Prepaid Payment Instruments (PPIs)

iasparliament Logo
April 07, 2023

Why in news?

Recently, National Payments Corporation of India (NPCI) has introduced interchange fees of up to 1.1% on merchant UPI transactions done using prepaid payment instruments.

What are Prepaid Payment Instruments (PPIs)?

  • PPI - Prepaid payment instruments are payment instruments that facilitate purchase of goods and services against the value stored on such instruments.
  • PPIs can only be used in Indian rupees.
  • PPIs can be in the form of mobile wallets, physical smart cards, secure tokens, vouchers or any other method that allows access to prepaid funds.




Closed System Payment Instruments

  • Generally issued by business establishments for use at their respective establishment only.
  • Do not permit cash withdrawal or redemption.
  • RBI approval is not required for issuing them.
  • Eg. Web portals for online shopping - Make my Trip, Flipkart, etc. run wallets for its customers

Semi-Closed System   Payment Instruments

  • Redeemable at a group of clearly identified merchant locations/ establishments which contract specifically with the issuer to accept the payment instrument.
  • Do not permit cash withdrawal or redemption by the holder.

Semi-open System Payment Instruments

  • Used for purchase of goods and services at any card accepting merchant locations (Point of sale terminals).
  • Do not permit cash withdrawal or redemption by the holder.

Open System Payment Instruments

  • Payment instruments which can be used for purchase of goods and services and also permit cash withdrawal at ATMs
  • Issuing PPI - Banks and Non-Bank Finance Companies (NBFC), who comply with the eligibility criteria, would be permitted issue prepaid payment instruments.
  • Only banks which have been permitted to provide Mobile Banking Transactions by the RBI shall be permitted to launch mobile based prepaid payment instruments (mobile wallets & mobile accounts).
  • Other entities would be permitted to issue only closed system prepaid payment instruments and semi-closed system prepaid payment instruments.

Mobile Prepaid Instruments - The prepaid talk time issued by mobile service providers.

What is PPI interoperability?

  • Interoperability – It is the technical compatibility that enables a payment system to be used in conjunction with other payment systems.
  • PPI interoperability through UPI - After the RBI has mandated interoperability among different PPI issuers, they tied up with National Payments Corporation of India (NPCI) for issuing
    • Interoperable RuPay PPI cards or
    • Creating interoperable wallets on UPI rails
  • The user can now send/receive money to any other wallet user. Similarly, a merchant with any UPI QR code can now accept payments from any PPI issuer or mobile wallet.
  • Advantages - PPI on UPI will speed up the growth of merchant transactions in rural areas and further deepen digital financial inclusion.
  • It will enable universal acceptance of wallets across all UPI QR codes and devices, thus increasing the salience or relevance of wallets.

What are the recent changes made by NPCI?

  • The interchange rates vary according to merchant category codes, in the range of 0.5% to 1.1%.
  • The charges are applicable if the transaction is more than Rs. 2,000.
  • Charges are applicable only if a person have accepted or consented to the transactions made using PPI Wallet (No charge for merchant accepting UPI payments from a customer’s bank account).
  • It also include charges for UPI-wallet-loading that will be paid by wallet issuers to remitter banks or the bank accounts from which the amount is being debited.

Interchange fee

  • It is a fee charged by the receiver bank/payment service provider to the merchant.
  • The PPI owner will receive the applicable interchange fee from the merchant.
  • The interchange fee is usually levied to cover the cost of accepting, processing and authorising the transaction.
  • Users will not be charged for these transactions.

What will be the impact of the change?

  • On merchants - Smaller merchants and shopkeepers are unlikely to be impacted as it is applicable only on payments of over Rs. 2,000.
  • However, MDR (merchant discount rate) is applicable on wallets on UPI in certain cases and this move may lead to higher MDRs imposed on merchants.
  • This may subsequently impact merchants’ ability to absorb the higher costs.
  • Currently, MDR for bank-to-bank UPI transactions is zero.
  • On customers - Officially there are no charges to be paid by the customer. However, merchants may pass on the additional burden to customers by way of price increases or some other means

A merchant discount rate, or MDR, is a rate charged to a merchant for the payment processing of debit and credit card transactions.

Quick facts

National Payments Corporation of India (NPCI)

  • It is an umbrella organisation for operating retail payments and settlement systems in India.
  • It is an initiative of RBI and Indian Banks’ Association (IBA) under the provisions of the Payment and Settlement Systems Act, 2007, for creating a robust Payment & Settlement Infrastructure in India.
  • It has been incorporated as a “Not for Profit” Company under the provisions of Section 25 of Companies Act 1956 (now Section 8 of Companies Act 2013).
  • Aim - To provide infrastructure to the entire Banking system in India for physical as well as electronic payment and settlement systems.

Initiatives of NPCI

  • RuPay - Indigenously developed Payment System
  • Immediate Payment Service (IMPS) - For real time payments in retail sector.
  • National Automated Clearing House (NACH) -Offline web based system for bulk push and pull transactions.
  • Aadhaar Payment Bridge (APB) System - helps Government in making the Direct Benefit Transfers
  • Aadhaar enabled Payment System (AePS) - To access these funds at door step & drive the financial inclusion in India.
  • National Financial Switch (NFS)- Largest network of shared Automated Teller Machines (ATMs) in India facilitating interoperable cash withdrawal, card to card funds transfer and interoperable cash deposit transactions.
  • Unified Payments Interface (UPI)- A 24*7 payment system which allows instant money transfer money to any bank account
  • Bharat Bill Payment System (BBPS) - One-stop bill payment solution for all recurring payments
  • National Electronic Toll Collection (NETC)- To meet the electronic tolling requirements of the Indian market.


  1. The Hindu| PPI Interoperability
  2. The Hindu Business Line|PPI
  3. RBI | Guidelines on PPI
  4. Arthapedia | PPI


Login or Register to Post Comments
There are no reviews yet. Be the first one to review.



Free UPSC Interview Guidance Programme