A claim made by Paytm representative today over phone on my Is Paytm a Scam? – Part 1 post – that they don’t earn any interest on the money lying in wallet – has forced me to scourge through the information available on the internet and with RBI, I can safely say that the claim is blatant lie. And to say that they have been insisting on me pulling my previous post from the blog!

First Let’s understand what is e-wallet, what are their types and establish what kind of wallet Paytm is.

In general, as per the RBI, there are three kinds of e-wallets—closed, semi-closed and open

* Closed wallet: 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 online shopping 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.

* Semi-closed wallet: In the payments space, companies 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.

* Open wallet: Such wallets 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.

 

#Source: Finacial Express Article on e-wallet

So now that we know that Paytm is a Semi-closed wallet, let’s deliberate further.

Here’s what Anirudh Vohra from Financial Express has written in the article:

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,” says Upasana Taku, co-founder, MobiKwik Systems, a mobile wallet service provider.

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 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. This interest is in the range of 4-6%. None of the wallets pay interest to customers,” says Jitendra Gupta, founder-MD of Citrus Payment Solutions, which offers payment gateway services.

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,” says Taku of MobiKwik. 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,” says a Delhi-based vendor who facilitates the use of Airtel Money.

 

#Parts of text highlighted to lay emphasis on my claim.

Vivina Vishwanathan reports exactly the same in a LiveMint article:

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.

#Parts of text highlighted to lay emphasis on my claim.

So obviously, Paytm, when they claim that they don’t earn any interest, is completely false information.

Digging further, I come across Draft Guidelines for issuance and operation of Prepaid Payment Instruments in India, by RBI (Reserve Bank of India) which states:

7.4 As an exception to the above, an entity can enter into agreement with the bank where escrow account is maintained, to transfer “core portion”, of the amount in the escrow account to separate account on which interest is payable, subject to the following:-

  1. The bank shall satisfy itself that the amount deposited represents the “core portion” after due verification of necessary documents.
  2. The amount shall be linked to the escrow account, i.e. the amounts held in the interest bearing account shall be available to the bank, to meet payment requirements of the entity, in case of any shortfall in the escrow account.
  3. This facility is permissible to entities who have been in business for at least ONE YEAR and whose accounts have been duly audited for the full accounting year.
  4. NO LOAN is permissible against such deposits. Banks shall not issue any deposit receipts or mark any lien for the amount held in such form of deposits.

#Highlighted text part of the original draft available at the link above.

And here is the document if you want to read it in leisure:

Draft Guidelines for issuance and operation of Prepaid Payment Instruments in India (PDF click-able link)

Now, someone can claim that these are just the guidelines and not actual regulations. True. But before you jump to conclusions, let me also introduce something more interesting and compelling:

The below excerpt is from Master Circular – Policy Guidelines on Issuance and Operation of Pre-paid Payment Instruments in India, issued by RBI again vide RBI/2014-2015/105, DPSS.CO.PD.PPI.No.3/02.14.006/2014-15, published on 01 July 2014 and updated on 03 December 2014.

8.4 As an exception to the above (8.3 xii), the entity can enter into an agreement with the bank where escrow account is maintained, to transfer “core portion” of the amount, in the escrow account to a separate account on which interest is payable, subject to the following:-

  1. The bank shall satisfy itself that the amount deposited represents the “core portion” after due verification of necessary documents.
  2. The amount shall be linked to the escrow account, i.e. the amounts held in the interest bearing account shall be available to the bank, to meet payment requirements of the entity, in case of any shortfall in the escrow account.
  3. This facility is permissible to persons who have been in business for at least ONE YEAR and whose accounts have been duly audited for the full accounting year.
  4. NO LOAN is permissible against such deposits. Banks shall not issue any deposit receipts or mark any lien on the amount held in such form of deposits.
  5. Core portion as calculated above will remain linked to the escrow account. The escrow balance and core portion maintained should be clearly disclosed in the Auditors certificates submitted to Reserve Bank of India on quarterly and annual basis.

Note: For the purpose of these guidelines “Core Portion” may be computed as under:-

Step 1: Compute lowest daily outstanding balance (LB) on a fortnightly (FN) basis, for one year (26 fortnights) from the preceding month.

Step 2: Calculate the average of the lowest fortnightly outstanding balances [(LB1 of FN1+ LB2 of FN2+ ……..+ LB26 of FN26) divided by26].

Step 3: The average balance so computed represents the “Core Portion” eligible to earn interest.

Download this too if you want to:

Master Circular – Policy Guidelines on Issuance and Operation of Pre-paid Payment Instruments in India (PDF click-able link)

Now, can they deny this too?

Read a bit further…

8.2 For the schemes operated by banks, the outstanding balance shall be part of the ‘net demand and time liabilities’ for the purpose of maintenance of reserve requirements. This position will be computed on the basis of the balances appearing in the books of the bank as on the date of reporting.

8.3 Other non-bank persons issuing payment instruments are required to maintain their outstanding balance in an escrow account with any scheduled commercial bank subject to the following conditions:-

(i) The escrow balance must be necessarily maintained with only one scheduled commercial bank at any point of time.

(ii) In case there is a need to shift the escrow account from one bank to another, same may be effected in a time-bound manner without unduly impacting the payment cycle to the merchants. The migration should be completed in the minimum possible time and with the prior approval of RBI.

(iii) The balance in the escrow account should, at no time, be lower than the value of outstanding PPIs and payments due to merchants. While as far as possible PPI issuers should ensure immediate credit of funds to escrow on sale / reload of PPIs to end-users, such credit to escrow account should not be later than the close of business day (on which the PPI has been sold / reloaded) under any circumstances.

#Parts of text highlighted to emphasize on important aspect.

Read 8.3.(iii) again. The amount which shall be in the escrow depends upon the outstanding payments due to the merchants, and not you or me – the user of the wallet.

Ok, so when you make a purchase, the amount becomes due to the merchant. Is not Paytm legally bound to maintain the same amount in escrow account?

Yes, and that’s where the caveat lies.

Yes, all that you pay for purchasing a product or service, Paytm is bound to have it in the escrow account. But, they are not bound to maintain the amounts that come as:

  1. cashbacks
  2. Refunds for returns
  3. Refunds for cancelled orders

You can gauge yourselves – majority of the amount in your wallet comes from cashbacks. However, have you ever wondered why Paytm keeps on cancelling orders arbitrarily? Now you know!! I’ve come across numerous instances (3 for myself and numerous for my friends) where the orders are cancelled arbitrarily, and the amount refunded to your wallet.

Now, am I wrong in assuming that Paytm earns huge interests from the money from our pockets? Money, which if was there in your Bank Account, would have earned you at least 4% interest. And collectively, the money  in PSUs are utilized by government to fund big projects.

4% may not be a big amount for you individually, but think about the larger picture as illustrated in my Is Paytm a Scam? – Part 1.

Oh yes! Did I forgot to mention that if you want the money back in your account, Paytm asks for 4% fee!

Do let me know your thoughts on this.