Pre-paid Payment Instruments (PPIs) are payment instruments that facilitate transactions like purchase of goods and services, including funds transfer, against the value stored on such instruments. The value stored on PPIs represents the value paid by the holders by cash through a bank account etc. There are large variety of PPIs including smart cards, magnetic stripe cards, internet accounts, internet wallets or digital wallets, mobile accounts, mobile wallets, paper vouchers and any such instrument which can be used to access the pre-paid amount. PPI sector is regulated by the RBI and as per the RBI regulations, there are three types of PPIs:
(i) Closed system payment instruments
(ii) Semi-closed system payment instruments and
(iii) Open system payment instruments (multipurpose cards).
Closed System Payment Instruments: These are payment instruments issued by a person/entity for facilitating the purchase of goods and services from him/it. These instruments do not permit cash withdrawal or redemption. Being very simple type, these instruments cannot be used for payments and settlement for third party services and hence these PPI are not classified as payment systems. The implication is that RBI approval is not required for issuing the closed system payment instruments. In the real world, closed system payment instruments include bonus point like wallets issued by web portals for online purchases /shopping for their customers. Mobile prepaid cards also come under this category.
Semi-Closed System Payment Instruments: These are payment instruments can be used for purchase of goods and services, including financial services at a group of clearly identified merchant locations/ establishments. These PPIs can be used for third party purchase settlements and the specific contract between the issuer and the merchant is needed for the use of these PPIs. Still, the semi-closed system payment instruments cannot be used for cash withdrawal or redemption by the holder. For higher payments, KYC norms are required. Example of semi closed system payments is Paytm wallets.
Open System Payment Instruments (multipurpose cards): These are payment instruments 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. An important feature of these PPIs that they can be used for limited cash transfer and cash withdrawals. During the time of demonetization, the RBI raised cash withdrawal limit of these PPIs to Rs 20000. These PPIs can be issued only by banks. Example for open system payment instrument is Vodafone mPesa.
Only banks can issue open system payment instruments. On the other hand, Closed and Semi Closed System Instruments can be issued by NBFC and other entities who avails a license from the RBI.