Introduction: The Reserve Bank of India (RBI) recently issued a cautionary advisory regarding an unauthorized payment intermediary system facilitated by a card network. This article delves into the intricacies of the issue, highlighting the concerns raised by the RBI and the implications of such unauthorized activities.
Detailed Analysis: The RBI’s scrutiny revealed a concerning arrangement wherein a card network facilitated payments through intermediaries to entities not accepting card payments. This mechanism, though seemingly convenient, lacked legal authorization under the Payment and Settlement Systems Act, 2007. Consequently, the RBI identified several key issues:
1. Lack of Legal Authorization: The arrangement qualified as a payment system but lacked the requisite authorization under the PSS Act. This absence of legal sanction raised significant regulatory concerns.
2. Non-Compliance with Regulations: Transactions processed through this system failed to meet essential regulatory requirements, particularly concerning KYC norms and fund management protocols. The pooling of funds into non-designated accounts and the absence of originator and beneficiary information posed serious risks.
3. Limited Implementation: While only one card network had operationalized this arrangement, the RBI’s intervention serves as a preemptive measure against potential proliferation within the financial ecosystem.
Conclusion: In response to these findings, the RBI has advised the concerned card network to suspend such arrangements until further notice. It’s imperative for financial entities to adhere to regulatory frameworks to ensure the integrity and security of payment systems. The RBI’s proactive stance underscores its commitment to maintaining a robust and compliant financial landscape, safeguarding the interests of all stakeholders.
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Reserve Bank of India
Date: Feb 15, 2024
Payment Intermediary by Card Network – Restraining of Unauthorized Payment System
It has come to the notice of Reserve Bank of India that a Card Network had an arrangement that enables businesses to make card payments through certain intermediaries, to entities that do not accept card payments.
2. Under this arrangement, the intermediary accepts card payments from corporates for their commercial payments and then remits the funds via IMPS/RTGS/NEFT to non-card accepting recipients.
3. On closer scrutiny, it was observed that this arrangement qualified as a payment system. Under the provisions of Payment and Settlement Systems (PSS) Act, 2007, such payment system requires authorization under Section 4 of PSS Act, which has not been obtained in the instant case. The activity was, therefore, without legal sanction.
4. The arrangement has also raised following concerns:
i. The intermediary in the above arrangement pooled large amount of funds into an account which is not a designated account under PSS Act.
ii. Transactions processed under this arrangement did not comply with the originator and beneficiary information requirements, as stipulated under Master Direction on KYC issued by the Reserve Bank.
5. As per information available, only one card network has operationalized this arrangement in the country so far.
6. As the matter is under detailed examination, the Card Network has been advised to keep all such arrangements under abeyance, till further orders. It is clarified that the Reserve Bank has not placed any restriction with respect to normal usage of business credit cards.
(Yogesh Dayal)
Chief General Manager
Press Release: 2023-2024/1885
