In its monetary policy of FY22, the Reserve Bank of India in view of the increasing penetration of UPI and other modes has also said to allow withdrawal and merchant payment using prepaid instruments (PPIs) including wallets, forex cards. And by this cash-withdrawal shall also be allowed for non-bank entities for customers that are fully KYC compliant.
In the current regime, withdrawal is allowed in case of only full-KYC compliant PPIs issued by banks. So, with it wallets shall also function at par with bank accounts. Now the differential is for your user account with the wallet, you do not have an account number nor there is any ATM network of these wallet or payment bank entities.
So, how will the process of withdrawal from wallets at ATM or merchant payment will be processed:
Payworld Money, a payments company that also has a wallet will issue prepaid cards to users and then users will be able to withdraw money from ATMs as well as swipe card at merchant stores.
Nonetheless, wallets cannot make use of Aadhaar Enabled Payment System (AEPS) which banks offer. This is because most of the user do link their wallet account to Aadhaar.