Sucheta Dalal :E-wallets useful but can be risky too
Sucheta Dalal

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E-wallets useful, but can be risky, too  

Jul 24, 2006

On July 14, the Reserve Bank of India (RBI) asked a leading media organisation which had launched India’s first electronic wallet to “desist” from offering the service. More interestingly, it has found an incredibly smooth way to ban e-wallets until it gets the regulatory and statutory teeth to supervise their activities by laying down clear rules and guidelines, and enforcing Know Your Customer (KYC) requirements.


A month ago, this column had expressed concern about the launch of electronic wallets or e-purses that threatened to operate in a completely unregulated market, with sketchy to non-existent KYC norms. Had the first e-wallet been allowed to take-off without any objection, dozens of similar services would have soon sprung up, creating an exciting new market for Net-based services and spending opportunities.


The e-wallet allowed anyone with a valid e-mail ID to send and receive money from just about anybody, or to settle bills through money stored online in safe systems. All it needed was registration on the e-purse provider’s website by filling out a simple form. This created an electronic account or e-purse to which you transferred some money from your bank account. The e-purse could then be used to make purchases on the Net, or simply transfer money to ‘anyone, anywhere’ in the world.


While the money showed up as an electronic credit in the e-purse, it was actually credited into the current account that the service provider had with a clearing and settlement bank. The transactions would be conducted through Real Time Gross Settlement (RTGS) systems to ensure immediate fund transfers. E-wallets, stored value payment cards and mobile phone companies offering payment facilities are all part of a burgeoning global market that is bound to become a hit in India.


Potentially, e-wallets offer low-risk e-commerce facilities for the purchase of gifts, flowers, tickets to movies, sports events, concerts and purchase of books and subscriptions on-line. This is the good part. On the flip side, the ability to open accounts and transfer money in an unregulated environment could encourage Net-based gambling and other dubious activities. This becomes doubly dangerous in times of increased security risk and creates worries about terrorist funding. If e-wallet providers are unregulated, dubious operators will easily manage to avoid audit trails and electronic finger-prints.


• E-wallets allow anyone with a valid e-mail ID to send and receive money

• Or to settle bills, all through money stored on-line in safe systems

• However, e-wallets need regulation, which is on the anvil in India


India’s first e-wallet was actually positioned as an instrument to transfer money. Its transactions should logically have been under RBI supervision; however, until Parliament passes the Payment Systems Bill (which has already been introduced), the banking regulator has no power over private service providers. This is a dangerous situation that must be rectified at the earliest. Meanwhile, if the RBI had stood by and done nothing, dozens of unregulated service providers would have sprung up and it would have been impossible to turn the clock back after millions of transactions had already been executed.


So here is what it did. The central bank decreed that since money stored in e-wallets is ultimately deposited in current accounts of the service provider, the action of collecting money and keeping it under their control amounts to “the acceptance of deposit that can be withdrawn on demand.” This, it said, was in violation of the RBI provisions governing registration of NBFCs and acceptance of deposits and asked the company offering e-wallets to desist from doing so.      

It did not stop at that. The e-wallet could not possibly work without the involvement of banks in clearing and settlement of transactions, or offering their current account facilities to deposit credits made into e-purses. Since banks are tightly regulated by the RBI, it could easily “advice” them “not to associate themselves with such schemes” and effectively draw the curtain on any e-wallet service operating outside its regulatory ambit.


This does not mean that e-wallets are always bad or risky. In fact, the first e-wallet, offered by a media group with deep pockets, is bound to be relaunched. But in the absence of a statutory framework to regulate e-purse operations, ordinary folk would be lured to a facility that depended entirely on the service providers’ honesty and willingness to redress grievances. The RBI will now have the time and space to put in place a proper regulatory framework that allows several players, including banks, to offer e-wallets with proper KYC rules and adequate supervision.

-- Sucheta Dalal