accounts, mobile wallets, paper vouchers and any such instrument which can be used to access the pre-paid amount. Unlike other pre-paid payment instruments, e-wallet is only an internet based online account, sans the existence of a physical card. Mobile wallet is an e-wallet where the mobile phone gets doubled up as an electronic wallet. Being a pre-paid payment instrument, digital / e-wallets are also subject to the regulations stipulated by RBI for such instruments.
With the emergence of e-commerce and online purchases, the form required for the payment system also required to change, forcing it to go digital. An indicative progress path is shown in the graph. Thus we migrated from cash payments (which required us to carry our leather /cloth wallet loaded with cash at all times that made it theft prone) to plastic card payments (debit / credit card based system which avoided the use of carrying liquid cash and gave us the freedom to withdraw money / make payments or transfers or remittances from all locations across the globe where the card could be machine-read) and now to contactless payments made over digital channels, either from dematerialized cards held on digital wallets or in the cloud, or from new digital payment mechanisms. Since the scenario is still evolving a wide variety of names are used inter-changingly for such transactions such as e-money, digital money, micro-payments etc. The terminology as well as the technology for operation of the wallet is still evolving.
Under mobile or electronic wallet, the individual pre-loads cash in the e-wallet and use it to make payments or transfers. Loading of money is done either electronically using a computer / mobile by debiting from a credit card or bank account or physically by handing over cash at a local merchant (point of sale [POS]) or at the ATM counters. What is required is an internet connection and a mobile /computer. With the technology in place, mobile based operations through e-wallets have become a mode for financial inclusion.
There are charges for use of mobile / e-wallet, which include registration fees and cash loading charges (above a limit) towards payment companies / service providers. These charges are at times higher than those for internet banking. However, the main advantage with the e-wallet is that while shopping online, the customer stands to benefit from the concessions/ offers from the payment companies in the form of cash-backs etc.
Benefits of e-wallets
Use of debit cards requires access to designated point of sales and ATM counters. However, in case of e-wallets, money moves along with the holder and he can access it from an instrument held in his hand – his mobile or computer, giving a lot of flexibility for the account holder. Further e-wallets avoid the dangers associated with card thefts.
For those who stay far away from the brick and mortar ATM / bank branches, as in the case of rural areas, money is still accessible to them at the click of a button. In case of any requirement for physical cash, they just need to go to the nearby banking correspondent or a local merchant who can double up like an ATM machine.
Thus, e-wallet comes handy for those who do not have a bank account, net banking or credit card, especially those who may otherwise be in-eligible for receiving them. At present, services are not generally designed to handle big payments.
The use of e-wallets substantially reduces the cost of doing banking transactions. Through e-wallets small and micro payments covering a large number of people (eg. entry fee of Rs. 10/- to a monument, application fee such as the fees of Rs. 10/- under the Right to Information Act, 2005, utility bill payments etc.) can be cost effectively carried out. Effecting such transactions through the normal/traditional route would be burdensome for the banks, requiring more people to be employed at their counters.
The use of e-wallet has been very successful in Kenya through M-Pesa transactions, where millions of people are estimated to be using this service to transfer small amounts of money to other people and merchants via their mobiles. In Kenya, this has been facilitated by the support of large number of agents and business correspondents.
Use of e-wallets particularly facilitates e-commerce as customers are not required to fill out order forms at each site when they purchase an item as the information has already been stored and is automatically updated and entered in the order fields across merchant sites.
Use of e-wallets helps in moving away from a cash based economy. In the process, all the transactions get accounted in the economy, which has the effect of reducing the size of the parallel economy.
Types of e-wallets permitted in India
As per the Reserve Bank of India, there are three kinds of e-wallets in India: closed, semi-closed and open.
- Closed e-wallets: These are wallets issued by an entity for facilitating the purchase of goods and services from 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 wallets are not classified as payment systems. Hence, RBI approval is not required for issuing them.
Eg. Cab services, e-commerce and mobile companies create e-wallets for making payments towards purchase of products from them /for usage of their services. They provide cash backs for payments made through this channel. This is one way of ensuring loyalty of their customers.
- Semi-Closed e-wallets: These are wallets 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 them. These wallets do not permit cash withdrawal or redemption by the holder.
Wallets for amounts upto Rs.10,000/- can be created under this category by accepting minimum details of the customer, provided the amount outstanding at any point of time does not exceed Rs. 10,000/- and the total value of reloads during any given month also does not exceed Rs. 10,000/-. Amount upto Rs.50,000/- can be created in wallets by accepting any ‘officially valid document’ which is compliant with anti-money laundering rules. Such wallets are non-reloadable in nature.
Amount upto Rs.1,00,000/- can be created by with full Know Your Client norms (KYC) and can be reloaded.
Eg. AirTel Money, which is used for making payments for a range of services like money transfer from Airtel Money to another bank account or any other Airtel Money Wallet or paying select utility bills.
- Open e-wallets: These are wallets 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 (POS) terminals] and also permit cash withdrawal at ATMs / Banking Correspondents (BCs). However, cash withdrawal at POS is permitted only upto a limit of Rs.1000/- per day subject to the same conditions as applicable hitherto to debit cards (for cash withdrawal at POS).
Eg. M-Pesa is an open wallet run by Vodafone in partnership with ICICI Bank. Axis Bank’s e-Wallet Card’, can used for making payments on sites that accept Visa cards, with a minimum limit of Rs 10, and a maximum limit of Rs 50,000, and a validity of 48 hours.
Who can issue wallets in India?
Only those companies incorporated in India and have a minimum paid-up capital of Rs. 500 lakh and minimum positive net worth of Rs. 100 lakh at all the times are permitted to issue wallets in India.
In India, Banks who comply with the eligibility criteria are permitted to issue all categories of wallets. However, only those banks which have been permitted to provide Mobile Banking Transactions by the RBI are permitted to launch mobile based wallets. Non-Banking Financial Companies (NBFCs) and other persons are permitted to issue only closed and semi-closed wallets.
Persons authorized under Foreign Exchange Management Act (FEMA) can issue foreign exchange wallets and where such persons issue such instruments as participants of payment systems authorised by the Reserve Bank of India, they are exempt from the purview of strict guidelines related to pre-paid instruments. However, the use of such wallets is limited to permissible current account transactions and subject to the prescribed limits under the Foreign Exchange Management (Current Account Transactions) Rules, 2000. Otherwise, use of wallets for cross border transactions is not permitted.
RBI has recently given permission to certain entities to open payments banks and small finance banks. The basic idea is to further the process of financial inclusion. These banks in the coming years are expected to make a remarkable change in online transactions by popularizing mobile payments through e-wallets in rural areas.
Government of India has adopted the stand that promotion of payments through cards and digital means will be instrumental in reducing tax avoidance, migration of Government payments and collections to cashless mode, discourage transactions in cash by providing access to financial payment services to the citizens to conduct transactions through card/ digital means and shifting payment ecosystem from cash dominated to non-cash/less cash payments. On 24 February 2016 Government suggested certain proposals for the promotion of payments through digital means. The essential features of the proposals for promotion of payments through cards and digital means include steps for withdrawal of surcharge/service charge/ convenience fee on card/ digital payments currently imposed by various Government Departments/organisations and introduction of appropriate acceptance infrastructure in Government Departments/ organisations; rationalization of Merchant Discount Rate (MDR) on card transactions and a differentiated MDR framework for some key transaction segments; mandating payments beyond a prescribed threshold only in card/ digital mode; introduction of formulae linked acceptance infrastructure by the stakeholders of certain card products; rationalisation of telecom service charges for digital financial transactions; promotion of mobile banking; and creation of necessary assurance mechanisms for quick resolution of fraudulent transactions and review the payments ecosystem in the country.
- Reserve Bank of India has issued Certificates of Authorisation under the Payment and Settlement Systems Act, 2007 for setting up and operating Payment System in India, including e-wallets. The names of entities which have received such certificates for operating e-wallets and the names of the wallets run by them are given on the website of RBI.
- See OCW- Middel East Technical University Open Course Material for understanding the various payment instruments used across the globe
- RBI Master Circular on Prepaid Payment Instruments dated 1 July 2015 (updated as on 9 July 2015: for further updates on the matter, latest versions of the master circulars may be seen)
- Reserve Bank of India (October 28.,2015) Certificates of Authorisation issued by the Reserve Bank of India under the Payment and Settlement Systems Act, 2007 for Setting up and Operating Payment System in India