INTRODUCTION
Generally, in the e-commerce industry, particularly startups, they continuously strive to increase their user base to achieve scalability and meet the financial targets to showcase to their existing and prospective investor base. To accomplish this, the companies often lure customers by offering coin-based incentives or benefits or rewards points. These incentives or benefits can be earned by various means, such as: referring to other users, signing up and opening the account or using the reward points to withdraw cash or use as the barter system with other benefits available on such platforms. While providing such coin or point based benefits there are certain regulatory norms to be born in mind which are subsequently bei
MODELS OF COIN BASED INCENTIVE
The coin-based awards system has two key components: first, how to earn or accumulate the awards/coins, and second, how to utilize them, whether in kind or as cash, including the terms for withdrawal. A few scenarios and cases are outlined below for better understanding.
- Accrual of Reward. To solicit new customers the company may offer the users a certain number of coins at the time of on-boarding or signing up into the application, or upon purchase from the partner with whom the Company has tied up.
Redemption or cashing out such coins or rewards points could be (i) redemption in cash or cash withdrawal, or (ii) getting the cashback over and above the discounts on the product and services of the merchant partners who have tied up with the company.
- In this case the earning and accrual of the rewards in coin would be in the similar line with the first scenario, however, withdrawal would be either redemption in cash or complete adjustment in the subscription fee.
Regulatory Framework
The key act and regulations which have significance or to be perused any regulatory exposure are the Payment and Settlement Systems Act, 2007 (“PSSA”) in which the Reserve Bank of India has been empowered to regulate the payment system. The Payment System is defined in Section 2(i) of the PSSA as a system that facilitates payment transactions between a player and a beneficiary and this system may encompass processes: clearing, payment, or settlement. Hence, there needs to be a transaction between the payer and payee and the purpose could be clearing, payment or settlement for certain transactions.
RBI regulates the prepaid payments instruments which are used for purchasing the goods, services, financial services and remittance against the value store therein[1]. It’s important to note that prepaid payment instruments (PPIs) issued by an entity and used solely towards purchasing goods or services from that same entity are excluded from the regulatory scope of the Master Directions on Prepaid Payment Instruments (“Master Direction of PPIs“). Such PPIs are termed Closed System PPIs and come with specific restrictions regarding their nature and usage. These instruments cannot be used for the payment or settlement of third-party services.
In other words, the RBI regulates PPIs that are issued by one entity but can be used to settle payments for goods or services provided by another entity. The Master Direction of PPIs stipulates following categories of the PPIs which are regulated by the RBI: (i) Small PPIs and (iii) KYC PPIs, the features of which are described as follow:
- Small PPIs – these are issued by the Bank and non-banks after procuring the minimum details of the holder the PPI. Small PPI can be used for the sole purpose of purchasing the goods or services. Following activities are prohibited under such Small PPI: (i) Fund transfer or (ii) cash withdrawal. There are a few examples and types of such Small PPI gift card, prepaid wallets, transit cards, promotional cards e.g. Edenred (India) Private Limited – nee Accor Services Pvt. Ltd. was given the approval for Delhi Metro Rail Corporation Limited was approved for prepaid payment instrument for mass transit[2]. Furthermore, paragraph 9 of the Master Direction of PPIs outlines two types of Small PPIs: (1) PPI up to ₹10,000 with cash loading facility, and (2) PPI up to ₹10,000 without cash loading facility. While both types share many features, they differ in key aspects:
- The former type is reloadable but must be converted into full-KYC PPIs within 24 months from the issuance date. Failure to do so will result in no further credit being allowed, although the balance can still be used.
- The latter type is also reloadable, with loading/reloading allowed from a bank account, credit card, or full-KYC PPI. The issuer must provide the option to close the PPI at any time, with closure proceeds transferred either back to the source account or to a bank account, subject to KYC compliance.
- KYC PPIs – such PPIs are issued by the banks and non-banks after completion of the KYC of PPI Holders. These PPIs are used for the purchase of goods or services, fund transfer or cash withdrawal such as credit cards and debits cards.
Prepaid Payment Instruments (PPIs) can be issued in various forms, including cards, digital wallets, and other instruments that provide access to and utilization of the funds within the PPI. It is important to note that PPIs cannot be issued in the form of paper vouchers[3].
ANALYSIS
Accruing rewards, points, or coins to attract and onboard customers may not qualify as Small PPI or KYC PPI, as these incentives are designed to draw customers in and can later be used for purchasing goods or services on the same platform. However, it is important to note that allowing cash withdrawals or converting these coins into cash and thereafter withdrawal of the same may trigger regulatory implications and compliances. The key parameters to determine whether a prepaid instrument, whether in the form of card, coins, points, rewards, coupons may come under the ambit of Master Direction are (i) uploading of the value, and (ii) ultimate utility of the value uploaded. If these two strict parameters with regulatory qualifications are scrutinized, it may provide clarity on the nature of the said instrument and determine whether they fall under the category of regulated Prepaid Payment Instruments (PPI) by the RBI or not.
Consider a scenario where; to attract potential customers, the company offers coins or reward points for installing the application. Additionally, coins can be awarded when a customer refers another person to install the application. These accrued coins or rewards can be used by the customer to avail of services within the application or be applied towards the subscription or purchase price of services or products offered on the application or platform.
Since in this entire scenario, the coins and rewards are provided by the issuer and can only be used for the issuer’s services or products, it may be classified as a Closed System PPI. In this example, if we introduce a factor allowing these coins to be used for purchasing third-party services, it could lead to regulatory implications. This change would alter the nature of the instrument, as Closed System PPIs are not permitted to be used for third-party products or services. Let’s introduce another factor into the same example: if the accrued coins or reward points on the platform are allowed to be withdrawn, this would violate the features of a closed PPI and could have regulatory implications. Any coin redemption into cash policy provided by the platform provider would contravene regulatory norms and could result in a voidable contract under the Indian Contract Act. Additionally, it could lead to claims under the Consumer Protection Act if customers encounter issues with such a policy, thereby attracting the legal dispute between the service provider and the customer.
CONCLUSION
It can be inferred that the use of any instrument for payment and settlement purposes may trigger regulatory norms, whether it is coins or reward points, regardless of who loads the value. Even if a coin or reward point is awarded by the service provider or app provider and can be used for third-party products or services, it may exhibit PPI characteristics. Consequently, the relevant regulatory norms should be examined and considered.
[1] Paragraph 2.8 of the “Master Directions on Prepaid Payment Instruments (PPIs)”, bearing no. RBI/DPSS/2021-22/82 CO.DPSS.POLC.No.S-479/02.14.006/2021-22, last updated February 23, 2024.
[2] Publications, Approvals/ Certificates of Authorization issued by the Reserve Bank of India under the Payment and Settlement Systems Act, 2007 for Setting up and Operating Payment System in India, dated July 25, 2024 last accessed on https://www.rbi.org.in/Scripts/PublicationsView.aspx?id=12043
[3] FAQ – Prepaid Payment Instruments (PPIs), paragraph 29, https://www.rbi.org.in/commonperson/english/scripts/FAQs.aspx?Id=2812 (last accessed on 3rd August, 2024)
