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In 2022, the Reserve Bank of India (RBI) set out a Payments Vision with 36 regulatory initiatives to enhance the payments landscape in the world's most populous country by 2025.
The bigger picture
India has seen significant growth in its payments market over the past decade with hundreds of millions of people getting access to bank accounts, e-money accounts and non-cash payment methods for the first time.
This has brought with it a series of regulatory challenges which the RBI proposes to tackle via the 36 goals in its Payments Vision 2025, with the overall objective of “empowering every Indian with access to a bouquet of e-payment options that is safe, secure, convenient, quick and affordable”.
The RBI has made some progress towards achieving its payments vision, including the adoption of two factor authentication for overseas card transactions, the expanded use of offline payments, and the use of name-look ups for fund transfers. That being said, there are still several goals that, if implemented, may place regulatory and commercial burdens on payment service providers (PSPs).
Why should you care
Although significant progress has been made, as the ambitious multi-year reform project nears its final stretch, several key initiatives are still awaiting implementation.
Buy now, pay-later (BNPL) operators should be aware that the RBI is proposing to regulate BNPL services and issue guidelines to operators, though it remains unclear how comprehensive these may be.
PSPs that hold customer funds, whether as a payment bank, prepaid payment instrument issuer or other entity, should take note that the RBI is studying the feasibility of establishing a digital payments protection fund, which will require operators to pay into a centralised fund to compensate consumers affected by fraud.
Payments processors that offer their services in India from abroad or that process Indian transactions abroad should be aware that the RBI’s exploration of local transaction settlement/processing requirements may require them to process Indian transactions locally or obtain permission to do so abroad.
Payments aggregators or payment gateways are likely already aware of the increasing regulation of the sector, as the RBI has sought to bring additional types of aggregators and gateways into its regulatory ambit in recent years. This is a trend that is likely to continue in line with the RBI’s goal of regulating all significant payment intermediaries. However, they should be conscious of the RBI’s goal of creating an online payment system for processing merchant payments via the internet and mobile banking.
PSPs in general should also be cognizant to the RBI’s goal of a comprehensive review of the Payment and Settlements Systems Act and its associated regulation.
Key considerations
Although it remains to be seen what the implementation of these goals will look like, there are still a number of tangible steps that PSPs can consider to be ready for their implementation.
BNPL service providers should be aware that regulation is likely coming and take steps to prepare accordingly. Although there has been little indication at present on how comprehensive these regulations may be, proactive engagement with the regulator may be a good way to gain insights on their regulatory approach.
PSPs that hold customer funds should remain vigilant to the creation of a digital payments protection fund and consider the pecuniary implications of a mandate to pay into such a fund. They should also consider increasing their fraud protection measures to reduce incidences of compensations to their customers due to fraud.
Payments processors that offer their services from outside India or process payments transactions abroad should consider the commercial and regulatory implications of a potential mandate to process transactions locally, including the costs of relocating their data processing facilities or even exiting the market entirely. They should also monitor the implementation of the Digital Personal Data Protection Act that will enter into force imminently, as it contains provisions that will regulate the transfer and processing of data abroad.
Payments aggregators and payment gateways that have not yet been subject to regulation would do well to proactively engage with the regulator. Aggregators and gateways should assess the RBI's online payments system's potential impact on their revenue, especially if they rely heavily on online merchant payments.
Finally, PSPs in general should be mindful of any regulatory reform of the Payment and Settlements Systems Act, as significant changes are likely to affect the foundational pieces of payments regulation in India.
