Over the last few months, multiple payment companies or large merchant companies have been getting payment aggregator (PA) licences from the Reserve Bank of India. The names include Razorpay, Cashfree, PayU, Amazon Pay, Google Pay, Tata Pay, Zomato, Policybazaar, Jio, EnKash, Cred, Groww and Worldline among several others.
How did the PA licensing regime start?
Earlier payment gateway companies were working in partnership with banks and were not regulated. Since digital payments have been growing exponentially over the last decade, RBI decided that it was time to bring these entities handling large sums of customer money under its direct regulation
What is a PA company?
PA firms are entities that enable e-commerce sites and online merchants to accept various instruments from customers to complete their payment obligations without the need for the merchants to create their systems. PAs get payments from customers, pool and transfer them to the merchants.
What is the requirement to become a PA firm?
A firm applying for a PA license should have had a net worth of Rs 15 crore at the end of March 31, 2021 and Rs 25 crore at the end of March 31, 2023. According to the RBI, the agreements between PAs, merchants, acquiring banks, and all other stakeholders shall delineate the roles and responsibilities of the involved parties in sorting/ handling complaints, refunds, failed transactions, return policy, customer grievance redressal (including turnaround time for resolving queries), dispute resolution mechanism and reconciliation, among other things.
Why did RBI bring payment gateway companies under its regulation?
Apart from the growth and importance of these entities, the idea is to monitor the companies that handle or move large volumes of money. By licensing these firms and bringing them under its direct control, the RBI can oversee any suspected money laundering activities and high-value suspicious transactions. It gives the RBI direct access to details on such transactions.
The RBI and Enforcement Directorate have also had issues with payment gateway firms facilitating crypto and betting transactions. The regulator also had issues with several payment gateway companies that were not diligent with the KYC of merchants. While PGs worked with banks, the final responsibility was with the banks, which often said that they don't have the capacity to check the KYC of merchants done by PGs. Now with the PA license, the responsibility falls clearly on the PA firms.
Why fintechs are making a beeline for PA licences?
Any payment firm or company handling and movement of large volumes of money will have to pay the payment gateway firms payment processing charges. Payment gateways or processing firms charge somewhere between 0.5 percent to 2 percent depending on the volume. Having a PA licence helps these firms to save a few hundred crore to a thousand crore every year, which more than compensates for the expenses that these companies incur to run and maintain a PA license besides the compliance and data security adherence cost.
Why do some large merchants want to be PA firms?
Depending upon the number of parties that merchants deal with, the move will make sense for them. For instance, Zomato does a gross order value of Rs 13,000 crore in a quarter. Even a 0.5 percent commission to a PA firm would be Rs 65 crore in a quarter and Rs 260 crore in a financial year at the current turnover. Similarly, Amazon and Flipkart or even payment firms like PhonePe and Google Pay process several thousands of crores every year. So it makes sense to have an in-house payment processing division than outsource it. Technology and the requisite talent has also become easier to develop, run and maintain over the last few years.
According to a fintech consultant, increasingly, payments have also become an integral part of consumer journey and satisfaction with a brand. Having control over the payment experience, from user interface to speed of processing and issuing refunds, makes it much easier to manage with an in-house team.
Banks, which manage the current accounts of merchants, usually pass back a small commission or interest, usually around 0.1 percent, for the volume of money maintained in the account on a daily basis.
Since the RBI directive on card tokenisation measure, merchants can only store tokenised information. But with a PA licence, they can, which again makes the payment processing experience easier for merchants.
If large merchants start their own PA division, will standalone payment firms lose business?
The long tail of merchant business is always much bigger than that of a few hundred large merchants. Also, increasingly most large merchants will have multiple payment gateways as they want to reduce transaction failure arising out of downtime or other technical issues.
Merchants also negotiate better rates with standalone PAs when they have an in-house payment gateway. Large merchants are not great for the profitability of PAs.
Of course, most large merchants still don't have a PA of their own.
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