Digital wallets staring at a major crisis with India's strict KYC rules

Digital wallet companies may be staring at the end of the road as the Reserve Bank of India's February-end deadline approaches for them to meet full know-your-customer norms for all their users.
 
The total number of customers who have submitted their KYC details is in 'low single-digit' percentage, according to industry executives.
 
"If these norms are implemented in full force, the entire industry, which handled around 12,000-crore worth of transactions in December, will be facing a major crisis," said the chief executive of a payments company, speaking on condition of anonymity since his firm is in talks with RBI to relax the requirements.
 
RBI in October introduced tougher KYC norms for digital wallets, or prepaid payments instruments, making the revised guidelines mandatory for even semi-closed wallets in which users cannot load more than 10,000 a month. Wallet providers not complying with the requirements within 12 months would face severe operational restrictions, it warned.
 
While industry body Payments Council of India has requested RBI to look into the issues plaguing the industry, there is hardly any reason to believe the regulator might reconsider imposition of its full KYC requirement, say industry experts. On Tuesday, RBI met with industry representatives and heard out their grievances related to the revised PPI guidelines.
 
Executives at multiple payment companies said while the digital wallet industry has been growing strongly, RBI wants them to increase use cases such as offline payments and peer-to-peer transactions. The industry is predominantly driven by domestic remittances business, which has the largest share of digital wallet transactions in India. RBI data show that of 288 million mobile wallet transactions recorded in Dec, only 99 million were towards payments for goods and services.
 
This has been the trend ever since digital wallets disrupted remittances happening through banks. Among the two major uses of mobile wallets are taxi payments, which was pioneered by Paytm and Uber in India, and instant refunds for e-commerce transactions, which was being driven in a major way by Amazon Pay.
 
"RBI wants more offline merchant payments to be driven by the industry. Hence, they are opening up interoperability (among digital wallets) but they will allow this only when our customer base is fully verified to reduce chances of fraud," said another top executive with a payments company who is privy to discussions with the regulator.
 
This, however, is easier said than done. Obtaining full KYC is almost like getting a bank account and requires physical verification and submission of government-approved documents.
 
"Interoperability offers huge scope but is also a huge responsibility since money transfers between different wallets need to be supported by sufficient usage and prepaid balance for all of them, else there might be a crisis," said a senior private sector banker. "That is why RBI is mandating full KYC and higher capital requirements."
 
The biggest safety aspect around digital wallets is that companies are mandated to deposit user balances in an escrow account that lies protected with banks. So in the event of a digital wallet company closing down, this money can be returned to consumers' bank accounts or used for payments against goods and services.
 
Facing challenges in the standalone digital wallet model, many companies have started taking early steps to diversify into other businesses in the payments space.
 
Mobikwik has been pushing hard on its payment gateway business and recently launched a product line in the corporate gifts and payments space to increase use cases. Citrus, which was sold to Naspers-backed PayU, has started prioritising its merchant payments business. The country's biggest digital payments company, Paytm, is now a payments bank.
 
"We can already see players like PayMate, Atom, and Citrus surrendering their wallet licences. I expect this trend to continue and companies will look for a scope in other related businesses," said the banker quoted above.
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