Introduction:
In our previous two FIG Papers of PA/PG Framework (here) and (here), we shared our key learnings in connection with operations of payment aggregator and payment gateway guidelines issued by the Reserve Bank of India (“RBI”) on March 17, 2020 (as amended from time to time) (“PA/PG Guidelines”).
The past four years have witnessed phenomenal growth in digital payments and credit spaces in India, along with proliferation of entities which have changed the way these services are provided to users. Given that these spheres of activity are crucial for the financial sector at large, it has become imperative for the RBI to keep up with the ever-evolving technological and regulatory landscape to foster growth along with safety and security.
The distillation of the authorisation process of the fintech players by the RBI is an important outcome. Of the 140-plus players (spread across, payments, foodtech, edtech, etc.) who applied for the authorization, as of May 28, 2024, about 29 (i.e., around 19% of the total applicants) received the RBI’s nod. This relative low number is reflective of the concerns of the regulator, which keeps a close eye on the authorised entities. Yet another development relates to the changes in the key aspects of the functioning of the various players in the chain.
In this paper, we discuss the following key legal and market level changes mentioned in the draft:
- regulation of payment aggregators-physical point of sale (“Draft PA-P Regulation Circular”); and,
- amendments to the existing directions on payment aggregators (“Draft PA Amendment Circular”), propose to bring in the payments’ ecosystem.
Revised definition and categories of Payment Aggregator (“PA”):
The proposed new definition of PA:
- aims to widen the scope of PA/PG (Payment Aggregator / Payment gateway) Guidelines to specifically include both online Payment Aggregators[1] (“PA-O”) and physical Point of Sale Payment Aggregators[2].
- intends to expand the scope of merchants covered from just the e-commerce sites to three categories of merchants -small merchants (upto INR 5 lakh turnover), medium merchants (upto INR 5 lakh turnover), and e- commerce entities facilitating transactions over a digital or electronic network).
PA Categories:
In addition to the existing “online PAs” (under non-Delivery vs Payment (“DvP”) mode), the revised draft framework also includes offline PAs providing access modes encompassing face-to-face/ proximity payment, including but not limited to Quick Response (“QR”) code, Near-Field Communication (NFC), physical card-reader/PoS Terminal, etc., which are termed as “PA-physical Point-of-Sale” (“PA-P”).
Q: As both DvP and non-DvP transactions are routed through the PA’s escrow account, do PA-O operating under the DvP model need authorisation for their business activities? .
Payments to other Accounts:
While under the current framework, PAs settle funds to any other account per specific directions from the merchants, the revised draft framework may impact the flexibility of direct settlement to sellers/ vendors of the marketplace merchants.
This may also impact the process of loan repayment EMIs by the merchants directly from the escrow account to partner banks/NBFCs.
Additionally, PAs will have to ensure that marketplaces onboarded by them do not collect and settle funds for services not offered through their platform.
Q: With such a requirement, some of the larger/ mid-sized e-commerce players may have to revamp their business models. Is such deletion of permissible debit limited to payments to third-party vendors only?
Q: Whether restricting certain use cases such as proprietary app stores collecting and settling funds for services provided on apps available on such app stores are the only use cases restricting PAs to not collect and settle funds for services not offered by the marketplaces through their platform?
KYC:
While the current framework allowed PAs to undertake limited KYC for the merchants having a bank account, the revised draft framework mandates the PA to undertake: (a) the conduct of a full KYC, i.e., CDD while onboarding merchants; and (v) Contact Point Verification (“CPV”) for small and medium merchants.
Q. Since the Draft PA Amendment Circular mandates full KYC while onboarding merchants, will the exemption for undertaking limited KYC under PA/PG Guidelines (March 31, 2021 Circular) continue for the merchants having a bank account?
Q: Given that procedure to undertake CPV is not provided under PA Amendment Circular and KYC Master Directions, will it necessarily involve a physical visit to the relevant address?
Conclusion:
Both PA-P Regulation Circular and PA Amendment Circular are steps taken by the RBI for enhancing the regulatory landscape directly under its purview. Barring the above concerns raised in the industry, both draft Directions intend to enhance transparency, security and visibility of payments space across sectors by bringing the DvP transactions under the ambit of PA/PG Guidelines. The RBI has invited feedback/ comments from the stakeholders on the Draft PA-P Regulation Circular and Draft PA Amendment Circular on or before May 31, 2024.
[1] PAs which facilitate e-commerce transactions in non-Delivery versus Payment (“Non-DvP”) mode.
[2] PAs which facilitate face-to-face / proximity payment for Delivery vs Payment (“DvP”) transactions.