Ben Trust and Sophie Papaevripides cast light on the rules that apply, and which may apply, in what may prove to be one of the most exciting markets for mobile payments
For the payments sector, 2015 will bring continued innovation, growth and associated challenges and, in particular, mobile payments have been widely tipped as the likely hot topic for 2015. Mobile payments are becoming increasingly popular across the globe as consumers use phones and tablets to complete purchases and make banking transactions. Although welcomed for its speed and convenience by western countries, it is likely that the greatest benefits will be, and will continue to be felt, by those in less developed countries, such as India and countries in Africa.
In India access to banking services is limited in rural areas, with an estimated 41% of households not having a bank account. Reasons commonly cited for this statistic include citizens living too far from the nearest financial services institution and the high cost of using these services. However, following on from their success in Africa, mobile payment systems are beginning to provide India's unbanked population with banking and cash transfer services. Mobile phone networks are extensive in India, with more than 873 million mobile connections across the country and over 350 million in rural areas alone.
There are a number of different mobile payment products currently available in India, which are subject to different regulatory regimes. These products, and the relevant regulations, are considered below.
Prepaid payment instruments (PPIs) known as mobile wallets allow consumers to purchase electronic credit with local cash payments. The credit on the mobile wallets can then be used to purchase a range of goods and services, or can be transferred to another user.
PPIs are regulated by the Reserve Bank of India (the RBI) under the Payment and Settlement Systems Act 2007 (the PSSA) and the Issuance and Operation of Pre-paid Payment Instruments in India – Consolidated Revised Policy Guidelines dated 28 March 2014 (the PPI Guidelines). Authorisation is required to commence or operate a payment system, such as mobile wallets, under the PSSA.
Under the PPI Guidelines, only banks are allowed to issue 'open' PPIs. These are instruments that can be used for purchases or transfers at any business which accepts credit cards or for withdrawals at ATMs. Non-bank entities are permitted to issue only 'closed' and 'semi-closed' PPIs. Closed PPIs permit only the purchase of goods and services from the issuing entity. Semi-closed PPIs can be used only with specified businesses which have a contract with the PPI issuer.
Unfortunately, this means that mobile wallets in the form of 'open' PPIs can be used only as a general form of payment by consumers with bank accounts.
This contrasts to some African countries, where mobile wallets issued by telecom providers are used widely for payment transactions. Since the M-PESA was launched in Kenya in 2007 by Safaricom (Kenya's leading mobile phone operator), Kenya has become the world leader in mobile payment transactions (in proportion to its GDP), with $24 billion worth of transactions made in 2013. M-PESA has enabled smaller businesses to reach wider markets due to its accessibility, low cost, convenience and security.
Direct Operator Billing
Direct Operator Billing is a means for customers to purchase mobile applications, ringtones and similar products through their mobile phones. The payment is then either deducted from their credit balance, if the customer is using a pay-as-you-go plan, or added to their monthly phone bill, if the customer has a monthly contract.
A third-party integrator is usually responsible for coordinating the provision of mobile content to the customers, the charging of customers via the appropriate method and the subsequent distribution of the proceeds among the telecom provider and content creator.
This model allows customers to make electronic payments without the use of a bank account. The PSSA does not require an agent (the third-party integrator) acting for the person to whom the payment is due to be authorised.
Mobile banking services can be provided by any bank which is appropriately regulated, has a physical presence in India and offers a service allowing customers to use any branch of the bank. The relevant regulations are the 2011 Mobile Banking Transactions in India – Operative Guidelines for Banks (the Mobile Banking Guidelines) and other related guidelines, including the 1998 Guidelines on Risks and Controls in Computers and Telecommunications. Mobile banking systems must be authorised by the RBI under the PSSA.
The Mobile Banking Guidelines do not allow cross-border transactions to take place via mobile banking systems. They also require that the banking system should not be tied to any particular mobile network.
The RBI's future plans
A new proposal for an electronic payments regime was announced by the RBI in November 2014. The proposal is for 'payment banks' to be introduced, which would offer a number of banking services including payments and transfers through branches and ATMs, internet banking, ATM and debit cards, pre-paid instruments such as mobile wallets, cross-border transfers, bill payments and deposits. A 'payment bank' will not be permitted to offer lending services.
The aim of this proposal is to allow India's unbanked access to banking services. Mobile phone operators are likely to be the principal businesses to make use of this new regime, as it will allow them to offer full-service mobile banking services to customers without bank accounts.
However, operators will need to give careful consideration to the regulations with which they will need to comply. Under the Guidelines for Licensing of Payment Banks, payment banks must ring fence their payment activities from all other operations being undertaken by setting up a new group company. The new group company must have paid-up capital of at least INR 1,000,000,000 (ie over £10 million). The aggregate foreign investment permitted to be made in a payment bank will be limited to 74%, in line with the equivalent shareholding limit in private sector banks.
Mobile payments technology is becoming an increasingly important means of providing the unbanked population of India, and other developing countries, with access to financial services for the first time.
To encourage growth, the RBI will need to ensure that the developing regulatory framework takes account of the concerns of companies in this sector and balances regulation and innovation so that they can exist in harmony. For example, the restrictions on foreign investments will mean that many overseas mobile phone operators will be discouraged from investing in the Indian mobile payments market. The limited number of activities which payment banks can undertake may also affect the commercial viability of offering these services. It remains to be seen whether these issues will need to be reviewed when future regulations are drafted.
The potential for growth is clear. However, it is apparent from the above that careful consideration is needed to ensure the right product is marketed in India (or any other developing country) and that the infrastructure is, or can be made, available to successfully execute it.
Ben Trust is a Partner in the Dispute Resolution Group and head of Payments at Nabarro LLP
Sophie Papaevripides is an Associate in the Dispute Resolution Group at Nabarro LLP