Prepaid payment instruments (PPIs), such as mobile wallets and prepaid cards, have emerged as a critical enabler of cashless transactions, particularly in a country like India, where digital financial inclusion is a key policy goal. PPIs offer convenience, speed, and security for users by allowing transactions without directly linking to a traditional bank account. The Unified Payments Interface (UPI), on the other hand, has become the backbone of India’s digital payments ecosystem, facilitating seamless and instant fund transfers.

However, until now, PPI users faced significant challenges due to the lack of interoperability with UPI. Transactions from PPIs could only be carried out through the mobile applications of their respective issuers, restricting users from accessing widely popular third-party UPI platforms like Google Pay or PhonePe. This created friction in the payment process, forcing users to juggle multiple apps and limiting the utility of their digital wallets. Such barriers not only reduced convenience but also hindered the broader adoption of digital payments.

In a significant move to bridge these two financial innovations, the RBI has announced revisions, allowing full-KYC PPIs to access UPI through third-party applications. This revision aims to remove these bottlenecks by enabling greater interoperability and convenience for PPI users, enhancing their ability to transact across platforms and driving further digital adoption.

Revised instructions

On-boarding for UPI: PPI issuers can now enable holders of only their full-KYC PPIs to make UPI payments by linking the PPIs to their UPI handle. While PPI issuers, acting as PSPs, still cannot onboard customers of other banks or PPIs, the revision now allows interoperability for full-KYC PPI wallets.

Third-party UPI access: PPI issuers may facilitate the discovery of their full-KYC PPIs on third-party UPI applications, such as Google Pay or PhonePe. These third-party platforms, in turn, can enable linking of such PPIs to their PSP handles. Authentication for such transactions will now rely on UPI credentials, simplifying the process for users.

These changes significantly enhance the utility and flexibility of PPIs, eliminating the bottlenecks of single-app reliance while fostering seamless integration into the broader UPI ecosystem.

Who benefits?

The revised provisions benefit multiple stakeholders by fostering greater convenience and accessibility for PPI holders, who can now use third-party UPI apps for seamless payments and a broader network of merchants and individuals. Merchants gain an expanded customer base and streamlined payment processes, while third-party UPI application providers see increased app usage and opportunities to monetise through value-added services. PPI issuers benefit from expanded reach and operational efficiency by leveraging third-party UPI platforms. Overall, the move enhances financial inclusion, enabling consumers who rely on PPIs to participate in the UPI ecosystem fully.

The RBI’s decision to enable full-KYC PPIs to access UPI through third-party applications marks a critical milestone in India’s digital payments journey. By breaking down barriers between PPIs and UPIs, the regulator has enhanced interop and catalysed the growth of a more inclusive digital payment ecosystem. This change empowers PPI holders, benefits merchants, and encourages innovation among third-party UPI providers.

As India continues to transition towards a less-cash economy, the RBI’s move underscores the importance of creating a seamless, secure, and user-friendly digital payments framework that caters to the diverse needs of its population.

Valiachi is an Assistant Professor at the School of Management Studies, Sathyabama Institute of Science and Technology, and Nagarajan is a research scholar at Alagappa University. Views are personal

Published on January 2, 2025