The Reserve Bank of India (RBI) has issued an order prohibiting corporates from making unauthorized card payments through certain intermediaries. This comes after the central bank observed that a particular card network had an arrangement allowing businesses to make card payments through intermediaries to entities that do not accept card payments.
The arrangement works by allowing corporates to make payments through the card network to an intermediary for commercial payments, which are then remitted through electronic transfer to recipients that do not accept card payments. The RBI noted that this payment system requires authorization under section 4 of the Payment and Settlement Systems (PSS) Act, which was not received in this case, rendering the money transfer illegal.
The central bank flagged two key concerns with this arrangement. Firstly, the intermediary pooled large amounts of funds into an account that is not a designated account under the PSS Act. Secondly, transactions processed under this arrangement did not comply with the originator and beneficiary information requirements stipulated under the Master Direction on KYC issued by the RBI.
It is notable that only one card network has operationalized this arrangement in the country so far. The RBI has also advised the card network to keep all such arrangements under abeyance until further orders, while making it clear that there are no restrictions with respect to the normal usage of business credit cards.
According to reports, the RBI has asked Visa and Mastercard to stop card-based business-to-business payments, such as rents or money transfers to vendors routed through third-party fintech firms. The central bank has for now requested Visa and Mastercard to suspend such transactions, with regular payments made to businesses via corporate cards not being impacted.
In response, a Visa India spokesperson stated, “Visa received a communication from the RBI on February 8, in what appears to be an industry-wide request for information on the role of business payment solution providers (BPSPs) in commercial and business payments,”. This communication included a directive to hold all BPSP transactions in abeyance.
The RBI’s move is expected to have significant ramifications for the card payment ecosystem, particularly in the context of commercial transactions made through intermediaries. This development underscores the central bank’s commitment to ensuring that payment systems in the country operate within the regulatory framework, safeguarding the interests of all stakeholders involved.
