Disclaimer: This newsle�er and all the material it contains, is for informa�on purposes only. Nothing contained herein is, purports to be, or is intended as legal advice. Ver�ces Partners makes no representa�ons or warran�es, express or implied, of any manner whatsoever in connec�on with this newsle�er. No recipient of this newsle�er should construe receipt of this newsle�er, as an a�empt to solicit business in any manner whatsoever.

Introduc�on

The Reserve Bank of India (“RBI”) has published a discussion paper on guidelines for payment gateways and payment aggregators, which encapsulates the ac�vi�es of payment aggregators and payment gateways and introduces various op�ons for their regula�on.

India has witnessed significant changes in the payment ecosystem in the last decade. The facilita�ng inter-alia role of innova�on, fintech and e-commerce ac�vi�es has contributed to the impressive growth. The RBI has proposed to review previous guidelines issued in November 2009 (“Exis�ng Guidelines”). A paradigm shi� is expected in the manner in which the digital payment ecosystem in India will be regulated and supervised in future.

The exis�ng role of the payment ecosystem has raised regulatory a�en�on on the governance prac�ces which may impact customer experience focus. These include (i) en��es having inadequate governance prac�ces; and (ii) lack of proper redressal mechanism and uniformity in prac�ce across the en��es, for the customer. Furthermore, there is a need for appropriate delinea�on of roles and responsibili�es amongst merchant and customers and also managing customer data, data privacy, know your customer requirement of merchants from the point of view of security and customer confidence.

Regulatory op�ons recommended by the RBI

Based on the current payment ecosystem, certain regulatory op�ons are recommended in the discussion paper for regula�ng the ac�vi�es undertaken by payment aggregators and payment gateways. In the discussion paper, the RBI has recommended three op�ons – one being to con�nue with the current regime of indirect regula�on and bring about minor change. The other op�ons are limited regula�on, and full and direct regula�on

Op�on 1: Con�nue with the Exis�ng Guidelines: To con�nue with the Exis�ng Guidelines with minor changes in respect of defini�on of 'T' (where T is currently defined as the day of in�ma�on regarding the comple�on of transac�on).

Op�on 2: Limited Regula�ons: The payment gateways and payment aggregators shall follow the norms and guidelines

in respect of minimum net-worth, merchant on-boarding, �melines for se�lement of funds, maintenance of escrow account, IT security, etc., and shall be required to submit certain returns to RBI.

Op�on 3: Full and Direct Regula�on: Payment gateways and payment aggregators would be required to be authorised under the Payment and Se�lement Systems Act, 2007 (“PSSA”). In rela�on, exis�ng payment aggregators shall, within approximately one year a�er the issuance of guidelines by RBI, comply with this net-worth requirement. Further, the payment gateways and payment aggregators shall also, if required, maintain the funds received from customers in an escrow account.

These payment aggregator and payment gateway en��es would be subjected to both on-site and off-site monitoring. A brief understanding of the requirements under the aforesaid op�on 3 are as follows:

(a) Authorisa�on/Licensing:

Non-banking payment aggregators and payment gateways shall require authorisa�on from RBI under PSSA. A company incorporated in India would be eligible for undertaking payment aggrega�on and payment gateway business and shall be given one financial year (from date of issue of guidelines) to comply inter-alia with the entry point norms and other technology, security, and storage norms issued in this regard.

(b) Capital Requirements:

En��es shall have a minimum net-worth of ₹ 100 crores to be maintained at all �mes. Exis�ng payment aggregators shall, within one year a�er the issuance of guidelines by RBI, comply with this net-worth requirement otherwise it shall wind-up payment aggrega�on business within one year of issuance of guidelines.

(c) Governance and Dispute Management Framework:

Promoters of the payment aggregator and payment gateway en�ties would need to sa�sfy the fit and proper criteria prescribed by RBI and such en��es shall have board approved policies to handle customer complaints/ grievances, the escala�on matrix for disposal of complaints and turn-around-�mes for complaint resolu�on

Discussion Paper on New Regulatory Regime Proposed by the Reserve Bank of India for Payment Gateways and Payment Aggregators

Disclaimer: This newsle�er and all the material it contains, is for informa�on purposes only. Nothing contained herein is, purports to be, or is intended as legal advice. Ver�ces Partners makes no representa�ons or warran�es, express or implied, of any manner whatsoever in connec�on with this newsle�er. No recipient of this newsle�er should construe receipt of this newsle�er, as an a�empt to solicit business in any manner whatsoever.

Discussion Paper on New Regulatory Regime Proposed by the Reserve Bank of India for Payment Gateways and Payment Aggregators

(d) Safeguards against Money Laundering Provisions:

The Know Your Customer (KYC) / An�-Money Laundering (AML) / Comba�ng Financing of Terrorism (CFT) guidelines shall apply muta�s mutandis to all the Payment Aggregators and Payment Gateways.

Payment aggregators and gateways provide technology infrastructure and are a cri�cal link in the transac�on flow to facilitate processing of an online payment transac�on and perform other func�ons without actually handling the funds. They also facilitate e-commerce sites and merchants to accept various payment instruments from the customers for comple�on of their payment obliga�ons to the merchants.

Considering the essen�al and cri�cal role played in the digital payment ecosystem by the payment aggregators and gateways, the RBI discussion paper has suggested to authorise the payment gateways and aggregators under the Payment and Se�lement Systems Act, 2007.

In addi�on to this, the RBI also suggested that e-commerce marketplaces will have to be separated from the payment

gateway or aggregator business to keep their payments business at arm's length if the guidelines come into effect. Since, some of the e-commerce marketplaces also offer payment aggrega�on services and hence a separa�on of the two ac�vi�es by such en��es would entail a be�er regulatory approach/process. Currently, mul�ple ecommerce majors have set up their own payment gateways including Flipkart's PayZippy, Amazon Pay and Shopclues’ Reach.

The Indian payment ecosystem is fast evolving, and we expect that customer data will have a key role in this evolu�on. Changes in the sector are being driven by a variety of market, technological, end-user and regulatory factors that have data at their core. The proposed discussion paper is a step in the right direc�on for customer-protec�on measures for digital transac�ons. The discussion paper has also outlined the framework to be adopted by the en��es if the RBI opted for complete regula�on.

The RBI has invited comments on the discussion paper from all stakeholders and members of the public by October 17, 2019 following which the final guidelines will be issued. ♦♦