In an effort to improve the security of digital transactions, the Reserve Bank of India made it mandatory for all digital wallets to comply with KYC norms in India. In the past, prepaid payment instruments (PPIs) as digital wallets are technically called, did not require any KYC documents for a user to register and conduct transactions. However, the RBI has now stated that all users will need to submit their KYC details by the 28th of February in order to continue using their digital wallets. Previously the deadline was 31 December, but this was extended after PPI providers requested for more time. The move has become one of the biggest payment trends of 2018 and has been met with a mixed response, both by digital wallet providers and users alike. Here’s how the introduction of KYC norms in digital wallets will impact the digitalisation of the economy.

Details Required by Users

Initially, digital wallets required only minimal KYC details to be provided by users. For most wallets, users needed to enter their phone number and then verify their details through an OTP sent to that number. Once the OTP was verified, they were then able to freely conduct transactions through their digital wallets. Now, however, the RBI has called for stricter guidelines when it comes to KYC details to improve security in digital payments. Users will have to add their PAN and Aadhar card numbers to be able to continue using their digital wallets. This is almost the same process that banks have followed to ensure secure payments. Users who have not yet submitted their KYC details can still have limited use of their wallets. They can continue using their wallets until their balance runs out, however, they can’t add any more money to their wallet until they add their KYC details. If PPIs don’t comply with these requirements, they might be heavily penalized by the RBI.

Short-Term Impact of KYC Norms in Digital Wallets

PPI providers estimate that only about 45 percent of users have actually completed the KYC process. For digital wallet providers, the biggest concern is that users might not want to go through the trouble of providing their KYC details. Shutting them out of their digital wallets might encourage them to go back to paying by cash or card instead of using digital wallets for transactions.

The biggest section of users that might face difficulties due to the introduction of KYC norms might be migrant labourers. Labourers adopted digital wallets very quickly precisely because they didn’t require KYC details as most of them didn’t have the documents required for KYC. An estimated Rs. 10,000 crores are transferred by this section every month back to their families at home. Most of these transactions are small, usually below Rs. 3,000. With the introduction of KYC norms, however, migrant labourers might not find any incentive to use digital wallets.

Will the Digitisation Drive be Impacted?

 In December of 2017, 28.83 crores of digital wallet transactions were conducted, to transfer around Rs. 12,568 crores. This huge volume of transactions through digital wallets was in a large part due to the demonetisation move by the government. After demonetisation wiped out almost 86 percent of currency from the Indian market, many people switched to digital wallets instead. The digitalisation of the economy also benefits the Government, so it could have had a positive impact. But could this move by the RBI slow down the digitalisation of the economy?

Since a number of users have still not filled out their KYC details, they could witness a slump in the number of transactions taking place. To prevent this, many wallet providers are offering special incentives to encourage more users to submit KYC details. Some of these promotional strategies include cashback offers for users who submit their details.     Certain big players in the digital wallet space are even prepared to invest as much as $500 million into encouraging customers to comply with the KYC norms in India. Such a great push by digital wallet companies might convince more customers to make their accounts KYC-compliant. While in the short run, usage of mobile wallets might dip, the huge investments PPI providers are putting in might bring the numbers back up again.

The introduction of KYC norms in digital wallets will bring greater transparency and security in digital payments. While digital wallet providers in India might witness a slight slump in transactions in the immediate aftermath of KYC requirements, major incentives being provided to customers are likely to prevent any long-term damage. The digital cash revolution taking place in India through digital wallets and convenient POS machines like those provided by Bijlipay will continue to simplify payments in India.

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