RBI Issues Draft Circular for the Regulation of Payment Aggregators

In April 2024, the Reserve Bank of India (“RBI“) issued the Draft Circular for the Regulation of Payment Aggregators (“Draft Circular“), in keeping with their pivotal role in the ever-evolving financial services industry. The Draft Circular is slated to update the extant Guidelines on Regulation of Payment Aggregators and Payment Gateways, as issued by the RBI on March 31, 2021 (“Guidelines“).

The Draft Circular encompasses changes to significant aspects of the Guidelines to bring them up to speed with the evolving landscape. The most notable features of the Draft Circular are as follows:

1. Definition of Payment Aggregators (“PA”): The Draft Circular proposes to amend the definition of PAs “Entities which on-board merchants and facilitate the aggregation of payments made by customers to such merchants, for purchase of goods and services, using one or more payment channels, in online or physical Point of Sale payment modes through a merchant’s interface (physical or virtual), and subsequently settle the collected funds to such merchants.” The addition of physical point-of-sale payment providers would effectively widen the scope of the Guidelines, which limited its conception of PAs to entities which facilitated e-commerce sites and merchants to accept various payment instruments from customers (for the completion of their payment obligations) without being needed to create separate payment integration systems on their own. The earlier definition had categorically emphasized that the function of PAs was to connect merchants with acquirers; particular by receiving payments from customers, pooling them, and transferring them to merchants after a certain time period. 

2. Introduction of Categorization:

The Draft Circular classifies PAs into 2 (two) categories, namely:

• Online PAs (“PA-O“): PAs that facilitate e-commerce transactions (excluding payments made upon the delivery of goods); and
• PA Physical Point-of-Sale (“PA-P“): PAs which facilitate face-to-face or proximity payments, specifically those made upon the delivery of goods. 

Further, the Draft Circular also classifies merchants (i.e., entities which sell/provide goods and services to customers, including marketplaces) into 2 (two) categories, namely:

• Small Merchants: Physical merchants which only deal in face-to-face transactions having an annual turnover of less than Rs. 5,00,000/- (Rupees Five Lakhs Only) which are not registered to pay goods and services tax; and
• Medium Merchants: Merchants (both physical and online) which do not fulfil the criteria for small merchants, having an annual business turnover of less than Rs. 40,00,000/- (Rupees Forty Lakhs Only), which are not registered to pay goods and services tax.

2. Escrow Accounts Integration: As per the extant Guidelines, PAs are required to maintain the funds collected in escrow accounts with scheduled commercial banks. By way of the Draft Circular, the RBI has now permitted the same escrow account to be used for both PA-O and PA-P activities, including funds in respect of ‘Delivery versus Payment transactions’ by the RBI. The Draft Circular has also deleted ‘payment to any other account on specific directions from the merchant‘ as a permitted debit from the escrow account.

3. Due Diligence of KYC: The Draft Circular requires that PAs ought to undertake due diligence of merchants onboarded by them in accordance with Customer Due Diligence prescribed in the Master Directions on KYC, 2016 issued by the RBI. It stipulates that for small merchants, the PAs must conduct contact point verification (“CPV“) of the business establishment and verify merchant bank accounts. In parallel, for medium merchants, CPV ought to be carried out along with the verification of one Officially Valid Document (“OVD“) of the proprietor/beneficial owner, and the verification of one OVD for the business itself. Existing PAs are required to ensure the due diligence process detailed above is completed for all existing merchants by September 30, 2025. Additionally, quarterly reports detailing compliance with the aforementioned requirements are required to be submitted to the RBI (through its regional offices) by the 7^th (seventh) day of the following month.

4. Agents: As per the Draft Circular, PAs are allowed to utilize agents for merchant onboarding if they have a board-approved policy clearly laying out the agent engagement protocols. Thorough due diligence of persons appointed as agents ought to be carried out and the respective PA shall be responsible as the principal for all acts of the agents (including aspects relating to safety and security) and shall preserve records/confidentiality of customer information at all times. 

5. Other Compliances:

• The Draft Circular also requires that ongoing monitoring of the transaction activity of merchants be carried out by PAs, based on which a merchant may be migrated to a high category of Customer Due Diligence.

• PAs must verify that merchant transactions processed by them align with their stated business profile; and that risk-based payment limits be put in place for the onboarded merchants.

• PAs ought to ensure that the marketplaces they onboard do not handle funds for services not offered through their platform.

• PAs must maintain ongoing compliance with wire transfer guidelines as per Master Directions on KYC, 2016.

• PAs are required to register with the Financial Intelligence Unit-India (FIU-IND).

Regulatory developments play a direct and significant role in the future of any industry. This is especially true in the arena of technology—where innovation is often unforeseen at the preliminary stages. With the advent of several new processes and technologies in the sphere of financial technology and payment aggregation in the recent past, the revamp of the guidelines governing payment aggregators and gateways is rightly timed. By adapting to the evolving landscape, the Draft Circular ensures transparency, security and sustainability, fostering a conducive environment for continued growth and innovation in the sector.