RBI’s new payment regulations impose heavy compliance costs on digital firms

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The RBI’s rule mandates compliance from entities such as Payment Aggregators (PAs) and Authorized Dealer (AD) Banks engaged in online payments for export or import transactions. The focus is particularly on cross-border payments. The rules transition account management from sponsor banks or authorized dealers to payment firms, essentially converting it to a full-stack payment system. Furthermore, these guidelines have extended their scope to PAs handling online domestic transactions, which were already under RBI’s regulatory purview.

All companies are now required to obtain a license. This requirement comes despite counterarguments like PayPal’s technology service provider claim at a July Delhi High Court hearing. The RBI mandate dismisses such claims and enforces direct supervision over all players. In addition to this, there are revised Know Your Customer (KYC) norms for merchants, stringent net worth criteria, and a mandate for all non-banks in this space to register with the Financial Intelligence Unit of India.

The process of obtaining a Payment Aggregator license is challenging, with numerous firms still awaiting final approval even though they have secured principal approval from the RBI. Existing PAs also need explicit permission from the RBI to continue cross-border payments. This significant sector shift imposes substantial compliance costs on these entities and has sparked apprehension among FinTech firms including PayPal, which had pivoted towards cross-border remittance after leaving the Indian domestic payments market. Therefore, these changes are expected to significantly impact major global entities like PayPal.

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