RBI’s Regulatory Shift: Cross-Border Payments and Compliance in India

Introduction:

The Reserve Bank of India (RBI) plays a crucial role in regulating and overseeing the Indian financial system. In recent years, the Reserve Bank of India (RBI) decided to bring cross-border payment aggregators (CB-PAs) under its direct supervision in order to enhance oversight and promote a safer and more robust cross-border payment ecosystem in India. Prior to this move, CB-PAs were only required to partner with an authorized dealer bank in India to facilitate cross-border payments. However, the RBI recognized that the growing volume and complexity of cross-border transactions necessitated a more stringent regulatory framework.

Cross-border payment aggregators (PA-CBs) will need a license from the Reserve Bank of India (RBI) to operate under the new criteria. Existing providers of online payment gateway services (OPGSPs) must apply for the license by April 30, 2024. Notably, before registering with the RBI, non-bank PA-CBs must also register with the Financial Intelligence Unit-India (FIU-IND). These rules supersede the draft Online Export Import Facilitators Directions released by the RBI in April 2022, which were withdrawn following consultations with industry stakeholders.

Who needs to comply with the new cross-border payment rules in India?

The new regulations apply to firms in India that facilitate online cross-border financial transactions for the import and export of approved goods and services. These entities include authorized dealer banks (AD Banks), payment aggregators (PAs), and PA-CBs that handle cross-border payments. An example would be a payment service provider that lets a foreign merchant to receive payments for things sold to a buyer in India.

Non-Bank PA Authorization Requirements-CB Service Providers:

All non-banks that provide PA-CB services must apply to the RBI for authorization as a payment system operator (PSO) under the Payment & Settlement Systems Act, 2007, by April 30, 2024. They can apply for license in one of three ways: export-only, import-only, or export and import. AD Banks that offer these services do not require a special license.

Key Requirements for Non-Bank PA-CB Providers to Obtain RBI Authorization:

1. Registration with the Financial Intelligence Unit (FIU-IND): Before seeking for RBI authorization, all non-bank PA-CBs must register with the FIU-IND. This registration assures compliance with anti-money laundering (AML) and counter-terrorism financing (CFT) requirements.
2. Minimum Net Worth:
a. Existing non-bank PA-CBs must have a net value of INR 15 crore at the time they apply for RBI permission. Furthermore, by March 31, 2026, they must boost their net worth to INR 25 crore.
b. New non-bank PA-CBs: New non-bank PA-CBs that begin operations after the circular’s publication must have a net worth of INR 25 crore by the end of the third fiscal year after gaining authorization.
3. Wind-up Requirements: Existing PA-CBs that do not achieve the net worth requirements or apply for RBI authorization within the specified timeframe must cease PA-CB operations by July 31, 2024.

Import and Export PA-CB Account Requirements:

An Import Collection Account (ICA) with an Authorized Dealer Bank (AD Bank) is required for PA-CBs. Payments for import transactions must be received by the PA in an escrow account, from which money must be transferred to the ICA for onward settlement to the offshore merchants.
PA-CBs that solely do exports must keep an Export Collection Account (ECA) with an AD bank. The ECA can be in Indian Rupees (INR) or in international currencies. Separate currency accounts must be kept for all foreign currency transactions. Only merchants who have been directly onboarded by export PA-CBs can settle transactions in currencies other than INR.

RBI’s comprehensive regulatory measures:

The RBI has imposed a significant compliance burden on Prepaid Payment Instrument Issuers (PA-CBs) by subjecting them to direct regulatory supervision of the DPSS. Considering that the domestic leg of a transaction involves cross-border payments either at the destination or origination, the RBI aims to standardize regulations across the entire spectrum of payments, covering both domestic Payment Aggregators (PAs) and PA-CBs.
In sending a clear message, the RBI emphasizes that payment processing companies must undertake robust merchant onboarding, customer complaint redressal, anti-money laundering, and information security protocols. Overall, this underscores the importance of adherence to comprehensive regulatory standards in the payment processing industry.

Conclusion:

The Reserve Bank of India (RBI) has implemented new laws in India for cross-border payment aggregators (PA-CBs). These policies are intended to improve oversight, create a more secure and resilient cross-border payment environment, and assure compliance with comprehensive regulatory standards. Registration with the Financial Intelligence Unit (FIU-IND), meeting minimum net worth requirements, maintaining specific account requirements for import and export transactions, and implementing robust merchant onboarding, customer complaint redressal, anti-money laundering, and information security protocols are key requirements for non-bank PA-CB providers to obtain RBI authorization.

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