PayNest: a small wallet doing large-value things
PayNest is a non-bank prepaid payment instrument (PPI) issuer authorised under the PPI Master Directions. It sells reloadable wallets through its app and 1,900 kirana merchant partners. Its 'Basic' wallet asks only for a name and mobile number; its 'Plus' wallet requires a self-declaration of address and a photograph. Between January and March, 2,100 Basic wallet holders loaded a total of ₹2.6 crore, and the highest single wallet outstanding balance on 31 March was ₹47,000. Basic wallets can send money to any UPI ID. PayNest permits cash withdrawal at merchant point-of-sale for a 2.5% fee. Its 'Gift' wallet is reloadable and permits a balance of ₹25,000. Customer balances sit in PayNest's own current account, from which merchant payments are also settled. The app shows no grievance officer or ombudsman details, and there is no 24x7 helpline.
1. Classify each wallet variant under the PPI framework and list the breaches with the correct limit or control for each.
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Basic = small (minimum-KYC) PPI. Permitted ceiling is an outstanding balance of ₹10,000 at any point, monthly credits up to ₹10,000 and ₹1,20,000 in a financial year. An outstanding of ₹47,000 is a clear breach. The aggregate load - ₹2.6 crore across 2,100 wallets, about ₹12,380 per wallet in a quarter - also points to monthly limits being crossed. Small PPIs cannot be used for funds transfer to arbitrary UPI IDs; the UPI linkage described is a full-KYC feature.
Plus = still minimum-KYC. A self-declared address plus a photograph is not full KYC. Full KYC needs PAN or an equivalent officially valid document, address proof, and customer due diligence with in-person or video-based verification. Without that, Plus wallets are also capped at ₹10,000 outstanding.
Gift = breach on two counts. Gift PPIs are capped at ₹10,000 and are non-reloadable, with no cash withdrawal. A reloadable ₹25,000 gift wallet is outside the product definition entirely.
Cash withdrawal. PPIs are for purchase of goods and services; using them to extract cash at merchant POS for a 2.5% fee is not a permitted use and is a classic conversion channel for tainted funds.
Escrow. Balances must be held in a dedicated escrow account with a scheduled commercial bank, with the outstanding liability covered at all times. Holding customer money in the issuer's own current account commingles float with operating funds, is a breach and creates a run risk if the issuer fails. Settlement of merchant payments must also flow from the escrow, not from an operating account.
Disclosure. Grievance officer, ombudsman details and a 24x7 helpline are mandatory.
2. PayNest's CEO proposes to 'grandfather' existing balances, keep Basic wallets live until the annual audit, and fix the product at the next version. Advise.
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Grandfathering is not available here. A PPI limit is a continuous condition of authorisation, not something reconciled at audit. Every day a ₹47,000 balance sits on a ₹10,000 product is a fresh breach, and the float in the current account is an unsecured liability to holders throughout.
What must happen instead:
- Stop the inflow now. Cap or switch off loads to Basic and Plus wallets until KYC is upgraded.
- Migrate or refund. Give holders a time-bound path - complete full KYC and move to a compliant variant, or refund the balance to a bank account. Communicate clearly, in local languages, with a fee-free exit.
- Move float into escrow immediately, reconciled daily against the wallet ledger; appoint the escrow bank and test the reconciliation before migration.
- Withdraw the gift and cash-out propositions and re-underwrite the merchant POS network - cash-out merchants are the highest-risk counterparties in the chain.
- Notify the supervisor with a remediation plan and dates rather than letting it surface in inspection.
The commercial argument is not as strong as it looks: the ₹2.6 crore of load is largely unverified money, and the loss of it is cheaper than an authorisation review, a penalty or a fraud episode traceable to PayNest floats. Cap the damage with a dated plan, and give the board a monthly breach dashboard until it closes.