BACKGROUND
With India moving closer to the financial inclusion mission day by day, digital payments have seen wide acceptance. A large section of the population has found comfort and convenience in going cashless. Of late, there has been a frenzy of new age technology driven companies (including some major fintech players that have become household names) entering the Indian payments space.1 These companies have become closely regulated by the Reserve Bank of India ("RBI") ever since the implementation of the Guidelines on Payment Aggregators and Payment Gateways on March 17, 20202 read with the subsequent clarifications issued thereto on March 31, 20213 (collectively, the "PAPG Guidelines").
Amidst this blitz of new players receiving authorization on a regular basis to operate as online payment aggregators, the RBI has made headlines by issuing a press release indicating its willingness to regulate a so far untouched segment of the payment aggregation business – i.e., offline payment aggregation.4 This press release contains two draft circulars for public comments – (I) the draft circular on regulation of payment aggregators – physical point of sale ("Draft PA-P Guidelines"); and (ii) amendments to the existing PAPG Guidelines ("Draft Amendments") (Draft PA-P Guidelines and Draft Amendments collectively, the "Draft Guidelines"). In this article, we aim to outline and de-clutter the requirements proposed through the Draft Guidelines.
TRACING THE REGULATION OF PAYMENT AGGREGATORS AND THE POLICY INTENT OF RBI
Before delving into the intricacies of the Draft Guidelines, it is important to contextualise the regulation of payment aggregation businesses and the policy intent of the RBI. The RBI initially started regulating all entities acting as payment 'intermediaries' i.e., entities that were involved in collection and settlement of monies received from customers for payment to merchants using any electronic/online payment modes through the erstwhile 'Directions for opening and operation of Accounts and settlement of payments for electronic payment transactions involving intermediaries, 2009' ("Intermediary Guidelines").5 The Intermediary Guidelines inter alia prescribed requirements for such intermediaries to maintain nodal accounts with banks for collection and settlement of funds between merchants and their customers along with permissible debits and credits for such accounts and settlement cycles. These nodal accounts were treated as internal accounts of the banks. Particularly, the Intermediary Guidelines applied only to electronic/online payment modes and excluded entities which facilitate delivery v. payment transactions (i.e., intermediaries who facilitate delivery of goods/ services immediately/simultaneously on the completion of payment) ("DvP Transactions") from the definition of 'intermediaries'6. Accordingly, DvP Transactions were not statutorily required to be routed through the aforesaid nodal account.
Subsequently, a discussion paper was released on September 17, 2019, outlining the shortcomings of the Intermediary Guidelines and the consequent approach for the regulation of payment aggregators and payment gateways. Soon after, the RBI issued the PAPG Guidelines. The PAPG Guidelines separately recognised the categories of 'payment aggregators' (erstwhile intermediaries under the Intermediary Directions) and 'payment gateways', and for the first time, brought in the requirement of authorisation of non-bank payment aggregators, while only prescribing certain good to have requirements for payment gateways.7 Additionally, PAPG Guidelines, also categorically called out e-commerce marketplaces which were required to stop acting as payment aggregators unless they completely separated their business activities and obtained relevant authorisation from the RBI. It is relevant to note that like the Intermediary Guidelines, the PAPG Guidelines continued to specifically exempt DvP Transactions, and clarified that their applicability did not extend to any offline transactions including cash on delivery transactions.8
Separately, certain commonalities that can be seen between the Intermediary Guidelines and PAPG Guidelines is that both prescribed certain requirements such as settlement time periods within which the money remitted by a customer, was required to be settled by an online payment aggregator to merchant(s) as well as permissible debits and credits from the nodal / escrow account where all money collected by payment aggregators was pooled and thereafter settled from. This prescription of (i) stringent settlement cycles and tight regulation of credit to and debit from the pool account, by the Intermediary Guidelines as well as the PAPG Guidelines for all online payments made through third-party intermediaries, and (ii) the specific exclusion of DvP Transactions from their respective scopes, made it clear that the RBI initially only intended to regulate online transactions where the payment is made in advance while the goods are delivered in a deferred manner and intended to extend protection to the merchants who provided their offerings without upfront payments for such offerings. This was to ensure customer and merchant protection and minimise the chances of funds being misappropriated or the customer or merchants being defrauded.
It was only in the RBI's Statement on Developmental and Regulatory Policies dated September 30, 20229 did the RBI, for the first time, indicate its intention to also regulate offline payment to bring about parity in regulation covering activities and operations of online and offline payment aggregators. Pursuant to the said statement, the RBI has now issued the Draft Guidelines which for the first time not only intends to regulate the activities of offline payment aggregators but also brings DvP transactions under its ambit.
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Footnotes
1. https://inc42.com/features/fintech-startups-india-payment-aggregator-rush-rbi-compliance/.
2. https://rbi.org.in/Scripts/NotificationUser.aspx?Id=11822&Mode=0
3. https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=12050&Mode=0.
4. https://www.rbi.org.in/Scripts/BS_PressReleaseDisplay.aspx?prid=57713.
5. https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=5379&Mode=0.
6. See paragraph 2.1 of the Intermediary Guidelines.
7. The PA-PG Guidelines do not require bank payment aggregators to seek authorisation given that they handle funds as a part of their regular banking activities. Similarly, payment gateways are also not required to obtain authorisation from the RBI given that they do not handle funds and merely act as technology providers.
8. The PAPG Guidelines in relation to payment aggregators inter alia also prescribed (i) net worth requirements; (ii) governance requirements; (iii) KYC related compliances; (iv) requirements on merchant onboarding; (v) usage of escrow accounts; (vi) permissible debits and credits for such escrow accounts; (vii) customer grievance redressal; (viii) settlement cycles; and (ix) base-line technology recommendations.
9. https://rbi.org.in/Scripts/BS_PressReleaseDisplay.aspx?prid=54466.
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