It appears that a new category of licenses is soon to be added in the world of financial services. To tighten the offline payments ecosystem, the Reserve Bank of India (RBI) is expected to come out with guidelines for issuing licenses to operate in the point of sales (POS) business. Third-party POS operators would have to obtain licenses to function in the space. The move is expected to impact players such as Pine Labs, MSwipe, Paytm and BharatPe to name a few.

According to highly placed sources, the objective of introducing a licensing framework is to ensure harmony in operations and establish level playing field between online and offline payment operators. “Regulated entities such as banks and NBFCs who are already in the POS business won’t be impacted. However, third-party operators will have to obtain a license to continue business,” said the source.

Third-party operators growing faster than regulated entities in this space has also made a strong case in favour of licensing the ecosystem. To put things in perspective, third-party offline payments operators are estimated to be maintaining daily average balances of ₹400 crore vis-à-vis ₹1,000 crore seen in the online space. “It is best to bring about regulatory changes before the offline market becomes too big,” said a senior executive of a payment company.

It is understood that that in recent years, banks have opted to operate through third-party POS players rather than doing it in-house due to ease of doing business. Similar to payment aggregator licenses, POS operators may have to comply with certain norms such as minimum net worth of ₹25 crore and passing the fit and proper conditions of RBI.

An email to RBI on the matter remained unanswered till going to press. If the licenses are made mandatory, it would be interesting to see if players such as BharatPe and Paytm, who are yet to get RBI’s nod for payment aggregator, will be allowed to operate in the offline POS segment.

Cash for swipe

The need for a licensing framework is said to have assumed importance for three reasons.

According to sources, cash loans on credit cards is increasing in informal sector with a steep surge in high-value, one-time swipes at POS recently witnessed by the industry. It is believed that the merchant handling the POS may be handing out cash for these swipes. “Right now, the third-party operators are responsible for KYC. But the system isn’t foolproof to detect and act against deficiencies,” said a CEO of a POS company.

Secondly, data storage of POS transactions is governed by agreements between the issuing bank and third-party operators. “Some people store data for 90 days and some do it for six months to a year, based on internal agreements,” said another CEO of a payments entity. For security reasons, there needs to be harmony in such practices.

Fund management

Lastly, there are concerns about fund management with third-party players. Settlement to merchants isn’t instantaneous and there is usually a day’s lag. “There is a risk with unregulated entities stocking cash and makes a case for bringing online payment aggregators at par with offline POS players. Given the extent of money handled by POS players, there is no recourse if a fly-by-night operator decides to wind down with the money. That’s a huge risk,” said a CEO quoted above. While no major lapses on this front has surfaced so far, with the business growing multifold in the recent years, this has emerged as a key concern to the regulator.