Introduction
India’s card payments ecosystem has recently seen two fee-related issues come to a head in quick succession. On one hand, the National Payments Corporation of India has issued detailed FAQs clarifying the Merchant Discount Rate, the fee a merchant pays for accepting a digital payment, applicable to UPI transactions, providing much-needed certainty to industry participants.
On the other, a dispute over the Interchange Reimbursement Fee, a separate fee mechanism within the card payments chain, has surfaced between PayU Payments Private Limited, a Reserve Bank of India-authorised payment aggregator, and a set of banks, resulting in litigation before the Delhi High Court. Unlike the UPI MDR position, the IRF dispute remains unresolved, and the Court’s order addressing it offers an early look at how such disputes may be approached going forward.
Relevant Definitions and Regulatory Context
A few terms are useful to establish before turning to the dispute itself. A payment aggregator, such as the plaintiff, is an entity authorised by the RBI to facilitate online payment transactions for merchants by offering a single integration point for card, net banking, UPI and wallet payments. An acquiring bank is the bank that processes and settles a merchant’s card transactions and remits net settlement amounts to the payment aggregator’s escrow account, while an issuing bank is the bank that has issued the card used by the customer.
A card network, such as Visa in this case, is the system provider operating the card payment rails connecting issuing and acquiring banks. The Merchant Category Code, a four-digit code identifying a merchant’s principal line of business, determines the Interchange Fee payable by the acquiring bank to the issuing bank for a given transaction; where an MCC is incorrectly assigned, an issuing bank may raise an Interchange Reimbursement Fee claim against the relevant acquiring bank to recover the resulting shortfall.
Factual Matrix of the Dispute
The plaintiff’s case is that an issuing bank raised IRF claims before the card network against four acquiring banks, alleging that certain merchants onboarded by the plaintiff had been assigned incorrect MCCs, and that these claims were taken up by the card network under its own private IRF Compliance Process, a process to which the plaintiff was not a party. The plaintiff maintains that it has no role in assigning MCCs, a function it attributes to the acquiring banks, and disputes any liability being fastened on it.
Despite this, one of the acquiring banks deducted amounts from the plaintiff’s ongoing settlements towards the disputed IRF liability; although a substantial portion was later reversed, a balance of Rs. 6,88,18,850 remained deducted. With IRF claims against the remaining three acquiring banks running into several crores, the plaintiff apprehended that adverse determinations against those banks would lead to further deductions from its settlements, and instituted the present suit.
Reliefs Sought by the Plaintiff
The plaintiff sought a declaration that the card network’s IRF Compliance Process does not satisfy the mandatory requirements of Section 24 of the Payment and Settlement Systems Act, 2007, and is therefore without jurisdiction to found any deduction from its escrow account, along with permanent injunctions restraining further deductions pending resolution through the statutory mechanism, and a mandatory injunction for the return of the amount already deducted, with interest.
Section 24 of the PSS Act establishes a structured framework for resolving disputes between system participants, requiring a system provider to constitute a panel of at least three uninvolved system participants, with further escalation to the RBI where a party remains dissatisfied, and a final and binding RBI determination at that stage. The plaintiff’s core contention was that the card network’s private compliance process, having real financial consequences for a non-party, could not substitute for this statutory mechanism.
Submissions on Behalf of Defendant No. 6
The card network’s position was that it functions as a Card System Provider operating under its own rules, and that the IRF process is driven by voluntary submissions from the acquiring and issuing banks, with no direct dealing with the plaintiff. It submitted that it does not itself debit the plaintiff’s settlement accounts or issue settlement instructions, and that any deduction from the plaintiff ultimately flows from separate, bilateral Master Service Agreements between the plaintiff and the acquiring banks, agreements to which the card network is not a party. On this basis, it argued that an injunction restraining its own compliance process was not an appropriate remedy for a dispute that, in substance, concerned the plaintiff’s contractual arrangements with the acquiring banks.
Findings and Directions of the Delhi High Court
Rather than deciding the maintainability question outright, the Court took a procedural route shaped by two considerations. First, since the suit is a commercial suit, Section 12A of the Commercial Courts Act, 2015 ordinarily requires pre-litigation mediation unless urgent interim relief is contemplated, a requirement the Supreme Court has treated as mandatory in Patil Automation (P) Ltd. v. Rakheja Engineers (P) Ltd., while also recognising, in Novenco Building & Industry A/S v. Xero Energy Engg. Solutions (P) Ltd., that a court retains the discretion to refer parties to mediation even after a suit has been instituted. Second, the Court noted that both the plaintiff and the card network operate under authorisations granted by the RBI under the PSS Act, and that the entire regime is accordingly already within the RBI’s regulatory oversight.
On this basis, the Court found it more appropriate to request the RBI to depute a senior officer to mediate a solution within thirty days, rather than directing the parties to a standard pre-litigation mediation process, while making clear that the RBI would be acting only as a mediator and facilitator in this exercise, not as the statutory dispute-resolution authority contemplated under Section 24 of the PSS Act, and that the plaintiff’s appellate rights remain unaffected even if the suit is ultimately found not maintainable.
Pending this mediation, the Court directed the parties to maintain status quo on claims arising from past transactions already raised before the card network, restrained the card network from issuing any final IRF determination on the pending claims during this period, and correspondingly restrained the acquiring banks from making further deductions or netting from the plaintiff’s settlements, while also restraining the issuing bank from raising further claims of this nature in the interim.
The Court was careful to clarify that this arrangement would not affect the parties ordinary-course transactions or their existing or future contractual and legal rights, all of which remain expressly open, and that the order is without prejudice to the rights and contentions of all parties on every issue in the suit.
Wider Ramifications for the Payments Industry
The dispute, and the Court’s response to it, touches a genuine structural question in the card payments chain: who bears the consequence of an MCC misclassification, and through what process, where the payment aggregator that onboarded, the merchant is not itself a party to the card network’s private compliance mechanism, but nonetheless bears the downstream financial impact through deductions from its settlement account.
Banks have a legitimate interest in recovering a shortfall that flows from a misclassified MCC; payment aggregators have an equally legitimate interest in not having amounts deducted from escrow accounts, which they are separately required to maintain at prescribed minimum levels, pursuant to a private process to which they were never a party and had no opportunity to contest.
The Court’s own observation, that unresolved MCC disputes could recur between other participants in future, suggests this case may be read as a template rather than a one-off, particularly given that the underlying question, the interplay between a card network’s private rules and the statutory dispute-resolution mechanism under Section 24 of the PSS Act, has not yet been finally decided and remains open for the RBI-facilitated process, and eventually the Court itself, to resolve.
AMLEGALS Remarks
Payment aggregators and acquiring banks alike would benefit from reviewing their Master Service Agreements for how IRF and similar interchange-related liabilities are allocated, including whether a card network’s private determination is treated as conclusive for the purposes of settlement deductions, and whether any opportunity to contest an MCC-related claim is built into that contractual chain before a deduction is made from an aggregator’s escrow account.
Given that this order is interim and procedural, addressing maintainability and interim relief rather than the merits of the underlying IRF claims, participants in this space would do well to track the outcome of the RBI-facilitated mediation and the subsequent hearing, since the eventual view taken on the relationship between Section 24 of the PSS Act and a card network’s private dispute mechanism is likely to have implications well beyond the immediate parties to this dispute.
For any queries or feedback, feel free to connect with Hiteashi.desai@amlegals.com or Khilansha.mukhija@amlegals.com