How a recent RBI proposal on KYC has got payment aggregators on the backfoot

Payment aggregators such as Razorpay, Cashfree Payments and PayU are intermediaries that facilitate digital payments between consumers and merchants or businesses. 

The Reserve Bank of India in a recent draft circular proposed stricter know-your-customer (KYC) guidelines for businesses that use payment aggregators to accept digital payments. Customer verification guidelines act as a vital safeguard against money laundering by mapping each account to a bonafide customer.

According to two industry executives, the new guidelines would likely impact smaller online merchants because payment aggregators might not be willing to spend additional money on them for enhanced KYC, given that their earnings from such merchants are limited. 

RBI’s concerns seem to have stemmed from recent events where some players were found to have not followed its KYC rules, forcing the regulator to step in. 

The primary grouse of the industry is that the draft proposes to do away with an exception granted in the earlier regulations from 2021. 

RBI has proposed ‘contact point verification’ of both existing and new merchants, which involves payment aggregators sending someone to physically verify the existence of the business. Whereas under the 2021 guidelines, payment aggregators are not required to implement the “entire process of KYC” for merchants that already have bank accounts for settling transactions. 

“Today when you want to set up an online business you need to first register as an entity then do a full KYC with a bank to open a bank account for that entity. This draft guideline says that for getting payments into that bank account, you need to do another round of KYC with the payment aggregator,” said the chief executive of a fintech company that processes digital payments, declining to be identified. 

RBI’s proposed new guidelines would not necessarily guard against frauds since a merchant would have already completed the KYC process with a bank, the CEO added.

“For small sellers, the dual KYC can be expensive and will increase the cost so much that most players will stop serving small online merchants. These include people selling on Instagram and Facebook, where the value and volume of transactions are small,” said the CEO. 

A spokesperson for Razorpay declined to comment. Cashfree Payments and PayU did not respond to emailed queries. A separate email sent to RBI remained unanswered.

Other industry experts say RBI’s proposals are a mixed bag, both clarifying prevailing ambiguities and raising the bar on things like KYC.

Know your business

According to Vishwas Patel, joint managing director of fintech Infibeam Avenues Ltd and chairman of the Payments Council of India, RBI’s draft brings uniformity across all payment aggregators, online and offline. 

“The KYC norms are now clearly defined but some of our members are finding the KYC of the smaller merchants stringent and not cost-effective, hence PCI will relay some comments to RBI on the draft notification this week,” said Patel.

The founder of another fintech company said that onboarding costs could go up from ₹200 per merchant to ₹500 if these new guidelines are implemented. He said the idea behind the draft circular is more about ‘know your business’—to check if a business is doing what it says it does on paper—than KYC. 

“Someone can go and verify that the business exists but that increases the cost. At present we do background checks and see if a seller is actually linked to the website where a customer pays for that particular product or service,” said the founder of a second fintech firm, adding that even at present merchant transactions happen through KYC-ed bank accounts and therefore a money trail is established. 

“We understand that the RBI wants to check frauds,” this person said, “but transactions are still being routed through bank accounts and are not hidden from the system.”