The Reserve Bank of India (RBI), India’s central bank, is under criticism from the digital payments industry over its newly announced draft guidelines for payment aggregators (PAs). This follows on the heels of US payments company Stripe reportedly departing the Indian domestic payments industry and Zomato, a prominent food delivery platform, abandoning its PA ambitions.
Industry Concerns: Strict KYC and Fund Disbursement Restrictions
During a meeting with RBI officials a week ago, around 40 representatives from the digital payments industry voiced their concerns about the new draft guidelines. The key points of contention include:
- Mandatory Full KYC: Industry representatives highlighted the challenges associated with mandatory full Know Your Customer (KYC) compliance, particularly for small merchants. A founder of a major payment aggregator who attended the meeting emphasized the difficulty of implementing contact-point verification for every merchant, especially street vendors using QR codes for payments. This, according to the founder, would create significant operational hurdles and incur substantial costs.
- Restrictions on Fund Disbursement: The draft guidelines also propose limitations on PAs directly disbursing funds to vendors on behalf of marketplaces or different companies. Industry representatives argue that such restrictions could hinder the smooth functioning of the payments ecosystem, especially for sectors like e-commerce.
Industry Seeks Balance Between Regulation and Innovation
The industry representatives urged the RBI to consider a more balanced approach that fosters innovation while ensuring robust regulatory safeguards. They emphasized the importance of PAs’ role in facilitating the growth of digital payments in India, particularly for small and medium businesses (SMBs). Stringent regulations, they argue, could discourage new players from entering the market and stifle the overall growth of the digital payments landscape.
RBI’s Focus on Mitigating Fraud Risks
The RBI, on the other hand, is primarily concerned about mitigating fraud risks associated with payment aggregators. The central bank is reportedly apprehensive about fraudulent merchants potentially using PAs to siphon off funds from Indian consumers and transfer them abroad through cryptocurrency channels. To address these concerns, the draft guidelines propose stricter oversight of PAs’ merchant onboarding processes.
Balancing Security with Agility: A Challenge for PAs
The industry acknowledges the need for robust security measures. However, they caution that overly stringent KYC requirements and limitations on fund disbursement could significantly impact the agility and cost-effectiveness that have been key drivers of PA growth. PAs, they argue, have built their business model on a foundation of quick and efficient onboarding processes. Implementing stricter regulations akin to traditional banking practices could compromise their competitive edge.
The Future of PA Regulations in India
The RBI has a history of engaging with industry stakeholders before finalizing regulations. While the central bank doesn’t make concrete commitments during these discussions, it utilizes the feedback to refine its approach. The final guidelines are expected to be issued after the RBI deliberates on the industry’s concerns internally.
Impact of Regulatory Environment on Market Players
The recent developments, including the draft PA guidelines and the exits of Stripe and Zomato’s PA ambitions, raise concerns about the potential impact of a strengthening regulatory environment on the digital payments industry. While these decisions might be driven by individual business considerations, industry insiders suggest that the evolving regulatory landscape could be discouraging investments in the payments sector.
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