Non-Banking Financial Companies have emerged as an alternative for banks in terms of raising funds for individuals as well as businesses. NBFCs also deploy funds to MSMEs in India. These...
It is often observed that people confuse Prepaid Wallet with Digital Wallets. However, both of them are different. As we are well aware of the digital wallets, in this blog, we are going to discuss Prepaid Wallets. Let’s start with the definition-
Defining Prepaid Wallet
Prepaid wallets are the modes of online payment instruments for the payment of goods & services procured and for online transfer of money from one bank account to another.
Prepaid wallets are slightly different from the digital wallet as in case of prepaid wallet money transfer from one bank account to merchant’s account or escrow account depending upon case to case.
Monetary values are stored in these wallets whenever the holder of these wallet transfers money into these wallets from his bank account or sometimes monetary benefits are also given on various payments which are credited to these wallets. The prepaid wallet is also known as prepaid payment instruments. They are issued in the form of:
- Smart cards,
- Online accounts
- Online wallets
- Mobile wallets, etc.
Browse through our articles on services provided at Swarit Advisors, and just let us know if we can help you with your NBFC registration or NBFC for Sale or RBI Advisory Services.
Types of Prepaid Payment Instruments
Three types of prepaid wallets can be classified as the following systems:
- CLOSED SYSTEM PAYMENT INSTRUMENTS: these payment wallets are issued by the company to the holders for only procuring goods & services from these companies itself. In simple terms money stored in the wallets of a closed system can be used only for making payment for the purchases made from these companies issuing such wallets. Money stored in these wallets can’t be withdrawn or redeem.
For Example Amazon wallet, OLA wallet
- OPEN SYSTEM PAYMENT INSTRUMENTS: money stored in these instruments can be used for making payment for any purchase and the money can also be redeemed or cash withdrawal at ATM using these instruments.
For example Debit cards, master cards, VISA cards, Rupay cards, etc
- SEMI-CLOSED PAYMENT INSTRUMENTS: the money stored in these wallets can be used for making payments to the party who also has a specific contract to accept these payment instruments. Semi-closed payment wallets do not allow the holder to withdraw cash or they can’t be redeemed.
For example Paytm, Mobikwik, Freecharge, etc.
Eligibility for Obtaining Prepaid Wallet License
These are the following entities eligible to obtain a prepaid wallet license. They have to meet the following requirement specified for them:
- Scheduled Banks & Non-banking Financial Institutions: These institutions have to obtain prior approval from Reserve Bank of India (RBI) for obtaining the license.
- New Incorporations: those newly incorporated companies that don’t have audited financial statement needs to get certified certificate from Chartered Accountant declaring current net worth and they have to prepare a provisional balance sheet.
- A company having Foreign Direct Investment/ Foreign Institutional Investment: these companies must have minimum capital as required by the guidelines of FDI policy.
- All other entities: they must have a minimum net worth of INR 25 Crore as per their latest audited balance sheet.
- The company incorporated under Companies Act: A private/public company incorporated under Companies Act 2013 or 1956 can do this business of issue of prepaid wallet only if it is authorized by its object clause in Memorandum of Association.
Minimum Capital Requirements
Banks: there is no specified minimum capital requirement for Non-Banking Financial Institution or scheduled banks. However, they shall obtain approval from RBI and shall have the authorization to issue prepaid instruments.
Any other entity: must have authorization from RBI and shall have a minimum net worth of INR 5 Crore.
FEMA authorized entities: Those entities authorized under the Foreign Exchange Management Act for the issue of foreign exchange prepaid wallets are exempted from these guidelines. Those payment instruments shall be used for limited permitted current account.
Other Conditions to be Fulfilled
Following are the other mandatory requirements to be fulfilled for obtaining a license:
- Net worth calculated shall be the total of:
1. Equity share capital
2. Preference shares capital
3. Free reserve
4. Share premium
5. CRR surplus
- Approval is obtained from the supervisory department of RBI by banks and NBFCs.
- Any existing entity who is already issuing a prepaid instrument and has obtained a license from RBI as per the past capital requirement has to increase their net worth as per these guidelines before 30th September 2020.
- Companies that are registered under the Companies Act, 2013/1956 are authorized to obtain a license from RBI.
- The object clause of Memorandum shall authorize the company to undertake such activities of the issuer of payment instruments.
Steps to obtain prepaid wallet license
Following are the procedure to be followed to get the authorization to set up the prepaid payment business for issuing prepaid wallet:
- Incorporate a company under the Companies Act, 2013 and authorize the company through its object clause to undertake such business.
- An application shall be made for the approval of the license in form A.
- The application is then processed by RBI for its completeness. It is thoroughly checked and inspected by RBI.
- Management and entity are assessed by taking the feedback of regulators, government authorities. Certain “fit & proper” criteria have to be fulfilled by an applicant
- If the application is complete and RBI is fully satisfied and applicant fulfill all the requirements, RBI grant in-principal approval which is valid for six months from the date of such grant.
- Within the period of these 6 months, an applicant has to submit a satisfactory system audit report to RBI. In principle, approval lapses automatically if an applicant fails to submit such report within 6 months
- And in cases is the application is not fir as per the requirement of RBI; the application is rejected without refund of the fees.
- After considering all the applications, audit report and after fulfilling all eligibility requirements, RBI grant the certificate of authorization for commencing the prepaid payment business and an entity can issue prepaid wallet.
- License is subject to review from time to time by RBI as is valid for 5 years from the date of issue.
Documents required for obtaining prepaid wallet license
The following are the documents required for getting the prepaid wallet license:
- Name of the applicant
- Registered office address proof
- Certificate of Incorporation
- Objects of the company
- Information about management
- Details of statutory auditors
- Audited balance sheet
- Name & address of the bankers to the company.
Benefits of Prepaid Wallets
Following are the advantages of keeping prepaid wallets:
- As the physical wallet can be lost or stolen, these prepaid wallets can never be stolen or lost as they are safe inside the mobile.
- The problem of change in case of cash payment is removed in case of payments made through online prepaid wallets.
- Even online payments such as internet banking require so many details and in some banks, the amount can be transferred after 24 hours or 12 hours of adding a beneficiary. No such problem in these wallets as money can be transferred instantly. For example: in Google Pay, one can transfer the money from one bank account to another by only adding the details of Account Number & IFSC code of the bank.
- There is no or minimal extra cost for running these wallets. There is no activation fee, monthly charges, or annual fees as in the case of IMPS in internet banking or the annual charge of debit cards.
- These wallets give incentives and rewards for referring these wallets to friends or relatives. They also give certain cash backs for making payments through these wallets.
- Loading the money in these wallets is very easy. Money can be added to these wallets through net banking, debit cards within no time.
- Autopay facilities of these wallets are a savior for those working persons who usually forget their due payment dates.