Lessons for RBI from its mandate that made recurring payments a nightmare

RBI must focus on monetary policy, stabilising the financial system and making payment systems better.

The frustrating experience of a recurring card payment to a foreign merchant failing and the card being declined is one which is all too familiar for most of us. Every now and then, you can find someone complaining about failed card payments on social media. This is largely due to the onerous regulations put forth by the Reserve Bank of India (RBI).

The RBI had mandated that from October 1, 2021, for every recurring transaction below Rs 5,000, banks must send a notification at least 24 hours before the renewal date. For amounts over Rs 5,000, a one-time password was required to authorise every transaction.

Laudable Intention, But

The rationale of the RBI’s intervention was that exiting from subscriptions is often deliberately complicated, and people often remain subscribed to services they don’t use. Free trial periods sometimes turn into indefinite subscriptions when users forget to cancel. In other instances, there was a jarring difference between entry and exit – subscribe with one click but send a physical form or call to unsubscribe. RBI’s mandate aimed to help customers keep track of their subscriptions and exit unwanted ones.

Though the intention can be lauded, there was and continues to be significant gaps in implementation. Initially, this created havoc and all recurring transactions faced severe disruption. The teething issues weren’t resolved for more than six months, as indicated by this article in Moneycontrol. Implementing the new system required coordination across the value chain of consumers, banks, processing platforms, payment aggregators, and merchants. This coordination has not been seamless, and the fallout has caused much pain to businesses and consumers.

Subscription Services Hit

The most significant impact has been on businesses whose subscription revenue dried up. Despite the adequate notice given by the RBI, companies big and small were impacted. The list included OTT platforms, news organisations, non-profits, cloud service providers, and many others. The biggest impact has been on small, bootstrapped businesses, which depend on revenue from subscriptions for their day-to-day operations. At the margin, an existing customer might have chosen to cancel the subscription rather than go through the hassle of manually making payments each month after getting a failure notice.

For the small businesses, apart from losing business on one side, they also had to bear the additional burden of managing their own payments. Many startups would have subscribed to numerous online services themselves, like cloud services, and payments to these had to be processed manually.

Not-for-profit organisations that were relying on repeat donations also faced the brunt of the mandate. In what now seems like a representation of the needless harm, the Internet Freedom Foundation, a digital rights advocacy group, took to Twitter to appeal to its donors to find alternate methods of supporting them. IFF’s monthly donation model was incongruous with the RBI’s new rules and as a result, they lost nearly 70 percent of its membership.

Choked Transactions

Though the failure rate for domestic transactions has reduced recently, international transactions continue to be a recurring nightmare a year and a half since this was introduced. There are significant hurdles for Indians who subscribe to global content and services. Most international merchants do not comply with RBI’s regulations. In response to queries about declined payments from Indian subscribers, The New York Times recommended using a valid US credit card for payments! Global businesses would have set up systems that adhere to a common global standard for payments. Deviating from it, like introducing an SMS-based OTP authentication, requires fresh investments and commitment to set it up.

International merchants might make alternative arrangements for accepting payments, like supporting UPI, but only if the numbers make sense. Some might have a mobile app through which one can subscribe, but that would attract a 30 percent markup due to the commissions charged by Apple or Google. However, for most others, customers have no option, but to let go of these subscriptions or make manual payments. Such hurdles in transacting with global merchants limit customer choice and hinder the ease of doing business.

The Way Ahead

A year and a half later, some problems have been ironed out and others persist. What lessons can we draw from this experience? Before the mandate, there were problems with opting out of subscriptions in some situations, but it worked for most people. The net impact of the new rules is not quantified, but it has imposed concentrated costs on many businesses and consumers. Holding open consultations and inviting stakeholder comments could have helped anticipate most of these consequences ahead of time. Publishing an impact assessment report also helps to build a consensus on the scope of the problem, the costs and benefits involved, and evaluate the impact of the policy.

Since this involves multiple stakeholders across the value chain, coordination has been a challenge. Lower-cost interventions, such as requiring banks to provide consumers with the ability to view and manage their subscriptions, might have also addressed the issue without as many disruptions. A solution similar to the Standing Instructions portals or hubs that banks provide on netbanking to consumers would have solved this problem.

Finally, should the RBI have ventured into this in the first place? It could be argued that companies not allowing for an easy exit to consumers falls under the purview of consumer affairs and not RBI. The RBI’s mandate, apart from fighting inflation, is to ensure the stability of the financial system. A complementary task is to ensure a seamless and smooth payments system and securing the financial system from criminals. Attempting to save a handful of subscribers to the New York Times at great cost to every other consumer and business was an adventure perhaps best avoided.

Bharath Reddy and Anupam Manur are researchers at the Takshashila Institution, an independent and non-partisan think tank and school of public policy. 

Views are personal and do not represent the stand of this publication.