Payment gateways – companies that provide the technology infrastructure to handle online monetary transactions – are realising that getting a payment aggregator licence is a lot tougher than they imagined when the process started more than two years ago.
While the Reserve Bank of India has given in-principle approval to many applicants, final approval has been pending for more than a year. The RBI has even stopped some big companies that got in-principle authorisation for payment aggregator (PA) licences from onboarding new customers.
PAs are entities that enable e-commerce sites and merchants to accept various instruments from customers to complete their payment obligations without the need for the merchants to create their own systems. PAs get the payments from customers, pool and transfer them on to the merchants.
The RBI has said that the grant of ‘in-principle’ authorisation should not be construed as authorisation unless the entity is granted ‘authorisation’ under Section 7 of the Payment and Settlement Systems Act, 2007. According to experts and company officials, the delay in issuing PA licences is due to the stringent approval process that is aimed at ensuring transparency, standardisation and trust in India’s fintech ecosystem.
Service issues
“PA firms are finding that a lot of things that they do will be regulated, like how a bank used to be in the past while doing the payments business. From reporting dubious transactions to fraudulent merchants, PG firms will have to produce KYCs on request at any time to any government agency,” said a senior payment gateway company executive who did not wish to be identified.
While increased scrutiny was expected, it appears that the fees and charges to merchants will also be regulated. Some payment gateway companies used to find ways to charge for UPI transactions, which banks avoid, and this could be a problem in the future, the executive said. UPI – Unified Payments Interface – is a platform that facilitates money transfers between bank accounts.
According to an official at a PG company, service issues have to be resolved within a stipulated time and missing any of this could result in hefty fines.
“In case they don't close issues on time, it will go as missed targets to the RBI. It will increase liability and might lead to penalties as well. By this, the regulator is emphasising that the customer is paramount when it comes to handling customer money,” the official said.
“Establishing processes to ensure these stipulations are followed is taking time. Also, the RBI needs its own time due to the lack of resources to ensure that such systems are in place at all PG firms,” the senior executive said.
“We have the same regulator for banking and fintech. The industry will take time to catch up. Some new startups are not familiar with the regulations. They need to understand that either it is regulated or it will get regulated. It is a discovery and journey process. What fintechs get wrong is not the intent, but a lack of awareness," MN Srinivasu, co-founder of payment gateway firm BillDesk said at the Moneycontrol Startup Conclave recently.
Chequered history
According to bank and PG officials, the RBI is also scrutinising cases filed by the Directorate of Enforcement against payment firms to see how serious past offences were and whether PGs facilitated illegal businesses. The cases pertain to issues such as facilitation of Chinese money lenders, enabling gambling and betting companies to bring in and take out money from the country and supporting crypto trading.
In many instances, KYC details were false. In some cases, merchants were registered as travel companies but were engaged in transfer of cryptocurrencies and betting. There were also instances of many businesses operating under a single KYC merchant.
“These are serious issues and the regulator and ED suspect that these happened with the knowledge of several executives at these firms. The RBI's thinking is that some of these firms clearly knew the merchants were doing illegal businesses and the PG did nothing to prevent it. Their intent and attitude is still an issue for the central bank," said a former banker who occasionally consults with the RBI on technology, banking and payment issues.
So far, every PG had its own definition of data and used to report its transaction data or gross merchandise value from an investor and valuation perspective, and oftentimes inflated them to increase their valuations. That won’t happen anymore. The number of merchants on a platform also will have to be reported to the regulator.
Regulation and innovation need to go hand in hand because things can get out of hand quickly in tech innovation. For the regulator, it is a question of when to intervene because while you want innovation to flourish, you also want to get the right rules in place, Harshil Mathur said at the Moneycontrol Startup Conclave earlier in July.
“Things like summons by the enforcement directorate that used to go to some PGs sometimes didn’t go out in public. This will also change and all government notices will have to be reported to the regulator,” said the senior executive of the PG firm. The executive added that reporting and monitoring of suspicious domestic and international transactions is also a key area for the RBI.
In the case of some PGs, the RBI wanted a set of changes to be carried out in terms of shareholding, primarily to ensure that overseas investors based in places such as Mauritius and Singapore are known. The RBI wanted the KYC of a few investors in these firms.
The regulator is also concerned about some firms being domiciled overseas.
“It is a task for the regulator to assess and regulate them all. You are dealing with the end-customers’ money and in case anything goes wrong, the people, government and media will turn around and ask what the regulator was doing. There is a clear onus on them. It has been a light-touch regulation from 2008 to 2017. With huge growth comes tighter controls,” Srinivasu said.
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