The Reserve Bank of India (RBI) has taken significant action by instructing a card network, whose name was not disclosed, to pause payments under an arrangement that facilitated businesses to make card payments to entities that typically do not accept such transactions. This move comes as part of the RBI’s efforts to regulate and ensure compliance within the payment ecosystem in India.
In a statement posted on its website, the RBI highlighted its awareness of a specific arrangement within a card network that allowed businesses to conduct card payments through certain intermediaries to entities that were not equipped to accept card payments. While the RBI did not explicitly name the card network involved, Visa, one of the major players in the payment industry, acknowledged receiving communication from the RBI on February 8 regarding the role of business payment solution providers (BPSPs) in commercial payments.
Visa’s spokesperson mentioned that the communication received from the RBI appeared to be an industry-wide request for information and included a directive to halt all BPSP transactions. This directive was in line with the RBI’s efforts to scrutinize and address potential issues within the payment system.
The RBI elaborated on the unauthorized arrangement, stating that intermediaries were accepting card payments from corporates for commercial purposes and transferring the funds to recipients who did not accept card payments. This process involved using Immediate Payment Service (IMPS), Real-Time Gross Settlement (RTGS), and National Electronic Fund Transfer (NEFT) for fund remittance.
Upon closer examination, the RBI determined that this arrangement qualified as a payment system under the provisions of the Payment and Settlement Systems (PSS) Act, 2007. However, the arrangement had not obtained the necessary authorization under Section 4 of the PSS Act. This lack of authorization raised concerns about compliance with regulatory requirements and the potential risks associated with unauthorized payment systems.
Furthermore, the RBI identified several other issues with the payment mechanism. For instance, the intermediary pooling large sums of money into an account not designated under the PSS Act posed risks to the integrity of the financial system. Additionally, transactions processed under this arrangement did not comply with the originator and beneficiary information requirements outlined in the master direction on know your customer (KYC) issued by the RBI.
In response to these findings, the RBI advised the card network to halt all such arrangements until further orders. It clarified that the directive did not impose restrictions on the normal usage of business credit cards. The RBI emphasized its commitment to ensuring the integrity and stability of the payment system and stated that the matter was under detailed examination.
This action by the RBI underscores the importance of regulatory oversight in the financial sector, particularly in payment systems where compliance and security are paramount. By addressing potential risks and unauthorized activities, the RBI aims to maintain trust and confidence in India’s financial infrastructure.
Moving forward, it is likely that the RBI will continue to monitor and regulate payment systems to prevent unauthorized activities and ensure compliance with regulatory requirements. This proactive approach is essential for safeguarding the integrity of India’s financial system and promoting a secure and efficient payment ecosystem for businesses and consumers alike.
