E-Wallets/Digital Wallets

E-wallets are prepaid accounts that permit the users to store money for any future online transaction through a computer or a Smartphone. In India, they are recognised as a Pre-paid Payment Instrument and comes under the Payment and Settlements Systems Act of 2005. Digital wallets basically intend to make the whole process of online transaction transparent and tamper proof.

Working of E-Wallets

The cash is loaded into E-wallets/Digital Wallets electronically using debit and credit cards or through cash submission at a designated verified bank/office or at a local merchant. What is required is an internet connection and a Smartphone/computer. The difference between e-wallets and other pre-paid instruments is that e-wallets are solely based on an internet based online account and not on physical cards. As it is a pre-paid payment service it is subjected to adhere to the rules and regulations made by the RBI.

Benefits of E-wallets

  • Using prepaid payment services need infrastructure like an ATM but an e-wallet or digital wallet gives flexibility to the user as the payments can be made from anywhere. This is particularly helpful to the population living in rural areas where ATMs are scarce.
  • E-wallets are a boon to those people who do not have a bank account, net banking or credit card. It also reduces the paperwork involved in banking transactions.
  • It is in line with the Digital India program of the government and has become an important channel for financial inclusion.

Types of E-wallets

Closed E-wallet: 

These wallets are used for facilitating the purchase of goods and services and do not allow cash withdrawal and redemption. Hence, RBI’s approval is not required by an issuing entity for issuing such wallets. Example: cab services, e-commerce and mobile companies.

Semi-closed E-Wallets: 

These wallets are used for the purchase of goods and services, including financial services at clearly identified merchant locations. But these wallets do not allow cash withdrawal and redemption by the holder. The money held in the wallet is managed by the payment companies. As per the regulations, since these wallets are handled by the non-banking entities, it is required to keep the money in the escrow accounts with a bank. Depending on the mutually accepted terms and conditions, the banks pay an interest to the payment company but none of these payment companies pays any interest to its customers. Example: Citrus Payment Solutions Pvt. Ltd’s Citrus Cash app, AirTel Money.

Open E-wallets: 

These are used for financial services like fund transfer and purchase of goods and services. This kind of wallets even supports cash withdrawals at ATMs or from business correspondents (BCs). In case of these wallets, the money is managed by the banks while the infrastructure is taken care by the payment service provider. These type of wallets earn interest which are shared by the payment service provider and the banks. Example: Vodafone’s M-Pesa run in partnership with ICICI Bank.

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