Everything You Should Know About E-Wallets

CS Rahul Harsh , Last updated: 16 November 2015  

As we all know E-COMMERCE Is the Latest Trend and without E-wallet services , ECommerce is Incomplete. In this article we will discuss EVERYTHING YOU SHLOULD KNOW ABOUT E-WALLETS.

As per Reserve Bank of India (RBI)'s directive these digital wallets can soon apply to become ‘payment banks’, financial institutions aimed at “furthering financial inclusion”. Several companies, especially those in the e-commerce and telecommunication services sector, have come out with digital wallets to help consumers. All you need to do is preload money and you can use it to pay for services or transfer it to other accounts.

As per the directive, telecom operators, supermarket chains, electronic wallets and prepaid instrument players can open these payment banks to accept deposits, offer basic saving facilities and provide remittance services for millions of people who are currently out of the digital financial system.

E-wallets have been around for quite some time and their popularity has been rising at an exponential rate. So, it was just a matter of time that the RBI issued guidelines for licensing of companies that can venture into the space. Several major players are now applying for licences to set up payment banks.

What are payment banks?

As per World Bank estimates, only 35% of the Indian population has accounts with financial institutions. Which is increasing at a fast rate after the success of Jan Dhan Yojana by the Current Indian Government. To service the remaining population, the RBI came out with two new banking categories called small finance banks and payment banks.

Payment banks are meant for simple banking transactions. These institutions are neither allowed to lend or accept term deposits nor can customers keep more than Rs. 1 lakh in such accounts. Such payment banks can issue debit cards and offer services like remittances and payments of utility bills , recharges, ticket booking. They can also distribute simple financial products like mutual funds and insurance. Individuals can use the payment bank account to make daily or monthly cash transactions either through debit cards or through mobiles. This can also help guard against debit card fraud since one can keep a smaller balance in accounts.

So, let us try to understand e-wallets. In general, as per the RBI, there are three kinds of e-wallets—closed, semi-closed and open.

1. A Closed wallet is one that a company issues to its consumers for in-house goods and services only. These instruments do not carry the advantage of cash withdrawal or redemption. Several portals such as Flipkart, Jabong and MakeMyTrip offer such closed wallets. It is basically an account where money gets credited in case of a refund due to cancellation or return.

2.  Semi-closed wallets In the payments space, firms such as MobiKwik, PayU and Paytm offer semi-closed wallets. As per the RBI, a semi-closed wallet can be used for goods and services, including financial services, at select merchant locations or establishments that have a contract with the issuing company to accept these payment instruments. Semi-closed wallets do not permit cash withdrawal or redemption by the holder as well. For example, customers can use Airtel Money, a digital wallet initiative by the telecom major, for an extensive range of services across merchants to pay for remote transactions like instant money transfers from an Airtel Money wallet to any bank account or another Airtel Money wallet across the country, booking railway and movie tickets and paying for utility bills, among others.

3. Finally, Open wallets, These can be used for purchase of goods and services, including financial services such as funds transfer at merchant locations or point of sale terminals that accept cards, and also cash withdrawals at automated teller machines or business correspondents. These kind of wallets can only be issued by banks.

An example of an open wallet is M-Pesa by Vodafone in partnership with ICICI Bank. Vodafone also offers M-Pesa as a semi-closed wallet.

How far will they reach?

To understand the e-wallet revolution, let me take you to Kenya, a country in eastern Africa, where M-Pesa was developed. Considered the most mature mobile payment system in the world at present, M-Pesa has spread quickly and has become the most successful mobile phone-based financial service in the developing world since its launch in March 2007.

In Kenya, over 25% of its $78-billion gross national product flows through M-Pesa transactions. Around one-third of Kenya’s population uses the service to transfer small amounts of money to other people and merchants via their mobiles. In India, Vodafone has been piloting M-Pesa along with ICICI Bank. M-Pesa provides branchless banking services and allows Vodafone subscribers to deposit and withdraw cash from their accounts by exchanging real cash for electronic cash at the Vodafone network of retail stores (at brick-and-mortar money transfer agencies).

In India, debit and ATM cards are primarily used to withdraw money. RBI data for the year 2013 indicated that the use of debit cards at merchant outlets was less than 5% in terms of value transacted. Even to pay utility bills, the majority still withdraws cash rather than paying through net banking. People still want to hold and pay cash.

In contrast, in Kenya, mobile-based digital payment has become the de facto mode of payment. The user exchanges his/her cash for electronic value at retail stores run by an agent, just like they do for recharging their phone’s airtime. M-Pesa has over 60,000 agents in its network, where its users can deposit and withdraw cash easily. In India, on the other hand, mobile money providers can’t offer cash-out transactions. Even with the new ‘payment bank’ directive of the RBI, it’s not clear if a user can withdraw cash anywhere or if it is limited to only the platforms that gave them their cards.

Another thing that is not clear is how payment banks will be integrated or work alongside Jan Dhan Yojana, a financial inclusion scheme that the central government launched in mid-2014.

Some companies earn a small interest on the money lying in closed wallets. There are two ways in which customers can get a refund: they can either get the money back or it can be put in the portal’s credit

With closed wallets, companies don’t need RBI approval to launch such accounts. In case of semi-closed wallets, the money is managed by payment companies. These wallets are handled by non-banking entities. As per regulations, we need to keep the money in an escrow account.

So, Does this money earn interest?

Yes, but how much depends on the agreement between the bank and the payment company. We have to maintain the escrow account with a bank. The RBI has made an exemption for the payment banks on earning interest on the funds lying in the account. A formula is used to arrive at the average balance on which one can earn interest, say, on the average balance of 52 weeks. This interest is in the range of 4-6%. None of the wallets pay interest to customers.

Some payment service providers, however, say the interest earned on money in semi-closed wallets can be higher. It can earn more than 6% on the average balance and in the range of fixed deposit rates. Merchants don’t get any benefit from the money lying in wallets.

However, companies such as Paytm give offers such as Rs 50 cashback on transactions to consumers. In case of open wallets, the banks manage the money. The bank is the legal entity, while the infrastructure is taken care of by the payment service provider.

So, With the release of final guidelines for licensing of small finance banks and payments banks, the RBI has reinforced its commitment to financial inclusion. This is a step in the right direction to bring India’s unbanked and underserved segments into the formal finance structure, with banking penetration expected to expand substantially beyond the traditional segments.

Do you actually need it?

If you use Internet banking or online payment through a credit or debit card, you need not switch to mobile money transfer services like Airtel Money or Vodafone M-Pesa. As mobile money transfers are costlier than, let’s say, National Electronic Funds Transfer (NEFT) or Immediate Payment Service (IMPS). This facility will be useful for those who don’t have a bank account, net banking or credit card and those who don’t use online card payments.

These payment formats are gaining popularity, as they work on Unstructured Supplementary Service Data (USSD) technology. In this technology, you can communicate with the service provider’s computer similar to online chatting. You need to choose the options step by step and this can be without the Internet service being activated.

However, if you have data services then you can simply download the apps and transact easily.

In 2013, RBI governor Raghuram Rajan had said, “The key to cheap and universal payments and remittances will be if we can find a safe way to allow funds to be freely transferred between bank accounts and mobile wallets, as well as cashed out of mobile wallets through a much larger and ubiquitous network of business correspondents.”

The transactions volume via mobile wallets has had more than a three-fold growth in the past two years, which has clocked over Rs 2,700 crore so far, as per Crisil.


* There are several charges involved in mobile money and these charges are generally higher than in banking transactions. For example, the registration fee for Airtel Money is Rs. 50. The cash-loading charges are nil (up to Rs. 3,000), Rs. 40 (Rs 3,001 to Rs. 4,000) and Rs. 50 (above Rs. 4,000).

* Similarly, the charges for money transfer between Airtel Money and a bank account are nil (Rs. 10-50), Rs. 15 (Rs. 51-R1,000), Rs. 35 (Rs. 1,001–R3,000) and Rs. 50 (Rs. 3,001–Rs. 5,000).

* These services are not designed to handle big amounts. Airtel Money’s ‘super’ and ‘express’ accounts, for instance, have the limit of a transaction of Rs. 10,000 per day.

* However, while shopping online, you stand to get several offers through these platforms. For instance, you can get 37% off on shopping for Rs. 1,500 from Myntra using Airtel Money. A mobile recharge on Airtel through Airtel Money can give you more talktime.

Benefits of E-Wallet Payments

The e-wallet makes online shopping easier because it fills in the fields in an online order form automatically, saving you the trouble of doing it yourself. This is also a great advantage for online merchants, because customers sometimes abandon online purchases if they feel that the order form is too confusing or frustrating. The e-wallet can overcome this phenomenon by automating the completion process.

a. Increased Speed and Convenience: E-payment is very convenient compared to traditional payment methods such as cash or check. Since you can pay for goods or services online at any time of day or night, from any part of the world, you don't have to spend time queuing in banks or merchant offices waiting for your turn to transact. Nor do you have to wait for a check to clear the bank so you can access the funds. E-payment also eliminates the security risks that come with handling cash money.  

b. Increased Sales: As Internet banking and shopping become widespread, the number of people making cash payments is decreasing. In a 2014 survey, Bankrate established that more than 75 percent of those surveyed carry less than $50 a day, meaning electronic alternatives are increasingly becoming the preferred payment option. As such, e-payment enables businesses to make sales to the customers who choose to pay electronically and gain a competitive advantage over those that only accept traditional methods.

c. Reduced Transaction Costs: While there are no additional charges for making a cash payment, trips to the store typically cost money, and checks also need postage.  On the other hand, there are usually no fees -- or very small ones -- to swipe your card or pay online. In the long run, e-payment could save both individuals and businesses hundreds to thousands of dollars in transaction fees.

What are the risks?

a. Security Concerns: Although stringent measures such as symmetric encryption are in place to make e-payment safe and secure, it is still vulnerable to hacking. Fraudsters, for instance, use phishing attacks to trick unsuspecting users into providing the log-in details of their e-wallets, which they capture and use to access the victims' personal and financial information.  

b. Disputed Transactions: If someone uses your electronic money without your authorization, you would identify the unfamiliar charge and file a claim with your bank, online payment processor or credit card company. Without sufficient information about the person who performed the transaction, though, it can be difficult to win the claim and receive a refund. 

c. Increased Business Costs: E-payment systems come with an increased need to protect sensitive financial information stored in a business's computer systems from unauthorized access. Enterprises with in-house e-payment systems must incur additional costs in procuring, installing and maintaining sophisticated payment-security technologies.

But What’s In It For Merchants?

While the eWallet poses a clear benefit for consumers, it’s not without perks for merchants, as well. In many ways, each value-added feature that benefits the consumer mirrors a benefit that the merchant can reap from accepting eWallets in-store or online:

a. An avenue for customer engagement. eWallets offer merchants a direct channel for engaging with customers through loyalty systems. By creating incentives, merchants give customers positive associations with their stores. Showing how much you value your customers will make customers invested in you and will encourage traffic.

b. A conversion-boosting checkout flow. Inefficient checkout processes often lead customers to abandon their shopping carts before making a purchase. You can increase conversions by allowing customers to pay with eWallets that streamline the checkout process, making it quick and easy to pay.

c. A competitive edge in the marketplace. Although consumers have embraced eWallet technology, retailers have been slow to do so. When you integrate the eWallet option and respond to consumer demand, you distinguish yourself from your competitors and give consumers another reason to shop at your store.

The eWallet not only gives the consumer control over payments, but empowers the retailer to attract customers through mutually beneficial incentives.

Going with the current Economic Scenario Ewallet comes fresh air. It not only helps in attaining the object of Financial Inclusion but also helps in reducing the use of Paper Money there by decreasing various associated costs and also corruption. yes

- CS Rahul Harsh, An Associate Member of The ICSI and A Commerce Graduate from Kolkata, Currently Employed as an Assistant Company Secretary with Aanchal Ispat Limited.

Email : csrahulharsh@gmail.com 

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