Payment gateways (PGs) and payment aggregators (PAs) are payment intermediaries (PIs) that facilitate payments online between a customer and a merchant. The Reserve Bank of India (RBI) has, so far, adopted a light-touch approach to regulating such intermediaries.
The RBI issued a set of Intermediary Guidelines in 2009, which required payment aggregators to maintain at a bank a nodal account from which debits, credits and settlement cycles were monitored and controlled. PIs had to meet no direct licensing, capital adequacy, reporting or other requirements.
Given the tremendous growth in digital payments, the RBI has said on a number of occasions that it intended to reconsider the regulatory framework for PGs and PAs. On 17 September 2019, the RBI released a discussion paper setting out: (1) three possible approaches to the regulation of PIs; and (2) a draft regulatory framework on the assumption that it decides to adopt a full licensing regime.
The RBI has pointed out that PIs perform a critical role in enabling online payments. They handle not only customer funds but also sensitive customer data. However, customers have limited direct access to PIs to resolve complaints. These factors prompted a re-evaluation of the existing regulatory framework.
The RBI has articulated three approaches to regulation of PIs: (1) status quo: continue with the existing approach, which appears to have worked well in the past decade; (2) limited regulation: PIs will be required to comply with minimum net worth requirements, guidelines concerning the settlement of funds, standards for technology and security platforms and escrow account requirements, but will not be licensed immediately, the licensing regime to be introduced in a phased manner; and (3) full licensing: PIs will require a licence from the RBI to operate under the Payment & Settlement Systems Act 2007 with existing players being given a period of 12 months to comply with the framework.
The framework will apply to all online payment transactions except transactions where payments are made against delivery. It focuses on:
PIs are already struggling with recent announcements concerning zero MDR (merchant discount rate) in online transactions. A full licensing requirement will mean higher costs of operation due to compliance obligations, reporting requirements, minimum net worth stipulations and enhanced KYC costs. These changes may not even be necessary, given the limited systemic risk that payment intermediaries pose to the payments ecosystem as a whole. The enhanced level of proposed merchant KYC is not entirely practical. The key areas that limited regulation can improve are the benefits of escrow as against nodal account structures, the infrastructure for customer redress and less onerous KYC obligations.
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