What happens to money in e-wallets?
Electronic and in-app wallets have emerged as another payment option. Many companies, especially those in e-commerce and telecom services, offer wallets where consumers can preload money and use to pay for services. Here’s a look at the treatment of money stored in various kinds of wallets.
Wallets in the market
According to the Reserve Bank of India (RBI), there are three kinds of wallets: closed, semi-closed and open.
A closed wallet is issued by a company to a consumer for buying goods and services exclusively from that company. These instruments do not permit cash withdrawal or redemption. Companies such as Flipkart.com, Jabong.com and Makemytrip.com offer closed wallets. Mostly these function as an account where money gets credited in case of a refund due to cancellation or return of a product or service.
In the payments space, companies such as Oxigen Services India Pvt. Ltd, Citrus Payment Solutions Pvt. Ltd and Paytm offer semi-closed wallets. According to RBI, a semi-closed wallet can be used to buy goods and services, including financial services, at clearly identified merchant locations or establishments, which have a specific contract with the issuer to accept the payment instruments. Semi-closed wallets also do not permit cash withdrawal or redemption by the holder.
An example of semi-closed wallet is Citrus Payment Solutions Pvt. Ltd’s Citrus Cash app. This wallet can be used not only at multiplexes such as PVR and Inox but also to recharge direct-to-home services such as Sun Direct.
Then there are open wallets, which 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 withdrawal at automated teller machines or business correspondents. These kinds of wallets can only be issued by banks.
An example of open wallet is M-pesa by Vodafone India Ltd in partnership with ICICI Bank Ltd. Vodafone also offers M-pesa as a semi-closed wallet.
Money in the wallet
Treatment of money stored in these payment options depends on the type of wallet.
In closed wallets, the associated merchant allows you to transact only on one website. “The money sits as a liability on the books of the company and there is no interest earned on it. When a customer makes a purchase, the money moves to revenue in the books,” said Supam Maheshwari, chief executive officer, Firstcry.com, an online babycare products portal. Firstcry.com has a closed wallet where the refund money is parked in case of a cancellation. Flipkart.com didn’t reply to our queries.
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 Jabong credit,” said Praveen Sinha, founder and managing director, Jabong.com. If money comes into the wallet due to a refund, it earns a minuscule interest, but the interest will be triggered only after a minimum amount is reached, he added.
With closed wallets, companies don’t need an 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-bank entities. As per regulations, we need to keep the money in an escrow account,” said Jitendra Gupta, founder and managing director, Citrus Payment Solutions.
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. RBI has made an exemption for us 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. Depending on the mutually accepted conditions between the payment company and the bank, an interest is paid to the payment company. This interest is in the range of 4-6%. None of the wallets pay interest to customers,” said Gupta.
Some payment service providers, however, said 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,” said Upasana Taku, co-founder, MobiKwik Systems Pvt. Ltd, a mobile wallet service provider.
Merchants don’t get any benefit from the money lying in wallets. “We don’t get any monetary benefit from the payment companies when a consumer uses her wallet at our outlet. However, companies such as Paytm give offers such as Rs.50 cash back on transaction to consumers,” said Vinamra Pandiya, chief operating officer at TastyKhana.in, an online food ordering portal.
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,” said Sunil Kulkarni, deputy managing director, Oxigen Services, which is planning to launch an open wallet with Federal Bank Ltd in January.
According to RBI’s guidelines, for schemes that are operated by banks, the outstanding balance has to be part of the “net demand and time liabilities” for the purpose of maintenance of reserve requirements. This position will be calculated on the basis of the balances appearing in the books of the bank as on the date of reporting.
“Depending on the agreement between the bank and the payment company, an interest is shared and it can vary,” said Kulkarni.
A.P. Hota, managing director and chief executive officer, National Payments Corporation of India agrees but says the interest will not be much.
Companies offer electronic wallets as a convenience for customers. So, the next time you use a wallet, keep in mind the terms that will apply to your money parked there.