RBI Tightens Grip on Offline Payments: New POS Licensing Framework Incoming

The Reserve Bank of India (RBI) is poised to introduce a new regulatory landscape for the burgeoning Point-of-Sale (POS) industry, establishing a distinct licensing category within the financial services sector. This move, reported by Hindu Businessline, signifies the central bank’s commitment to strengthening offline payment regulations, fostering fairness, and creating a level playing field between online and offline payment providers.

Established Players Remain Unfazed

Existing players like banks and non-banking financial companies (NBFCs) currently operating POS systems can breathe a sigh of relief, as they won’t be affected by these new guidelines. However, the impact will be significant for third-party POS operators like BharatPe, MSwipe, Paytm, and PineLabs. These companies will need to acquire licenses to continue offering their services under the new regulatory framework.

Addressing Market Dynamics

The Hindu Businessline report emphasizes the surge in third-party POS operators, prompting the need for regulatory action. Banks have increasingly turned to these solutions for streamlined business operations. Notably, the report highlights that daily balances handled by POS operators average ₹400 crore, constituting a significant chunk of the offline payment landscape compared to the ₹1,000 crore handled online. An industry expert underscores the urgency for implementing these changes before the offline market expands further.

Licensing Requirements: Mimicking Payment Aggregators?

The report suggests that the licensing framework for POS operators might mirror the requirements for payment aggregator licenses. Potential criteria could include a minimum net worth of ₹25 crore and strict adherence to RBI regulations.

Challenges and Concerns: Why Regulation Matters

Three key concerns within the industry are driving the need for a robust licensing framework:

1. Cash-for-Card Transactions: A rising trend of cash loans facilitated through credit cards has emerged, leading to large, one-time transactions at POS terminals. Regulatory authorities suspect that some merchants might be offering cash in exchange for these transactions, raising questions about Know Your Customer (KYC) procedures and the effectiveness of current oversight.

2. Inconsistent Data Storage Practices: Disparities in data storage practices among POS operators pose security risks. Retention periods vary significantly, ranging from 90 days to over a year, highlighting the need for standardization and alignment with robust security protocols.

3. Fund Management Concerns: The management of funds by third-party players is another area of concern. Potential issues include delayed settlements to merchants and the risk of unregulated entities mishandling funds. While no such instances have been reported yet, the RBI aims to be proactive in mitigating these risks.

Uncertainties for Payment Aggregator Aspirants

The report concludes by highlighting the uncertain impact on players like Paytm and BharatPe, who are currently awaiting RBI approval for their payment aggregator services. It remains unclear if these proposed POS licenses will become mandatory for their offline POS operations as well.