RBI’s nod to payment aggregators signals start of light-touch regulation

That, too, has been some time in the making. After first unveiling in 2020 its plan to have oversight of payment aggregators, the Reserve Bank of India has now granted in-principle approval to 32 such entities. These include Amazon Pay, Google Pay, Razorpay Software, Innoviti Payment, Pine Labs, Reliance Payment Solutions, Infibeam Avenues and NSDL Data Management, with the applications of some big names such as PhonePe and Bharti Pay Services being vetted by the regulator.

Without a formal regulatory structure, India has had many payment aggregators and payment gateways operating over the last few years. These aggregators, or PAs as they are now called, help merchants process their e-commerce transactions while the payment gateways provide the technological infrastructure to route and facilitate the processing of payment transactions. Payment gateways, unlike PAs, do not handle funds. Aggregators receive funds from customers while facilitating transactions, pool that, keep it in an escrow account, and then transfer it to merchants after settlement. It is a business which, according to the RBI, grew at one of the fastest rates globally after 2017.

And during this period, oversight of these players was through banks, with RBI introducing a framework for outsourcing payment and settlement-related activities. That covered fit and proper norms for payment aggregators, checking the background of merchants, a board-approved policy for disposal of complaints by customers, besides a dispute resolution mechanism.

But the huge volume of transactions, protection of consumer interest and broader financial stability concerns made it inevitable for the Indian central bank to quickly be guided by the principle of activity-based regulation than the conventional approach based on entities. For the industry and for customers, RBI’s regulatory approval should provide a confidence boost given that quite a few of these payment aggregators and gateways have attracted investment from both big domestic and foreign funds and will approach the public markets to list too.

For RBI, as its deputy governor, Rabi Shankar, articulated once, in the digital payment space, one of the challenges is to ensure that intermediaries such as payment aggregators which operate outside the regulatory domain do not undermine the role of banks. Non-bank players do not have the burden of huge capital requirements, and buffers, posing regulatory arbitrage challenges. There is also the concern of risks relating to fraud and cybercrimes. And clearly, the need to be mindful of customer grievances considering the volume of transactions running into millions daily. In many other jurisdictions, these intermediaries are also authorized to operate or obtain licences. It will also be a test for India’s new-age and vocal financial sector intermediaries to meet stiffer regulatory and compliance norms.

So far, despite the initial pushback from the industry when a ban on pre-paid instruments was announced, it has been a light-touch regulatory approach. That’s the stance that the RBI should stay with if Indian consumers are to continue to benefit from the efficiencies which digital payments offer. The other key to regulatory success in this area is in getting the balance right in terms of not discouraging innovation while also ensuring competitive pricing, managing disruptions and an effective consumer dispute resolution mechanism.

Relatively easier entry norms, the jostling of a few established players and low margins could mean that payment aggregators and other intermediaries will have to look at related areas to counter the pressure of revenues. And inevitably, segments such as digital lending. That will be the challenge ahead.