PPI interoperability: How RBI’s new UPI rule set to ease digital payments? An explainer

The Reserve Bank of India (RBI) recently allowed the users of prepaid payment instruments (PPIs) to access UPI services via third party applications. This is seen as a commendable move which will give a massive boost to the digital payment ecosystem in India.

In order to understand this, let us first understand the key differences between UPI and mobile wallets.

UPI Vs PPIs

UPI stands for unified payments interface, which enables customers to transfer money digitally by virtue of being linked to the bank account. Effectively, it is a bank-to-bank money transfer, and the interface is a mobile application such as Google Pay or BHIM.

Since these applications are linked directly to the bank, users can transfer money across platforms via a mobile number and QR code.

On the other hand, prepaid payment instruments are mobile wallets which, as the name suggests, have pre-loaded money and can transfer it to another person who is also using the mobile wallet by the same PPI provider.

However, it has limited capability because it is not UPI, and the money does not move from one bank account to another.

So, to move money from one wallet to another requires what is known as ‘interoperability’ which the RBI has now allowed with its latest rollout.

“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,” says Ankush Julka, COO at Mufin Pay.

Current ecosystem

Interestingly, some popular prepaid payment instruments (PPI) providers still provide access to UPI. For instance, PhonePe is linked to UPI via BHIM.

Similarly, MobiKwik also allows interoperability via its UPI functionality called Pocket UPI. This means one can use his MobiKwik wallet to transfer money to PhonePe by using former’s UPI functionality called Pocket UPI.

But as one can understand this access is restricted to the UPI app provied by the PPI provider only.

Third party UPI apps

With the latest change being rolled out, however, the users of PPIs will now be allowed to use third party apps as well and not only the UPI functionality provided by the PPI provider only.

For instance, MobiKwik customers can use the UPI functionality of any third-party app and not only Pocket UPI. Similarly, PhonePe customers will now be able to use Google Pay as well and not only BHIM for the UPI payments.

It is worth recalling that the banking regulator had announced about this plan to introduce interoperability via its statement in April this year.

“At present, UPI payments from bank accounts can be made by linking a bank account through the UPI App of the bank or using any third-party UPI application. However, the same facility is not available for PPIs. PPIs can currently be used to make UPI transactions only by using the application provided by the PPI issuer. To provide more flexibility to PPI holders, it is now proposed to permit linking of PPIs through third-party UPI applications. This will enable the PPI holders to make UPI payments like bank account holders,” reads the RBI statement dated April 5, 2024.

So, the latest move on Dec 27 was a follow-up action where the RBI instructed all prepaid payment instrument (PPI) issuers to enable UPI payments from / to full-KYC PPIs through third-party UPI applications.

“UPI’s popularity and ease of use will likely encourage more users to adopt digital wallets, particularly those who were previously concerned about compatibility with existing payment systems,” adds Julka.