`Prepaid Payment Instruments A Future Payment solution for all – In Indian Perspective

Neha Choudhary

Some time back we read in the headlines that individuals without bank account can soon withdraw money from ATMs. So we have a card without bank accounts?? Yes it is true in India. Now ATMs withdrawal without bank accounts. Where is the future lying…..???? How will any card without Bank Account help in withdrawing money?? This is possible with the advent of the prepaid cards issued by Non Bank entities under the RBI Guidelines on Prepaid Cards way back in April, 2009 and continuously modifying it to suit the Indian requirements. The said prepaid cards are becoming popular and gathering momentum recently.

Are prepaid cards the next biggest force in the cash dominant economy like India?? Mobile Banking with prepaid cards?? Are they the substitute for bank accounts, debit card and credit card?? So what are these prepaid cards??

We all know India is predominantly cash driven economy. Almost 97%[i] of the transactions are done through cash. Payment from cards such as debit and credit cards has risen during the past decade only due to growing consumer awareness and internet penetration. Further, the inroads made by the internet in far smaller towns in the country have made it possible to access the virtual payment world. This is also coupled with the young Indians who are more tech savvy and are ready to take a plunge in the virtual payment world. India has the highest youth in % terms to its population compared to any country on the globe. However, half the population is unbanked. Only 55%² of the population have deposit account with a banks. This leads to a basic need for an instrument which can genuinely fulfill their needs.

The Prepaid Payment System in India has been in existence for long primarily with the beginning of calling cards such as Virtual Calling Cards (VCCs), Voice Over IP Cards (VOIP), Long Distance Calling Cards, Prepaid Mobile Recharge Cards. Most of them were from the telecom industry to provide the customer access to telecom services as per customers’ affordability i.e. in different denominations, also to keep them within control of their budget. Corporate gift vouchers and food coupons have been in existence for long for various tax–related benefits and incentives. Gift and Discount vouchers/coupons have been in place for a long time by various branded outlets, superstores and mall across the country. Then was the birth of general purpose reloadable prepaid cards for payment through internet, mobile and Point of Sale (POS) terminal. Most of them targeting domestic customer of India who want to control their budget and risks though not requiring the Bank account.

Considering the potential for tapping the large cash payment markets which are dominated largely by rural population and the young generation who are either unbanked/under banked or are averse to such channels for the apprehension for the Banks or are not entertained by Banks due to illiteracy. The Prepaid card is the probable and possible solution to address the needs of the consumers who would like to be away from Banking channels and still availing the benefits of internet and ATMs.

EVERYTHING ABOUT PREPAID CARDS

Prepaid cards are akin to debit card except that a person pre-loads the card with desired amount. Prepaid card provides lots of benefits including but not limited to convenience, secure access to funds, and control over spending and safe payments. The awareness for prepaid cards is growing gradually. The market is currently witnessing entry of number of banks/non bank entities in issuance of various categories of prepaid cards. Prepaid card popularity and acceptability in India is low compared to other types of payment instruments like cheques, bank drafts, credit cards and debit cards. Currently, the prepaid payments instruments are at a nascent stage as a mode of payment contributing only 2% of the payment volume.

There are 3 main categories⁸ of prepaid cards:

• Closed System Payment Instruments: These are payment instruments issued by an entity facilitating the purchase of goods and service only 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 instruments are not included in the Systemic payment.

• Semi-Closed System Payment Instruments: These are payment instruments where the issuer and acceptor are different and 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 accept the payment instruments. These instruments do not permit cash withdrawal or redemption by the holder.

• Open System Payment Instruments: These are payment instruments which can be used for purchase of goods and services, including financial services like fund transfer at any card accepting merchant locations (point of sale terminals) and also permit cash withdrawals at ATMs.

 A new category – virtual cards is also emerging. These can be bought, tracked, and redeemed either online or offline, potential delivering cost and time advantages.

PAYMENT AND SETTLEMENT SYSTEMS ACT, 2007

In India, the payment and settlement systems are regulated by the Payment and Settlement Systems Act, 2007 (PSS Act) which was legislated in December 2007. The PSS Act as well as the Payment and Settlement Systems Regulations, 2008 framed there under came into effect from August 12, 2008. .

To regulate the issue and operation of the prepaid payment instruments, Reserve Bank of India had laid out guidelines for issuance of prepaid instruments by bank and non bank entities vide circular dated April 27, 2009. The instructions have been revised from time to time since then. The revised guidelines have been issued on March 28, 2014.

PREPAID MARKET-Indian Perspective

India has primarily been a cash dominant economy. Electronic payments constitute less than 5%⁹of the transactions. Large proportion does not even have a bank account. In order to reach out to this unbanked and under-banked population the RBI in its vision has proactively encouraged electronic payment systems for ushering in a less –cash society in India and to ensure payment and settlements systems in the country to be safe, efficient, interoperable, authorized, accessible, inclusive and compliant with international standards.

RBI’s ROLE

The RBI’s vision statements sets out the roadmap to ensure benefits of a structured modern payment and settlement systems, including innovative products, to reach out beyond the currently served target groups thereby facilitating greater financial inclusion. The prepaid card market in India is expected to increase from US$11.5bn in 2012 to US$ 62bn in 2017, growing at a CAGR of 40%.

The RBI also has been certainly playing a catalytic role by means of enabling policy framework and allowing non bank entities promote innovative payment technologies. The popularity of prepaid is driven by its unique and practical ability to solve almost any payment need. It democratizes electronic payments for those outside the traditional banking system and provides a transparent, cost-effective alternative to cash.

Having said that the target population for the industry is invariably the unbanked/under banked rural and urban population including the youth.., With sufficient disposable income to spend on goods and services, the above segment is an attractive target for prepaid cards. A simple comparison between two countries with a global benchmark on cash usage,  the US, with 6% of the world’s population accounting for 35% non-cash payments and India with 17.5% of the world’s population accounting only 3-5% of non cash payments, clearly highlights the opportunity and scope of growth for the industry.

According to a recent study if India is able to maintain its current growth trajectory, average household incomes will triple over the next two decades and it will become the world’s 5th-largest consumer economy by 2025, up from 12th now. It is certain that the Indian economy would gain by moving from a “Cash Reliant Economy” to a “Less cash economy” which is the vision of the Central Bank of the country; the industry expansion from a nascent stage to the growing number of customers in the segment is a potent proof of the same.

Regulator, the Reserve Bank of India (RBI) in its “Payment Systems in India –Vision 2012-15” released early this financial year reiterated its vision of “Less Cash Society” if not the “Cash less society” with its vision statement – “To proactively encourage electronic payment systems for ushering in a less-cash society in India and to ensure payment and settlement systems in the country are safe, efficient, interoperable, authorized, accessible, inclusive and compliant with international standards.”

In its vision statement RBI offered the industry participants its helping hand by promising to rationalize the guidelines for payment systems and providing aconducive framework for growth of payment systems by developing policy guidelines which are equitable. The focus would be to prescribe principles and do away with micro management. Regulation will channelize innovation and competition to meet these demands consistent with international standards and best practices.. Embracing new technology and innovation to unveil a bouquet of simple, low cost, easy to use modern payment products and services would be the mainstay to this endeavor. As indicated above, the continued year on year growth in electronic transactions is likely to encounter a huge exponential rise in volume when electronic benefit transfers and debit transfers of subsidies from the Government to the beneficiaries take place in electronic mode.

This will make the Prepaid cards as the most convenient, secure, comfortable medium with control over the payment. This is so because Indian mindset is invariably to spend within means added with a flavor of control over the spend, the prepaid cards would be the best solution. With the widespread acceptance of the prepaid cards in most common day to day uses, there will be a win-win situation for both the public at large and authorities. Financial inclusion is likely to emerge as a key driver for banks, business correspondents, Micro Finance Industries, Insurance Companies and other entities to issue prepaid instruments to the unbanked. This will also enable the efficient transfer of Government benefits to the citizens and would act as a key driver to increase transparency in the system – NREGS will also act as a trigger for the advancement of electronic payment within the under banked in the rural and urban areas.

Giving further push to financial inclusion, Delhi Government has recently launched the ‘Saral Money Prepaid card’ to provide banking services to those people who are unable to open a bank account due to lack of supporting documents know as KYC (‘Know your customer’) verification.

TRAVEL PREPAID CARDS

Travel cards have become the foremost choice of travelers crossing boundaries of their homeland as these payment cards allow the user to safely carry multi currencies on just one plastic card. They are issued by specialist money exchanging companies which allow you to preload money from your bank account on to the card fixed at the day’s exchange rate. You can top-up and check your balances online, by phone or by text messages in some cases. The large Corporate also insists their employees to carry such cards for the posting of their employees in the country or outside. This benefits both as the employee can utilize the pre loaded fund as and when required i.e. online or offline and the corporate keep the track of their spending. The travel card is expected to grow at an anticipated CAGR of 45% during the period 2012-2017.

PAYROLL  PREPAID CARDS

Payroll cards draw on the user’s wages or salary instead of a deposit account. Users access their money from an ATM or cash-back purchases in the same manner as a traditional debit card. It is a service offered by banks and employers for the low-income employees who do not have a bank account and also provide a way to escape the bank services charges. The amount that can be spent is limited to the employee’s income. More and more corporations are adopting prepaid cards in the form of payroll cards for replacing cheques, thereby streamlining their payment processes while enabling safer and secure transactions. Not only private companies but Government authorities too are gearing up to bring in prepaid cards for payroll and employee incentive payment. Government schemes such as NREGA are gradually adopting prepaid cards for payments to laborers. Payroll cards are growing at a cumulative annual growth rate of 40%.

MULTIPURPOSE PREPAID PAYMENT CARDS

Instead of opting for cards for specific purposes, individuals are more drawn towards multipurpose cards that could be used in more than one application area. These cards are readily used by customers for good purchase, cash withdrawals (if card permits), renew DTH subscriptions, bill payments, online reservations/bookings as well as in physical space. Multipurpose cards are anticipated at a strong growth annual rate of around 40% during the forecast period of 2012 -2017

REMITTANCE CARDS

One of the most crucial needs of people having their relatives abroad is met by remittance cards which allow users to remit money anywhere with ease. Some of the cards offered in the markets allow hassle free withdrawal of foreign remittance through ATMs, using money remit cards. Few cards are accepted to POS terminals through which consumers can effectively use this card for all their shopping needs. The remittance card market shall grow at nearly 23% CAGR during the five years to 2017

OTHER PREPAID CARDS

Besides the prominent categories of prepaid cards, other categories too grab a small share of total prepaid card market. To name a few, Gift cards, Meal Cards and Insurance cards

GIFT CARDS

Gift card is the rapidly growing category in India. Gift cards have become the latest retail tool to keep consumers hooked to brands. They offer convenience and safety, because customers do not have to carry cash, and they often come with a variety of offers, including discounts.

MEAL CARDS

Meal card offers the ease and convenience of providing employees with meal allowance on a card platform. It gives access to more various merchant establishments. This frees employees from the hassles of carrying extra cash, the correct change or cumbersome meal vouchers. The card can be used like any debit card or credit card at any Food & Beverage POS terminal. Meal card is a prepaid instrument authorized by RBI.

It is a user-friendly and convenient method of disbursing meal allowances to employees on a monthly basis. Not only does it distribute meal allowances seamlessly but also enables effective monitoring of expenses and management of costs.

INSURANCE CARDS

All your health care reimbursements are made into these cards providing you a hassle free experience.

GLOBAL PREPAID MARKET

Globally, prepaid payment instrument (PPI) is projected to emerge as $853bn opportunity by 2017⁵. The global prepaid market is by and large driven by Government Schemes propelled by Government, corporate plans to streamline expenditures and end consumers’ increased usage towards multiple services being availed by prepaid cards. The prepaid card market in the Brazil, Russia, India and China (BRIC) countries which includes both open system payment instrument³ and closed system payment instruments⁴, registered significant growth during the review period 2012-2017 and is expected to continue developing rapidly over the forecast period by 2017. China was the largest prepaid cards market among the BRIC countries during the review period 2012-2017, followed by Russia, India and Brazil. The Chinese Prepaid cards market valued over US $160 billion in 2011. However, Russia registered the strongest growth in prepaid card usage, as the prepaid card market registered a CAGR of 61% during the review period of 2012-2017. India is expected to be the fastest-growing market for prepaid cards over the forecast period, with the market expected to increase in value at a CAGR of c. 40%⁶. Although the penetration of prepaid cards as compared to other transactions mode such as debit cards and credit cards is still very low, the use is gradually increasing worldwide. The success of non-cash transactions depends to a large extent on consumer acceptance; Finland recorded the highest number of non-cash transactions per individual at 405 during 2011, followed by U.S on 367 during 2011⁷.Increasing consumer awareness, versatile uses and Government initiatives in almost all developing countries to encompass more and more beneficiaries under financial inclusion schemes are some of the major drivers for the growth of global prepaid card industry.

RISKS, CONCERNS AND ROADBLOCKS

The concept of PPI/payment solutions is relatively new and hence to reach out to the masses, the PPIs’ are required to invest a considerable amount on marketing to create awareness about the different innovative products to offer for its consumers, customized as per their needs and each one demand a considerable amount of expenditure. The fact still remains, the moderate margins in this industry make it a business that requires a large volume of scale to breakeven.

Usage of cash is a deep-rooted habit in India and will continue to dominate the economy in the near future.

With the physical currency the individuals/the potential customers enjoy the privacy about their holdings, and the Indian mindset values this anonymity. This becomes a challenge as the electronic currency reduces that privacy and hence the acceptability gets deterrent.

Ensuring security and tackling fraud remain key challenges in payment acquisition. The proliferation of origination channels and the risk of exposure (due to anywhere origination and acceptance) requires constant investment to ensure fraud can be detected and addressed.

Building trust among consumers that the usage of the prepaid cards is safe is one of the key drivers.

Infrastructural Challenges hinders massive growth:

Even though growing at a rapid pace, India is still significantly underpenetrated when it comes to the number of ATM and PoS terminals as compared to the other emerging economies, significantly hampering the utility of prepaid cards.

Low Awareness about embedded benefits:

One of the biggest resistances in the growth path of prepaid cards is the considerably low consumer awareness about the multiple uses and engrossed benefits that the card offers. Market education, in this context is vital for the prepaid card market growth. The miniscule penetration of 2% clearly reflects the lack of awareness amongst the masses. The lack of awareness about the types of prepaid cards available in the country is the main challenge preventing wider prepaid card usage.

Customer Acquisition:

The findings show that the process for acquiring any of e-payment instruments is cumbersome. Know Your Customer (KYC) norms act as a deterrent towards introducing many more Indians into formal financial fold as cash is immediate, better and convenient option for the masses.

SO WHY PREPAID CARDS ?

Better than Credit Cards

The main benefit of using a prepaid card is that it allows people who otherwise wouldn’t be able to get a credit card or open a bank account. These days it is impossible to get away without a credit card and what better then a substitute for it. Since there are so many people who need a credit card but can’t get one a prepaid card can come really handy. All that you have to do is walk into one of the many stores which sells these prepaid cards and buy one. This allows you to make purchases that you need a credit card for quickly and easily. The other benefit is that these prepaid cards don’t actually require you to go into debt. When you use a credit card you are actually borrowing money, and a lot of people manage to get themselves into real trouble financially because of this. A lot of experts recommend that the best thing to do is not have a credit card so that you don’t get into trouble with it. But the problem is you need the credit card to make purchases these days. The best way to avoid this problem is to use a prepaid card which allows you the benefits of credit card without the risk that come with it. Also it is far cheaper than the credit card. Whether it is true or not will depend on the balance you carry on your credit card.  Since most people carry a pretty big balance and credit card interest rates are high it can get very expensive.

Parents love it

Perhaps the most popular use of prepaid cards is to transfer funds from parents to children and particularly college students. Prepaid card is “a perfect product” for young people who don’t have a high income or substantial assets and may be away from home, either at school, travelling in the country. Part of the appeal is the technology. Youngsters today don’t see the need to go through the hassles and costs of a bank account when their mobile phone and a piece of plastic can serve most of the their needs. The attraction for parents is the ability to monitor the young person’s expenditures.

Acceptability

Prepaid cards are widely accepted means of payment.You can use prepaid cards to pay bills, which could be preferable to sending cheques through the post if you don’t have access to a debit or credit card.

Fraud protection

If you’re worried about card fraud and identity theft, a prepaid card could be a good option as they’re not linked to your bank account and are PIN-protected. You can also use prepaid cards to buy goods online, safe in the knowledge that a fraudster who managed to get hold of your prepaid card details could not run up credit at your expense.

Chargeback on prepaid cards

If you have a Prepaid card you may be able to claim back any losses from the card provider using the chargeback mechanism. So if a purchase goes awry, you are the victim of theft or fraud, or if a purchase doesn’t arrive or is not as described, contact your prepaid card provider to put forward a chargeback.

Opens the door to economic participation

There is an increasing need for electronic payments in market such as India, where more than 40% of the adult population do not have access to banking services Many Indians are forced to rely on a combination of cash and money orders. The launch of this revolutionary product will not only help bring more Indians into the financial system, but also benefit merchants especially those who currently do not have a point of sale acceptance. These prepaid cards will allow Indians to our increasing card based economy and provide an improved sense of control and empowerment.

(Author may be contacted at neha.d.choudhary@gmail.com) 

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1 RNCOS research report titled “Indian Prepaid Card Market Outlook to 2017” Link – http://www.rncos.com/Report/IM493.htm

2 RBI

3 These are payment instruments which can be used for purchase of goods and services, including financial services like fund transfer at any card accepting merchant locations (point of sale terminals) and also permit cash withdrawals at ATMs.

4 These are payment instruments issued by a person facilitating the purchase of goods and service from him/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 instruments are not classified as payment systems.

5 RNCOS research report titled “Indian Prepaid Card Market Outlook to 2017” Link – http://www.rncos.com/Report/IM493.htm

6 The Wall street Journal – The Report – Market Opportunities and Emerging Trends in the Prepaid Card Market in BRIC Countries

7 World Payment Report 2013

8 RBI

9 RNCOS research report titled “Indian Prepaid Card Market Outlook to 2017” – Link – http://www.rncos.com/Report/IM493.htm