India: UPI enabled for prepaid payment via third-party apps

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The Reserve Bank of India (RBI) has permitted prepaid payment instruments (PPI) users to conduct Unified Payments Interface (UPI) transactions through third-party mobile apps, thereby enhancing the scope of digital payment services in India.

Now, users can transfer or receive funds through UPI in their PPI wallet using third-party apps, making it interoperable. Previously, transactions could only occur if both the sender and receiver used the same third-party application providers.

A prepaid payment instrument is a financial tool that enables users to load funds onto a card or digital wallet for future transactions. In India, PPIs encompass mobile wallets like Paytm, PhonePe, and MobiKwik, as well as payment gateways such as Razorpay and Instamojo.

“Currently, UPI payments from / to a bank account can be carried out using the UPI application of that bank or of any third-party application provider. However, UPI payments from / to a PPI can only be carried out using the mobile application provided by the PPI issuer,” RBI said in a statement.

“It has been decided to enable UPI payments from / to full-KYC PPIs through third-party UPI applications. This will enable PPI holders to make / receive UPI payments through the mobile application of third-party UPI applications,” RBI said.

A PPI issuer shall enable holders of only its full know-your-customer (KYC) PPIs to make UPI payments by linking its customer PPIs to its UPI handle. UPI transactions made through a PPI on the issuer’s application will be authenticated using the customer’s existing PPI credentials. As a result, the transaction will be pre-approved before reaching the UPI system, the central bank clarified in the statement. 

Additionally, a PPI issuer, acting as a payment service provider, cannot onboard customers from any other bank or PPI issuer.

A PPI issuer may also enable the discovery of its full-KYC PPIs on third-party UPI mobile applications, allowing them to be linked to their payment service provider handles. RBI said UPI transactions initiated from PPIs via third-party UPI apps will be authenticated using UPI credentials.

Significant move toward financial inclusion

PPIs can include payment wallets, smart cards, magnetic chips, vouchers, and mobile wallets.

PPIs have traditionally struggled with limited compatibility with mainstream banking platforms. By integrating PPIs with UPI, the RBI has simplified linking digital wallets to UPI apps, streamlining transactions like bill payments, shopping, and transfers. Users can now link fully verified PPIs to third-party UPI apps, expanding transaction options.

The RBI’s move to enable UPI payments through full-KYC PPIs on third-party apps is a major step toward financial inclusion. This integration improves digital transaction accessibility and convenience, allowing seamless use across platforms. For rural communities with limited banking infrastructure, it’s a significant advancement. The enhanced interoperability between PPIs and UPI simplifies transactions while boosting trust and security with pre-approved authentication.

According to the RBI, PPIs can be issued by banks and non-banks. Banks can issue PPIs after obtaining approval from RBI. The non-bank PPI issuers are companies incorporated in India and can operate a payment system for issuing PPIs to individuals/organizations after receiving authorization from RBI.

The money collected by the PPI issuers is to be used to make payments to merchants who are part of the acceptance arrangement and to facilitate funds transfer or remittance services on behalf of the PPI holders.

India’s flagship UPI is a global success story and an example of effective Digital Public Infrastructure. UPI has seen a tenfold increase in volume over the past four years, from 12.5 billion transactions in 2019-2020 to 131 billion transactions in 2023-2024, or 80% of all digital payment volumes.

In December, the RBI permitted small finance banks to extend pre-sanctioned credit lines through the UPI in an attempt to expand the reach of credit on UPI. The RBI has also suggested small businesses adopt digital payment systems, like the UPI, to create a digital footprint for their financial transactions, making it easier for lenders to assess the firm’s financials and reduce the credit gap.

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