On April 16, 2024, the Reserve Bank of India (RBI) issued a press release with draft directions for regulation of payment aggregators (PAs) that facilitate payments at physical point of sale (referred to as, PA-P), i.e., offline PAs. The proposed regulation is in addition to the existing regulatory framework applicable to PAs that facilitate payments at online points of sale (referred to as, PA-O), i.e., online PAs. PA-Ps are involved in facilitation of face-to-face / proximity payments at physical locations of the merchants, whereas PA-Os are involved in facilitation of payments for e-commerce transactions.

The draft directions (collectively, Draft Directions) have been prescribed in two parts, namely:

(a)  Amendments to the existing regulatory framework contained under the ‘Guidelines on Regulation of Payment Aggregators and Payment Gateways’ dated March 17, 2020, as updated vide the subsequent clarifications dated March 31, 2021 (collectively, the PA Guidelines); and

(b)  New draft directions on regulation of PA-Ps.

Once the Draft Directions are finalized, the consolidated guidelines will apply mutatis mutandis to both PA-Os as well PA-Ps.

Some of the key provisions proposed under the Draft Directions are as under:

1. Authorization: Akin to the requirement prescribed for PA-Os, the non-bank PA-Ps will need to obtain an authorisation from the RBI to operate a payment system for their offline payment aggregation business by May 31, 2025. The non-bank PA-Os who have already received an authorisation (or whose application is pending with the RBI) are also required to seek an approval from the RBI for their existing PA-P activity, if they propose to continue with the same.
2. Applicability of the PA Guidelines to PA-Ps: The entities operating as PA-Ps are also mandated to comply with the conditions under the PA Guidelines in respect of governance, merchant on-boarding, customer grievance redressal and dispute management framework, baseline technology recommendations, security, fraud prevention and risk management framework, on an ongoing basis. The Draft Directions clarify that the continued adherence with these conditionalities will be considered in the processing the application for authorisation and approval by the concerned PA-P.
3. Net-worth criteria: All non-bank PA-Ps will be required to maintain a minimum net-worth of INR 15 crore at the time of submission of the application for authorisation to the RBI and INR 25 crore by March 31, 2028, and maintain such net-worth at all times thereafter.
4. Escrow Account: The escrow account opened by PAs (in accordance with the PA Guidelines) can be used for both PA-O and PA-P activities. The Draft Directions require that the funds for delivery versus payment (DvP) transactions, i.e., transactions where payment for goods or services is to be made at the time of delivery, need to be routed through such escrow account.
5. Payments on merchant’s instructions: The existing debit permitted from escrow account in respect of payment to any other account on specific directions from merchant, is proposed to be deleted from the PA Guidelines. The proposed deletion is likely to impact existing PA-Os that have been relying on this entry to enable certain use cases that involve disbursements to third-parties from the escrow account.
6. KYC for Merchants: In order to streamline the KYC and due diligence for merchants in accordance with Master Direction – Know Your Customer Direction, 2016 (MD-KYC), the Draft Directions propose to categorise merchants of the PA as:

• Small Merchants: These are merchants with physical presence that only offer face-to face and proximity transactions, have a business turnover of less than INR 5,00,000 per annum and are not registered under the Goods and Services Tax (GST) regime. For small merchants, PAs will need to conduct due diligence by undertaking contact point verification (CPV) in respect of the physical premises operated by such merchants. Also, PAs need to verify the bank account in which funds of such merchants are settled.
• Medium Merchants: These are merchants with physical or online presence that have a business turnover of more than INR 5,00,000 but less than INR 40,00,000 per annum and are not registered under the GST regime. For these medium merchants, PAs will need to not just conduct CPV but also obtain and verify one officially valid document (commonly, OVD) of their proprietor / beneficial owner and verify one OVD of the business.

For the purposes of undertaking KYC of merchants through video-based customer identification process (commonly, V-CIP), PAs are permitted to take assistance of agents for assistance with the process at the merchant’s end. Additionally, the Draft Directions propose that PAs will need to comply with the wire transfer guidelines prescribed under MD-KYC.

7. Monitoring of Merchants: PAs need to monitor the transaction activities of all merchants on an ongoing basis, ensure that the merchants’ transactions are in line with the merchant’s business profile and migrate merchants to a high category of customer due diligence based on their transaction patterns.
8. Registration with FIU:  All non-bank PAs need to register with the Financial Intelligence Unit-India (FIU-IND) and provide necessary information as desired by the FIU-IND.
9. Restrictions on storage of cards data: The Draft Directions expressly extend the current restrictions on storage of cards data (in respect of online transactions) to offline transactions as well. Similar to the restriction for online transactions, besides the card issuers or card networks, no entity in the card transaction or payment chain can store card-on-file data for face-to-face and proximity payment transactions. Additionally, the requirement to purge and delete previously stored cards data is also applicable to such transactions. This conditionality is proposed to be effective from August 01, 2025.
10. Agent of PAs: The Draft Directions have proposed to enable PAs to appoint third-party agents to assist with onboarding of merchants, subject to the PAs assuming responsibility for the agents’ actions and meeting certain other conditions as set out under the Draft Directions.

The RBI has invited comments and feedback to the Draft Directions by May 31, 2024.