The Reserve Bank of India (RBI) announced the first batch of payment aggregator licences on Tuesday. The likes of Razorpay, Cashfree, Open Financial Technologies, Enkash, and Google Pay all made it to the list.
While recognition from the central bank is always a big deal for startups, for Cashfree and Razorpay it meant finally getting back to business. For a year or so, these startups were barred from onboarding new merchants by the central bank.
Two other major payment players, Paytm and PayU, are still languishing under the embargo.
So, what does this payment aggregator licence mean? And why is it so significant for payment companies? ET explains.
First up, what is a payment aggregator?
A payment aggregator is an entity that works with online merchants and helps connect them with acquirers (mostly banks) to process digital payments.
Once a customer makes a payment while checking out from an ecommerce portal, a payment aggregator processes the transaction. At the end of the day or after a day, they collect all the payments made to the merchant and settle them directly into the merchant’s account.
Why is the RBI licensing these players?
Until recently, payment aggregators were not regulated by the RBI. They had to follow the tech service provider norms of banks. But over the last few years, as the internet ecosystem in the country boomed, many payment companies flouted basic rules of customer onboarding, KYC and background checks in the rush for market share.
Finally, in 2020, the central bank decided to step in and came out with guidelines for PAs to operate in a rule-bound fashion.
Also read | RBI ban makes online payment aggregators seek alternative business lines
How did the application process go through?
Every company offering this service had to apply to the RBI. Existing PAs continued offering the services, while new ones had to wait for an RBI licence before they could start.
Around 37 existing players were granted ‘in-principle approval’ by the RBI and allowed to operate. Another 24 new players were granted in-principle approval but can start operations only after getting the full licence.
Enkash and Paymentz are two new players who got final approval on Tuesday.
Why were some players put under an embargo?
A year ago, the central bank hauled up Razorpay and Cashfree for certain issues around customer onboarding and KYC violations, and they were put under an embargo.
For Paytm and PayU, the reasons were mostly around their foreign shareholding and complex corporate structures. Officially, none of the companies commented on the reasons for the embargo, but industry insiders pointed these out as potential reasons.
Now, Razorpay and Cashfree are back in the game, while Paytm and PayU are still waiting for the embargo to be lifted.
Why does everyone want to become a PA?
A PA is a critical service for the booming ecommerce industry. PAs can handle funds for these merchants, which means they can eventually build financial services on top.
PAs can offer early settlements to select merchants based on their business volumes, which is a form of credit. They can offer term loans as well by partnering with NBFCs and banks.
Interestingly, Google Pay, which is a major player in the consumer-focused UPI payments space, has received the licence too, sources said. This means that after PhonePe, even Google Pay will now be able to build merchant payment solutions in India. Also, this is the first time Google is building a regulated business in India.
