The RBI’s monetary policy on digital payments

An increased limit will help payments banks cater to a wider set of use cases (like larger instalments, property taxes, insurance payments and salary accounts) that were earlier out of their reach due to the lower limit on deposits. This will, in turn, increase digital transactions and customer stickiness as users would be able to better utilise with their payments bank accounts.

• Increased balances will also renew the popularity of payments banks among new customers and the target audience. Small and medium enterprises, traders, etc., may now be interested in dealing with payments banks.
• Increased balances will lead to higher interest income, provided the spread between interest paid on deposits and earned on Government securities and bank deposits does not decrease.

• The increase in account limit may be too little, too late, given the thin margins and limited revenue streams for payments banks.
• Further, with the change in PPI regulations – increase in limits, mandatory interoperability, cash withdrawal for full-KYC PPIs – the gap between payments banks and PPIs has been significantly bridged.

• By becoming direct members of the CPSs, non-bank payment service operators (PSOs) will help reduce settlement risk and dependency on traditional banks. As non-bank PSOs may need to maintain settlement accounts with the RBI, universal banks will need less liquidity to be kept with the RBI, thereby freeing up cash resources to be deployed/invested in businesses.
• Since non-bank PSOs will not be able to access the RBI’s intra-day liquidity (IDL) facility, they may need to avail the assistance of banks for the same.
• Allowing non-bank PSOs to participate in RTGS and NEFT will help in distributing transactions across different payment players and ensure that the CPSs are not overly dependent on a limited set of players.

• Participation in RTGS and NEFT (which were earlier the sole domain of banks) will lead to decreased customer stickiness for banks as users will have new avenues to execute the transactions. Banks will need to counter this by developing intuitive interfaces. 
• Traditional banks will lose an additional revenue stream of float income, especially what they would have received through the non-bank PSO transactions of CPSs on the bank’s platform. 
• Even with the enhanced limit of INR 2 lakh in full-KYC PPIs, it needs to be seen if a use case is at all possible for PPIs when it comes to RTGS (which is only allowed for transactions of INR 2 lakh and above).

Interoperability

• Interoperability of PPIs will narrow the gap to a significant extent between non-bank PPIs and bank-issued debit/prepaid cards as customers can now use their PPI balance across multiple merchants and send money directly to anyone’s wallet or bank account.
• The RBI has enabled PPIs to compete with traditional banks for micro savings in rural India by mandating universal acceptance and interoperability.
• Enabling interoperability will greatly benefit those who are concerned about payment security. Not exposing bank accounts for transactions and using PPIs for payments limit risks and bring down the exposure of bank savings in case of fraud. Interoperability enabled through UPI (for wallets) and approved card networks (for cards) for full-KYC PPIs may lead to less maintenance and more innovation in creating a financial ecosystem with a common backbone supporting various players and processes.
• Increased interoperability will lead to rising incomes for PPI issuers owing to the interchange earned on transactions. This income will, however, be countered by the expense for cash withdrawal transactions where the interchange must be paid by the issuer. We may see a capping of free cash withdrawals.
• Interoperability will boost wallet companies by promoting optimal utilisation of payments instruments. It will aid financial inclusion by incentivising migration to full-KYC PPIs and adoption of digital payments instruments across the country. It shall also provide easy access to payments instruments such as UPI and cards to the unbanked and underbanked population.

Increase in account limit

• The increased limit of outstanding balance from INR 1 lakh to INR 2 lakh will enable PPI issuers to gain customer confidence. Due to the availability of a higher limit in the outstanding balance, many customers may use the instrument/wallet of the PPI issuers as their primary mode of payment. This will lead to a growth in transaction value and transaction fees for PPI issuers.

Cash withdrawal for full-KYC PPIs

• Cash withdrawal using full-KYC PPIs of non-bank PPI issuers will give a boost to the acquirers (ATMs and PoS machines) as the income from reverse interchange is expected to increase.
• The business of ancillary services such as KYC providers will also increase due to the compulsory full-KYC mandate for cash withdrawals.
• PPIs will compete with banks for market share in smaller urban and rural areas, given the versatility of PPIs post the RBI announcement.
• The said measure shall also create a level-playing field for bank and non-bank PPI issuers. It will also provide flexibility to non-bank PPI holders since it reduces their need to carry cash. The scope of this change is unrestricted in the acceptance of such a service. Essentially, all PPIs will have to allow full-KYC customers to withdraw cash. This is true for any PPI player and will help in increasing competition by enhancing the acceptability and usage of PPIs.

• V-CIP was initially only permitted for individual customers. Entities such as proprietorship firms and beneficial owners in legal entities will get a boost from V-CIP and can conduct complete digital onboarding. Additionally, the entire process will be paperless and shall eliminate the long and cumbersome procedures of submitting and storing physical documents.
• Periodic updation of KYC details through V-CIP was a challenging process and initially not permitted. The relaxations prescribed in the periodic updation of KYC through V-CIP make it a faster and cheaper process. Customers can now simply provide a self-declaration through their registered email address or online/mobile banking, etc., in case there are no changes in the KYC information.
• The amendments in KYC regulations also permit the conversion of limited KYC accounts opened on the basis of Aadhaar e-KYC authentication in non-face-to-face mode to fully KYC-compliant accounts through V-CIP. This measure shall considerably reduce the cost of customer onboarding and acquisition.

• Regulated entities will be mandated to revamp their internal systems and infrastructure, thus making it cumbersome for them and increasing their operational and compliance hurdles. They will be required to comply with the minimum standards prescribed, formulate the required board-approved policies and adhere to other procedural aspects. 
• In the past, certain players sought identification information from the CKYCR portal and considered it as completion of the KYC process. The allowability of seeking identification information from the CKYCR portal for undertaking V-CIP indicates that players are expected to verify customer details post gathering information from the CKYCR portal.