RBI’s latest recommendations to regulate payment aggregators in offline spaces | Explained

RBI proposes new regulations for offline payment aggregators to enhance safety and compliance in proximity transactions - The Hindu Explains

The story so far: Following its announcement in June 2022 that it will seek better regulation of offline payment aggregators (PAs) facilitating proximity or face-to-face transactions, the Reserve Bank of India (RBI) floated two consultation papers earlier this month. The first deals with activities of offline PAs, while the second proposes to strengthen the ecosystem’s safety by expanding instructions for Know Your Customer (KYC), due diligence of onboarded merchants and operations in Escrow accounts. The RBI has invited comments/feedback by May 31.  

Payment aggregators are entities that facilitate payment from customers to merchants — unburdening the latter from creating a payment integration system of their own. The existing guidelines cover their activities in e-commerce sites and other online avenues. The latest draft guidelines propose to extend these regulations to offline spaces, entailing proximity or face-to-face transactions. RBI observed back in June 2022 that the nature of activities carried out by the PAs, both online and offline, is similar. It aspires to bring in “synergy in regulation covering activities and operations of PAs apart from convergence on standards of data collection and storage.”

The proposed norms are elaborate and incorporate lessons from what happened this year with Paytm Payments Bank (PPBL) — albeit in an unrelated space. With expansion of the utility and scope of operations of PAs, RBI appears to be strengthening the ecosystem against any opacity. The PPBL crisis was triggered by, among other things, major irregularities in the bank’s KYC adherence. In fact, the Financial Intelligence Unit (FIU-IND) had imposed a penalty of ₹5.49 crore having found that PPBL “engaged in a number of illegal acts, including organising and facilitating online gambling.” It added that the money generated from it were “routed and channelled through bank accounts maintained by these (illegal) entities” with the PPBL. 

The primary focus here is on non-bank PAs and within them, the offline extensions. Banks providing physical PA services as part of their normal banking relationship would not require any separate authorisation from the RBI. They are only expected to comply with the revised instructions within three months after they are issued.   

Non-banking entities providing PA services at the point of sale (PoS), that is, offline, would have to inform RBI within 60 days (after the circular is issued), about their intent to seek authorisation. The entities would, however, be allowed to continue their operations while their applications are being reviewed. As for non-banking entities providing PA services online – both those authorised and whose applications are pending, would require to seek approval, about their existing offline PA activity, from the Department of Payment and Settlement Systems (DPSS) and the regulator within 60 days of the directions being mandated. This would also apply to any authorised non-banking entity aspiring to enter the online and/or offline PA space in future.  

Also Read: PayU gets RBI’s approval to operate as Payments Aggregator

RBI’s directions also stipulate that entities currently engaged in PoS activities must ensure they adhere to guidelines on merchant on-boarding, customer grievance redressal and dispute management, baseline technology recommendations, security, fraud prevention and risk management framework as per the previous framework within 3 months. For entities that would require fresh registration, RBI has said continued adherence to existing guidelines framed in 2020 governing e-commerce transactions, would be viewed positively while processing the applications.