Everything is fine until companies collapse: vendors remain unpaid, customers don’t get deliveries or can’t access services. Users of BlueSmart, an EV cab service, have reported that money they loaded into the app’s wallet is now stuck. They can’t use it outside the app, and they can’t withdraw it. There are now reports that the Reserve Bank of India is looking into “the lack of safeguards for closed-loop wallets used for EV-related transactions”, and “Consultations with EV charging operators and platforms are underway to assess consumer risks and potential regulatory measures like escrow arrangements”. Interestingly, it’s looking at both EV companies and EV charging point operators, and I’ll explain why this matters.

Typically, under RBI regulations, there are two types of wallets (or Prepaid Payment Instruments) allowed: Closed and Semi-closed.

1. Closed : Closed wallets are for merchants to allow customers to load cash into the wallet, so that they can pay for their services, but not take money out or pay third parties. For a closed wallet, the merchant needs to be the one providing the service. For example, a restaurant could allow customers to prepay money into a wallet, and offer customers a discount when using their wallet to dine in their restaurant or restaurant chain. In this case, the money held by the merchant is used to pay the same merchant. This is a closed wallet because it doesn’t leave the merchant’s bank account or escrow account, and the transaction is notionally communicated to the customer. This doesn’t require a license.
2. Semi-closed: Semi-Closed wallets are for merchants to allow payment for other peoples services. To use the same example, if the same restaurant A was to allow you to pay with the money held in their wallet, at another restaurant B, it means the money leaves the restaurant A’s account and goes into restaurant B’s account. So it’s closed from one side, in that you can put money in but not withdraw it, but it’s open from the other side, which means you can use it to pay a third party. This requires a Prepaid Payments instrument (PPI) license from the RBI. Paytm and Mobikwik wallets are/were licensed semi-closed wallets.
3. Open wallets: Banks can also issue open prepaid wallets,  including travel cards and student cards, from which money can be withdrawn as well. Apart from this, the RBI also allows a Full KYC PPI, which also allows cash withdrawals and bank transfers of the money out, after a user has done KYC. 

At a time before UPI existed, prepaid payment wallets were all the rage, because not everyone had a credit card or a debit card, and more importantly, not everyone had a card machine. Wallets allowed money to be transferred from one user to another via the mobile number as an identifier. Paytm at one point in time had over 200 million customers with wallets. 

How was Blusmart running a closed wallet?

The key question I have about the Blusmart situation is this: how exactly were they even running a closed wallet? It’s not clear whether they were a cab aggregator (unlike Uber or Ola), since even though most cabs (5000 of 8000) were leased from Gensol Engineering, which was run by one of the promoters, while the rest were either owned by Blusmart or leased by them.

Why this matters is if you’re running an aggregator, which means you’re effectively platforms/marketplaces, not employing the drivers or owning the cabs, and the drivers are essentially third party merchants being aggregated by the marketplace. You are thus only allowed to set up semi-closed prepaid wallets for payment to third parties.The same applied to Amazon India once upon a time: when they launched gift cards in India, they did that with a company called Qwikcilver, which had a semi-closed prepaid wallets license. This is because Amazon is – legally speaking – a marketplace in India. As a foreign company it is not allowed – again, legally speaking – to own inventory and sell its own products. It can only aggregate “independent” third party vendors like (cough, cough) Cloudtail, Appario, and thousands of others. Since the money in the gift card was going to be used to pay third party vendors (including “independent” ones like Cloudtail and Appario), Amazon needed either a semi-closed prepaid wallet license, or to partner with someone who had one.

I had raised this issue once when Cleartrip had launched its wallet in 2014, because in my view, Cleartrip, as an ecommerce website aggregating tickets from airlines (i.e. third party vendors) needed a prepaid wallet license, unless it was buying and selling inventory, in which would then have meant that it couldn’t raise foreign funding, because of restrictions in foreign ownership for entities doing multi-brand retail.

Many news reports refer to Blusmart as a platform, and if that is the case then the drivers were not employees. If drivers are not employees, then logically, Blusmart needs a prepaid wallet license (aggregator), in order to pay third parties (drivers).

There is a third option: if the wallet is used by the customer to pay Blusmart, and then Blusmart pays the drivers as vendors of the company, and not as independent sellers in the marketplace, then this remains a closed loop for the wallet, and isn’t pass-through revenue for the company. 

This is probably how most companies, including EV charging apps, are running closed wallets. They’ve merely taken pre-payment from you for a service that they’ll render in the future. 

This means that when the company has financial issues, your money is gone because they’ve booked the revenue instead of keeping the money in an escrow account as a fiduciary. The money was not yours anymore once you added it to the closed wallet. Technically, you’ve paid for a service but never received that service.

Now what should the RBI do here? 

If indeed closed wallets are being used to pay third parties in an indirect manner, then this loophole probably needs to be closed by the RBI. One principle of law is that you cannot indirectly do what you’re not allowed to do directly. This is probably more so in case of multi-service-provider EV charging apps than something like a Blusmart. 

Firstly, a regulation around closed wallets will probably not be as stringent as that for semi-closed prepaid wallets, but will probably involve keeping consumer money in an escrow, thus preventing its utilisation for company operations. This is the only way that refunds can be guaranteed to consumers. However, this hurts companies that take prepayment for deals from early users, and then utilise that money for building their product.

 Services like Appsumo are popular, and aid product development, by offering businesses the ability to acquire early users looking for a discounted product. Friends who have sold deals via Appsumo have told me that a large number of users in fact buy something and then don’t use the product. To disallow using that money for product development would hurt these businesses significantly.

Secondly, the impact of regulating closed wallets has an impact that goes far beyond cab aggregators and EV charging. Every gaming company and AI SAAS venture will potentially be impacted.

There will be workarounds for this as well – What if I issue credits, say a random token like a BS$ where 1 BS$=1Rupee, and can be used to pay third parties with that token, and then I give that third party a rupee per BS$? I don’t have to call it a wallet anymore. 

These issues don’t diminish the fact that people haven’t been able to redeem or use money stuck in their Blusmart wallet, or points with Jet Airways.

They’ve clearly lost money/the equivalent of money here, and there’s pressure on the RBI to do something about these practices. However, the RBI doesn’t have an easy task on its hands, and should watch out for collateral damage.