The Reserve Bank of India (RBI) announced on Friday that users of Prepaid Payment Instruments (PPI) are now permitted to conduct UPI payments through third-party UPI applications. While UPI payments between bank accounts can be done using the bank's own UPI app or any third-party provider's app, UPI transactions involving PPIs must currently be completed using the PPI issuer's mobile application.
The announcement made in the Statement on Development and Regulatory Policies on April 5, 2024 aims to enhance the efficiency of transactions and promote interoperability between mobile wallets and the UPI ecosystem.
As per the statement on Development and Regulatory Policies (April 05, 2024), it has been decided to enable UPI payments from/to full-KYC PPIs through third-party UPI applications. The RBI said this will enable PPI holders to make/receive UPI payments through the mobile application of third-party UPI applications.
Popular Payment Service Providers (PPIs) such as Paytm, PhonePe Wallet, Amazon Pay Wallet, among others, will be impacted by this decision. On the other hand, third-party UPI apps like Google Pay and PhonePe will also be subject to the changes.
"A PPI issuer shall enable holders of only its full-KYC PPIs to make UPI payments by linking its customer PPIs to its UPI handle. UPI transactions from PPI on the issuer’s application shall be authenticated using the customer’s existing PPI credentials. Such a transaction will, thus, be pre-approved before it reaches the UPI system. A PPI issuer, in its capacity as a PSP, shall not on-board customers of any bank or any other PPI issuer," the central bank said in the note.
It added: "A PPI issuer may also facilitate discovery of its full-KYC PPIs on third-party UPI mobile applications, who, in turn shall enable such PPIs to be linked to their PSP handle/s. Such UPI transactions, from PPIs using third party UPI applications, shall be authenticated using the UPI credentials."
How would it impact UPI users
A prepaid payment instrument (PPI) is a financial tool that allows users to store funds on a card or digital wallet for future transactions. Now, the interface of any third-party app can be used to transfer and receive money in the wallet. Previously, under RBI guidelines, linking wallets to UPI was restricted to the wallet company's app, requiring authentication with the wallet's login details.
The RBI has now simplified the process for users of prepaid wallets, allowing them to make payments through widely-used UPI apps such as PhonePe, Google Pay, and Paytm.
The updated regulations allow users to connect their fully verified wallets with third-party UPI apps after completing the full KYC process. This integration enables wallet holders to conduct transactions, such as sending and receiving money, similar to traditional bank accounts.
Full-KYC wallets are now easily accessible through UPI apps like PhonePe and Google Pay, allowing users to link their wallets to the UPI system and authorize payments using their UPI PIN. However, as per the recent guidelines from the RBI, wallet companies are prohibited from onboarding customers from other banks or wallets through this mechanism.
“The Reserve Bank of India’s decision to enable UPI payments through full-KYC prepaid payment instruments (PPIs) on third-party applications is a groundbreaking step towards driving financial inclusion across the country. By bridging the gap between PPIs and UPI, this initiative enhances the accessibility and convenience of digital transactions for millions of users, enabling them to transact seamlessly beyond the confines of individual platforms," said Dilip Modi, Founder & CEO of Spice Money.
He added: "For rural communities, where banking infrastructure can be limited, this integration represents a significant leap forward. At Spice Money, we have seen how empowering underserved communities with digital tools creates real change. This development will allow PPI users—including those relying on gift cards, digital wallets, or transit cards—to participate in the digital payment ecosystem with greater ease. The enhanced interoperability between PPIs and UPI not only simplifies transactions but also instills greater trust and security through pre-approved authentication mechanisms."
"One of the main challenges with PPIs has been their limited compatibility with mainstream banking services and payment platforms. By integrating PPIs with UPI, the RBI has addressed this issue, making it easier for users to link their digital wallets to UPI-enabled apps. It will make transactions smoother, whether it’s paying bills, shopping online, or transferring funds. The ability for users to link full-KYC PPIs to third-party UPI apps means customers can choose from more platforms for their transactions," said Ankush Julka, COO at Mufin Pay.