RBI tightens the reins on cross border payment aggregators and gateways

The RBI has overhauled the regulatory framework governing cross border payment service providers, This has been done in the light of recent judicial pronouncements regulating online payment gateway service providers (OPGSPs) as payment system operators under the Payment Settlement Systems Act, 2007,. Abandoning its light tough approach, RBI has directed entities, formerly known as online payment gateway service providers, to mandatorily seek approval from RBI to continue operations in India.

Earlier, OPGSPs only had to partner with an authorised dealer bank in India to facilitate cross border payments; now they been have brought under the direct control and oversight of the RBI. These entities have been renamed Payment Aggregators - Cross Border (PA-CB).

This is accompanied with an obligation to conduct themselves as a Payment Aggregator and ensure compliance with the Payment Aggregator regulations in all substantial aspects.

PA-CB is an entity that facilitates cross-border payment transactions for import and export of permissible goods and services in online mode. Non-bank entities providing PA CB services must apply for RBI approval latest by April 30, 2024, depending on the category of service they provide (such as payment for export or import or both).

Compliance norms

They have been given three months (from October 31, 2023) to ensure compliance with substantive aspects of the Payment Aggregator Regulations including keys aspects such as merchant on boarding, security and fraud prevention frameworks and customer grievance redressal.

On an ongoing basis, PA-CBs will be expected to undertake customer due diligence (on their merchants, e-commerce partners or entities providing PA services abroad) to PAs under the current PA regulations.

A key action point for existing non-bank PAs undertaking CB payments is to inform RBI in 60 days about their PA CB activities and seek a separate approval from the RBI if they wish to continue offering such services. This would be over and above their PA authorisation (whether approved or pending with the RBI).

Retaining serious players

RBI’s intentions seem clear. They only want to retain serious contenders in this business. The new criterion for registration demands commitment on corporate governance, high standards of compliance as well as financial investment by the players.

Anyone seeking the RBI’s approval to continue to act as a PA-CB will need to rethink their business strategy as it comes with a dual obligation of pre-registration with the Financial Intelligence Unit of India and a minimum net worth of ₹15 crore (with a commitment to increase the net worth to ₹25 crore by March’ 26).

Registration with FIU would mean that the entity will be treated akin to a ‘reporting entity’ under the Prevention of Money Laundering Act, 2002 and ensure compliance with rather onerous and often stringent obligations of maintaining and furnishing cash and suspicious transactions reports, cross border wire transfer reports with FIU in their prescribed formats, appoint a principal officer and a designated director in charge of compliance with the PMLA. Failure to meet these requirements could result in serious consequences in forms of heavy fines and penalties.

Limits revised

RBI has also enhanced and revised the limits available for undertaking cross border transactions. Instead of per transaction, the limits are now linked to per unit of the goods/service sold or purchased with the maximum value being fixed at ₹25 lakh per unit of the goods/service.

In what appears to be a conscious decision and may also have been precipitated by recent investigations into the conduct of certain reckless players, the RBI seems to have put a stop to all collection accounts arrangements it had approved on a case-to-case basis to various banks to permit their constituents to facilitate cross border payments outside of the OPGSP framework.

Whether some of these will be permitted to continue operations outside of the PA-CB framework remains to be seen, but what is clear is that such arrangements are unlikely to be approved on an ad hoc basis going forward. OPGSPs and entities functioning under the collection account model have their work cut out.

Over the course of next few months, they must decide if they want to scale up operations and embrace the status of a full-fledged regulated payments entity in India or scale back and perhaps look to partner with or merge business with another licensed PA-CB in India.

 The writer is Partner, Shardul Amarchand Mangaldas & Co.

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