RBI Restricts BPSP Transactions over Compliance Fears

The Reserve Bank of India (RBI) has recently directed prominent card networks like Visa and Mastercard to immediately stop enabling commercial transactions by a class of entities called Business Payment Solution Providers (BPSPs) until merchant compliance issues are addressed.
RBI announced that the Card-based business-to-business payments made through payment intermediaries have been stopped since they violated the Payment and Settlement Systems Act, 2007.
The regulator also said the arrangement did not comply with the requirements stipulated under the master direction on KYC (know your customer) as issued by the RBI.

What are Business Payment Solution Providers (BPSPs)?

BPSPs are intermediaries that facilitate business-to-business (B2B) payments by allowing corporates to securely pay suppliers, vendors etc using virtual credit cards when the latter may lack mechanisms to handle such transactions directly.

BPSP Transactions Modality

They provide an online platform for managing the entire process starting from onboarding registered businesses to settlement of payments via settlement accounts.
Payments are usually made by corporates through RTGS and NEFT account transfers. BPSP allows businesses to accept card payments without having the required mechanisms. A business can make payments to its smaller suppliers using this mechanism, even if the latter do not have the infrastructure for accepting credit payments.

RBI’s Concerns

BPSPs are regulated and licensed by RBI under the PA-PG (Payment Aggregators and Payment Gateways) guidelines.  However, the Reserve Bank of India (RBI) fears absence of required KYC documentation or details on end utilization of funds routed via BPSPs. This makes tracking source of money and audit trail difficult leading to potential misuse.

Implications of Restriction

The directions directly impacts specialized BPSP providers like EnKash, Kodo, Happay that power such virtual commercial card payments. Card networks must also halt enabling transactions via these entities.

BPSP Utility for Businesses

The facility fills an important niche in facilitating urgent B2B payments where beneficiaries may not readily have credit card acceptance infrastructure in place compared to retail chains.

Response from Card Networks

Confirming RBI communication, Visa said it is further engaging with the regulator and ecosystem partners to ensure compliance requirements are met for restoring BPSP services, highlighting their utility.

Growth of Commercial Cards

BPSP is a subset of the commercial cards segment focused on streamlining B2B payments which has seen fast adoption by corporates, startups and SMEs in recent years for managing expenses and cash flows efficiently.

Reasons for Regulatory Scrutiny

RBI scrutiny follows specific instances of dubious practices like unregistered merchants, personal payments branded as business and bypassing merchant onboarding rules before enabling card transactions.

Category: Economy & Banking Current Affairs