A valuable segment within the Indian FinTech industry, the facilitators of cross-border payments, are on the verge of a significant transformation. This shift is in anticipation of the challenging new Payment Aggregator-Cross Border (PA-CB) Regulations introduced by the Reserve Bank of India (RBI). While aimed at improving transparency, the new framework necessitates FinTechs to potentially restructure their operations, make significant additional investments in technology, and forge new partnerships to effectively meet compliance standards. This is not just about following new rules; it signals a new era where the RBI is determined to bring openness and responsibility to financial players handling funds in India. While it is a positive step for a more responsible industry, it does mean that FinTechs will have to deal with onerous compliance duties.
As per the PA-CB Regulations, entities performing similar cross-border payment facilitation must get a special license from the RBI called the PA-CB license. This means they can no longer operate as unregulated technology service providers in a cross-border transaction but must take accountability for the entire cross-border payment. Before introduction of PA-CB framework, Authorized Dealer (AD) banks monitored payment accounts of such FinTechs and complied with RBI’s instructions for cross-border transactions, but now FinTechs must handle it all. With a deadline of April 30, 2024, for these companies to get the new license, they need to comply or maybe team up with bigger players that will act as the licensed PA-CB.
Evolution of PA-CB regulations
Historically, the RBI allowed entities to handle online payments for import and export without needing a license. These entities, known as Online Payment Gateway Service Providers (OPGSPs), partnered with AD Banks for cross-border transactions. The actual processing and settling of cross-border payments were handled by the AD Bank, overseen by the RBI, while OPGSPs operated somewhat independently and outside RBI’s scrutiny.
However, in a significant ruling in July 2023, the Delhi High Court in determined that platforms like PayPal were not just technology providers but actively operated payment systems for cross-border money transfers. This meant OPGSPs needed to obtain a license to operate and had to adhere to reporting requirements under India’s anti-money laundering law – the Prevention of Money Laundering Act, 2002. This legal shift paved the way for the RBI to introduce the PA-CB Regulations, establishing detailed rules for compliance by these formerly unregulated OPGSPs and other entities involved in cross-border payments.
(Partner at JSA)
Key compliances
The PA-CB Regulations establish a framework for banks and non-banking entities in cross-border payments, which includes– (i) entities must seek authorisation by April 30, 2024; and adhere to RBI guidelines focusing on governance, merchant onboarding, grievance redressal, and risk management; (ii) export proceeds must be directed to the Export Collection Account, while import payments must be routed through a PA escrow account to a separate Import Collection Account; and (iii) PA-CBs must conduct due diligence of merchants before onboarding them.
Grey areas
Amidst the opportunities for FinTechs to comply and directly handle funds in cross-border transactions, challenges emerge alongside compliance costs, particularly in certain ambiguous aspects of these regulations:
- Compliance Timelines: Entities performing PA-CB functions at the time of introduction of PA-CB Regulations were placed under a stringent compliance timeline. RBI had imposed a deadline of January 31 for such entities to comply with RBI’s KYC norms like merchant onboarding, and customer grievance resolution. Entities that failed to meet this January 31 deadline may face potential rejection when seeking PA-CB authorisation by April 2024 deadline set by RBI, posing a risk of operational disruption.
- Hurdles in carrying out KYC: Meeting KYC requirements under PA-CB regime also presents a challenge for the FinTechs. In scenarios where PA-CB facilitates transactions between merchants in India and users abroad, or vice versa, PA-CBs must undertake a comprehensive KYC process of the onboarded merchants. Moreover, PA-CBs can only disburse import and import proceeds into the accounts of these onboarded merchants. Conducting full KYC for each merchant is a big challenge, especially in situations where multiple merchants are being onboarded for settling cross-border payments.
(Regulatory Counsel)
Conclusion
Certainly, the PA-CB Regulations represent progress in the cross-border payments arena. Allowing PA-CBs to operate accounts handling customer funds that were (structurally) owned by the banks earlier, reflects a regulatory effort aligned with industry dynamics. Nevertheless, the RBI should consider industry concerns during the implementation of these regulations. It should provide further clarifications on the compliance issues and address practical industry concerns to ensure effective execution of these regulations.
