Over regulation of payment entities will create greater distress in India’s fintech sector

The Regulations impose an onerous burden on the startups in this sector.  PA & PG activity is essentially a facilitating or intermediation activity of providing instructions between 2 KYC-ed FI of Authorised Issuers. PAs are not containers or issuers of authorised financial instruments. They essentially allow only credit or debit KYC-ed FI and are subject to instructions accepted by licensed banking and non-banking institution “issuers”. It would be beneficial if the RBI undertook an economic impact assessment study & competition assessment study of the regulation in order for the stakeholders to understand and assess the consequences of enacting such policy in the coming days and also ensure that regulations does not stifle competition and provide an advantage only to the incumbents large players.

The Regulations place the “small pure play payments companies” on unequal footing when compared to the large established payment players and banks. Unlike banks who have multiple revenues from the same customer (interest and fees income) model, PA/PG only depend on service fees from merchants on a high volume and low margin model. With COVID-19 and in a zero and low MDR environment, the additional burden of KYC/PMLA and OSV/IPV, reporting for all merchants is going to significantly add stress to the sector and challenge the survival of the Indian startup economy. We recommend that the regulations must be relooked taking into consideration the differences in scale and capacity of large established banks, and payment companies. Lighter KYC norms, would be beneficial. Application of stringent regulation across the board is ineffective, serves no end, and decreases ease of doing business. This will also ensure a competitive environment which can bring in economic development in a post COVID world. Moreover, it needs to be noted that the banks which act as PAs need no additional licensing.The banks have multiple revenue pools whereas PAs have a single revenue pool.This comes from the  MDR or fees from merchant which with Zero MDR and now increased obligations makes it burdensome for the business models to sustain.

The Regulation has increased compliance requirements for PAs. The requirement for antecedent checks will place excessive burden on MSME’s while it will also increase the onboard costs for PA’s. We recommend a self certification mechanism up-to revenue threshold based on a progressive KYC approach that can be part of the board approved KYC/AML policy of PA.

From a Business Continuity Perspective for merchants and consumers, in light of recent events in the banking sector, it would be beneficial to allow a second bank as an escrow bank partner. This will help in contingency and risk planning measures for the benefit of merchants and consumers.