caalley logo

The alley for Indian Chartered Accountants

RBI planning strict rules for firms offering payments via PoS machines

May 19, 2023

This will bring companies like Pine Labs, MSwipe, Innoviti Payments, and Ezetap that are deploying point-of-sales terminals, mobile payment terminals, and QR code terminals at offline merchant outlets within the regulatory ambit.

The Reserve Bank of India is set to implement strict capitalisation norms and mandatory Know Your Consumer (KYC) requirements for digital payment companies offering merchant payments through point-of-sale terminals, three people in the know said. This will bring companies like Pine Labs, MSwipe, Innoviti Payments, and Ezetap that are deploying point-of-sales terminals, mobile payment terminals, and QR code terminals at offline merchant outlets within the scope of regulations.

“The RBI is currently working on completing the processes for final approval of the PA/PG (payment aggregator/payment gateway) licences… After that gets done, they will come after the offline sector,” a senior banker in the know said. Two startup founders who operate in this space told ET that there have been no consultations with the industry yet, but the policy direction has already been conveyed to the sector. A discussion paper could get circulated very soon, they said.

Unlike online payment aggregators, offline payment players are managed closely by banks and card schemes like Visa and Mastercard. Hence, it should be easier to regulate them, given most of them already operate under strict mandates from their partner banks. Also, many of these companies have already taken an in-principle payment aggregator nod from the regulator, which means the RBI has already scrutinised them. The industry expects that the regulatory process will be simple and fast.

“RBI wants to regulate merchant acquirers, given they have the major job of ensuring that the right set of merchants get onboarded and settlements of transactions also happen in a systematic fashion,” said the banker quoted above.

QR code deployers could come under the ambit of offline payment aggregators, too. There are major players like BharatPe, Paytm, PhonePe, and Google Pay who operate in the offline channels.

“If you look around, anyone and everyone is deploying QR code terminals offering UPI, wallet payments. This space needs to get regulated with proper norms and that is the thinking of the central bank too,” said one of the founders ET spoke to.

Capital requirements

The industry expects the regulator to follow the framework of the online PA-PG rules while formulating rules for offline players too.

For online payment aggregators, the RBI mandated a net worth criteria of Rs 25 crore to be maintained at all times. A similar net worth requirement could come for offline players as well. The regulator will also bring in mandatory KYC checks along the lines of online players. Background verification of the merchant and strict compliance with KYC will be essential to ensure that this quickly growing sector can be managed well, sources said.

The regulator could also mandate base line technology requirements, which can help reduce frauds and have proper board-mandated security systems in place.

“In the past, getting a PoS terminal was very difficult for small merchants who would often not maintain healthy current account balance with large banks, but all that changed post demonetisation when banks went on an overdrive to deploy PoS terminals at all types of merchant outlets and opened current accounts too,” said the banker quoted above.

But with QR code terminals, merchants could accept digital payments in their personal accounts, too. While this helped grow the network exponentially, it also could pose an oversight risk. Businesses can be of different types and, without proper checks, if they start getting banking services, then it could pose systemic risk, industry insiders said.

These players function as an intermediary between the bank and the merchant. They accept payments from the customers’ bank account and settle it in the merchants’ account within a specified time frame.

These players hold these funds for some time in the middle and settle after one or two days. They offer early settlements too where they settle the entire transaction for the day into the merchant account at the end of the day in lieu of a small fee.

Offline, online and now omnichannel

One important aspect to focus on is the need for separate guidelines for merchant payment players. There is a growing trend among industry participants to go omnichannel with their offerings. Be it Razorpay, Pine Labs or Paytm, everyone operates across the payment spectrum. With merchants going omnichannel, too, the payments industry is going in that direction as well.

“The regulator has already scrutinised these entities as part of their payment aggregator applications, so this should be easier to implement,” the banker said.

But the offline payment space has of late been overshadowed by its online peers. Venture-funded Ezetap got acquired by Razorpay, while Mumbai-based Mosambee got acquired by Pine Labs. Atom, another PoS deployer for banks, was acquired by Japanese IT giant NTT Data.

But the sector as a whole processes a large bulk of digital payments at merchant outlets. RBI data shows that there are around 7.7 million PoS terminals deployed in the country. Across credit and debit cards cumulatively, the sector settles around Rs 80,000 crore worth of transactions every month.

[The Economic Times]

Read more on:
Don't miss an update!
Subscribe to our newsletter