The Reserve Bank of India (RBI) has issued a surprise instruction to card networks like Visa and Mastercard to stop card-based commercial payments made by companies and small enterprises. The move is likely to affect fintech startups that process payments through commercial cards for business needs, such as paying vendors, suppliers and others.
Why did RBI take this step?
According to industry sources, the main reason behind RBI’s decision is the lack of proper KYC (know your customer) verification of the merchants who receive card payments. While their bank accounts might be KYC-ed, they are mostly not authorised to accept card payments as merchants. This could pose a risk of money laundering, tax evasion or fraud.
RBI has been tightening its regulations on digital payments in recent years, especially after the ban on Paytm Payments Bank from issuing new cards in 2021. The central bank has also mandated full compliance with its data localisation norms for all payment system operators by June 2024.
How will this affect the industry?
The sudden halt of card-based commercial payments has caught the industry by surprise and caused inconvenience to many businesses that rely on this mode of payment. Some fintech startups that offer this service include Enkash, Paymate, Cred, Paytm and NoBroker.
These startups will have to find alternative ways to facilitate business payments, such as net banking, UPI or RTGS. Some of them have already made some arrangements to comply with RBI’s instructions and ensure that business payments are not disrupted.
However, some experts believe that this move could hamper the growth of digital payments in India, as card payments offer convenience, security and rewards to both payers and payees. They also argue that RBI should have given more time and clarity to the industry before taking such a drastic step.
What are the implications for consumers?
The impact of RBI’s instruction on consumers is likely to be minimal, as it only affects card-based commercial payments made by corporations and small enterprises. Card payments for personal use, such as shopping, travel or bill payments, are not affected by this move.
However, some consumers who use their cards to pay rent or tuition fees through apps like Cred, Paytm or NoBroker might face some issues, as these transactions might also be considered as commercial payments by RBI. These consumers will have to switch to other modes of payment until the issue is resolved.
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