FinTechRBI’S Revolutionary Step on Cross Border Payments

INTRODUCTION

On October 31, 2023, the Reserve Bank of India (RBI) issued a circular titled “Regulation of Payment Aggregator – Cross Border” (Circular), aimed at establishing direct regulatory oversight over all entities engaged in facilitating cross-border payment transactions related to the import and export of goods and services. The Circular delineates these entities as Payment Aggregator – Cross Border (PA-CB) and seeks to establish a regulatory framework governing their operations.

The Circular consolidates simplifies the extant present regulatory framework pertaining to entities facilitating cross-border payments and transactions. It has replaced certain prevailing arrangements for Cross-Border Payments such as, collection agents and Online Payment Getaway Service Provider (OPGSP).

Consequently, entities utilizing such arrangements will be required to transition to the regulatory framework applicable to PA- CB compliance to ensure the continuity of their operations.

EXISTING FRAMEWORK ON CROSS BORDER PAYMENT

Prior to the issuance of the Circular, cross border transactions for business related import and export primarily relied on the following arrangements:

1. Online Payment Gateway Service Providers (OPGSPs):

OPGSPs were subject to regulation under RBI’s circular titled “Processing and Settlements of import and export Related Payments Facilitated by Online Payment Gateway Service Providers” dated September 24, 2015.

OPGSPs were not required to obtain authorization from the RBI; however alternatively, they were required to establish a standing arrangement with an Authorised dealer (Category 1) bank (AD Bank). Under this regulatory framework, OPGSPs operated under certain constraints, including limitations on import of goods (excluding service) and software and were further capped by a limit of USD 2,000 for import transactions.

2. Collection Agents:

NBFC’s and other private financial services companies sometimes entered into arrangements approved by RBI, enabling them to function as collection agents for foreign entities offering goods and services within India. Although there was no dedicated regulatory framework governing collection agents, RBI approvals delineated specific terms and conditions for these entities, including stipulations regarding the remittance timelines for collected proceeds, reporting obligations, and due diligence requirements in accordance with the provisions of the Foreign Exchange Management Act, 1999 (FEMA).

The facilitation of transactions under these aforementioned arrangements will now fall within the purview of PA-CB activities. This framework enables PA-CB entities to engage in facilitating import and export transactions for both goods and services, explicitly encompassing digital services conducted in an online mode. However, it remains uncertain whether the specific approvals granted by the RBI for collection agents will be entirely absorbed into this consolidated regime.

INTRODUCTION OF PA-CB

The Circular, which has been issued to all Payment System Providers and Payment System Participants defines a PA-CB as any entity that facilitates cross-border payment transactions for import and export of permissible goods and services in online mode.

By broadly defining PA-CB activity, the intention is to establish a regulatory framework enabling domestic payment aggregators (PA) to engage in cross-border payment facilitation, while also encompassing intermediaries traditionally engaged in OPGSP activities. Consequently, such entities are obligated to establish requisite bank accounts stipulated by the Circular, such as Import Collection Accounts or Export Collection Accounts, and adhere to the corresponding obligations delineated therein.

Although the inclusion of the words ‘online mode’ has raised some ambiguity regarding whether the Circular only governs electronic payment methods or if it also encompasses direct bank-to-bank transfers initiated by the payer via methods such as Real-Time Gross Settlement (RTGS) and National Electronic Funds Transfer (NEFT).

RBI’s Guidelines on Regulation of Payment Aggregators and Payment Gateways (PA Guidelines) dated March 17, 2020 have now also been extended to encompass PA-CB entities. This extension lacks specific qualifications regarding the deferred nature of ‘Delivery versus Payments’. While the RBI previously clarified that the PA Guidelines, inclusive of settlement timelines, pertain to transactions where payment is made in advance with goods delivered in a deferred manner, the Circular’s broad application of the PA Guidelines to all PA-CBs necessitates operational assessment by such entities concerning the applicable timelines for cross-border payments where payment is deferred and goods are delivered in advance.

ELIGIBILITY AND AUTHORIZATION

The Circular specifies that PA-CB activities can be undertaken either by AD Banks, which are exempt from separate authorization, or by authorised non-bank entities. On the other hand Non-bank entities are mandated to apply to the RBI for authorization by April 30, 2024.

All entities intending to operate as PA-CB entities abide by the following requirements:

1. Required Net Worth:

Both existing and new non-bank PA-CB entities require minimum net worth of INR 15 crores to submit  the authorization application. Subsequently, existing non-bank PA-CBs are have an additional condition to increase their net worth to INR 25 crores by March 31, 2026

2. Registration with financial Intelligence unit:

All non-bank PA-CB entities existing as of the date of the Circular are mandated to register themselves with the Financial Intelligence Unit-India (FIU-IND).

3. Compliance with PA-CB Guidelines:

Non-bank entities applying for PA-CB authorization within the stipulated timelines are authorized to continue offering such services until receiving communication from the RBI regarding the decision on their application.

However, the RBI has imposed a condition necessitating all entities presently engaged in this activity to ensure adherence to the governance guidelines, merchant onboarding procedures, customer grievance redressal mechanisms, dispute management frameworks, baseline technology recommendations, security measures, fraud prevention strategies, and risk management frameworks delineated under the Payment Aggregator Guidelines within a three-month period from the date of the Circular, and thereafter, on an ongoing basis.

Failure to meet these requirements within the specified timeframe may result in the rejection of their application by the RBI. Additionally, all other directives issued by the RBI concerning PA, including those pertaining to tokenization and restrictions on the storage of card credentials, will apply to PA-CBs. Entities currently undertaking PA-CB activities are also obligated to assess any potential transition of existing fund flows to align with the flows outlined in the Circular prior to the RBI’s authorization grant.

4. Import PA’s

Import PAs  are mandated to establish and maintain an Import Collection Account with an AD Bank. Pursuant to the provisions set forth in the Circular, payments originating from customers in India for the importation of goods or services must initially be collected in an escrow account of a PA, it must then be transferred to the Import Collection Account, and ultimately debited to the corresponding overseas Merchant Accounts.

In offering import facilitation services, Import PAs are granted permission to directly onboard overseas merchants or establish agreements with e-commerce marketplaces and foreign entities providing payment aggregation services. Import PAs are entrusted with the responsibility of ensuring that the onboarding procedures comply with the RBI Know Your Customer  Master Directions, 2016 (KYC Master Directions) and refrain from facilitating imports prohibited under India’s Foreign Trade Policy.

Customers are empowered to effect payments for imports utilizing any payment instrument offered by Indian authorized payment systems, such as credit cards, debit cards, prepaid payment instruments, and Unified Payments Interface, with the exception of small prepaid payment instruments.

Furthermore, in scenarios where customers endeavour to import goods or services exceeding a per-unit cost of INR 2.5 lakh, Import PAs are obliged to undertake customer diligence in accordance with the KYC Master Directions.

5. Export PA’S

Export PAs  are mandated to maintain an export collection account with an AD Bank, which may be denominated in Indian currency or foreign currencies. Should an Export PA opt to maintain export collection account in foreign currencies, separate export collection account must be maintained for each foreign currency. In terms of payment flows, the Circular stipulates that all export proceeds must be directed to the relevant currency ECA.

Similar to Import PAs, Export PAs are obligated to:

• ensure compliance with India’s Foreign Trade Policy to prevent the exportation of goods or services in violation thereof;
• conduct due diligence of merchants, e-commerce marketplaces, and PA’s onboarded by them in accordance with the KYC Master Directions; and
• ensure that proceeds from the export collection account are directly settled into the merchant’s account. The Circular specifies that PA-CB entities may only offer settlement in foreign currencies to merchants directly onboarded by them.

AMLEGALS REMARKS

The Circular represents a significant stride towards establishing regulatory clarity and uniformity in cross-border payment transactions, which was previously fraught with disparate in multiple confusing and often overlapping regulations. The Government passed the Circular recognizing the rapid evolution in the Indian business strength which has caused sizable a surge in cross-border payments over recent years.

The regulatory clarity provided by the Circular will also assist investigative agencies are increasingly scrutinizing the intricate business models, fund flows, and regulatory approvals/licenses of stakeholders within the payment ecosystem. Given the widespread adoption of digital payments, the dynamic nature of technology, advancements in payment systems, and the increase in market players, investigative agencies are intensifying efforts to effectively regulate the sector without causing damage the yet nascent rise of many upcoming companies and industries.

Looking ahead, companies in the business of cross border payments would be compelled to be more aware and ensure abidance by the Circular and evaluate their operations wherever the present systems are lacking.

– Team AMLEGALS assisted by Ms. Utsav Sheth

For any queries or feedback feel free to reach out to mridusha.guha@amlegals.com or jason.james@amlegals.com