89. Who Moved My Money?

“Who Moved My Cheese?”

One of the bestsellers… The book is about 4 characters, and their thoughts and instincts when their cheese is gone.

The book doesn’t talk about ‘WHO’ moved that Cheese (Kind of misleading)

Doesn’t matter… it is just cheese… anyone can move it.

We are ‘payments’ people… and for us, ‘Who’ moved the money is really important.

Payments is about moving money from payer to payee efficiently, securely and economically… that’s not it… the money has to be held and moved by authorized entities within the boundaries of permissible credits and debits.

RBI has been regulating payments intermediaries, and the guidelines have given specific emphasis on fund management and periodic reporting of debit/credits to RBI.

Here are few examples.

A. Online Payment Aggregators (PA-O):

Only authorised PAs can move money through escrow accounts (max. 2) as per permissible debits and credits.

PAs are allowed to earn interest on the ‘core portion’, which is calculated using an amazingly boring formula (refer 8.15.5 in this guideline)

Offline PAs: RBI has issued a draft circular and yet to issue final guidelines. We can very well assume that the fund movement requirements will be similar to that of online PAs.

If an entity is operating online and offline PA, then the entity has to use the same two escrow accounts (no separate accounts for offline and online business)

B. PA-Cross Border:

• PA-CB-Export entity to receive funds from outside India in an Export Collection Account (ECA), and then remit to the beneficiary in India.
• PA-CB-Import entity will collect INR from the Indian remitter in the Import Collection Account (ICA), and then remit to foreign beneficiaries.
• Both ICA and ECA should be opened with Authorised Dealer (AD) — I bank.

Debits and credits to ECA and ICA as per guidelines (Read article on PA-CB)

C. COU and BOU:

Funds related to BBPS transactions can be moved through Escrow accounts of COU (Customer Operating Unit) and BOU (Biller Operating Unit); debits and credits as per guidelines (Read article on BBPS)

Few more cases:

• Digital Lending: Disbursement of loan amount should go from lender’s a/c to borrower’s a/c and repayment fund will go from borrower to lender via PA’s Escrow Account (funds won’t touch digital lending Apps or LSP) (Read this article)
• PPI (Prepaid Payment Instrument) issuers: Can hold the customer’s funds (wallet top-up) in a nodal account
• Merchant’s closed loop wallets can hold customer’s funds (related customer’s wallet top up, refund credits) in a nodal account. These wallets are common among gaming, eCommerce, and travel merchants.
• eCommerce Marketplaces are allowed to hold the funds in a nodal account, and then do payout to sellers/vendors as per RBI’s 2009 guideline.

Note: The 2009 guidelines covered PAs and marketplaces. And then, in 2020, RBI floated new guidelines of PAs, and started the Authorisation process.

Even other regulators (IRDAI and SEBI) are not far behind…

• Insurance brokers and web-aggregators: Funds of insurance purchase or renewal will directly go to the insurer.
• Stocks: With UPI One time-mandate (Single block — Single debit / multiple debit), funds will directly go from customer to exchange (not stock broker’s wallet). Note: At present, users can top up the broker’s wallet (UPI, Net-banking or bank transfer), and then purchase shares.
• Mutual Fund Broker: Customer’s funds will directly go to AMC or ICCL (funds won’t touch MF distributor’s wallet / account)

So all regulators have made their stance clear — the fund movement has to be done only by the regulated/authorised entities through designated accounts and within the permissible credits/debits, and intermediaries are not allowed to earn interest on the pooled money (Exception: PA Escrow); In nutshell, no unnecessary pooling or holding of money by entities.

Recently RBI has cracked down on couple of business models where fund movement/holding is not done by authorised entities

A. Business Payments Solution Provider (BPSP)

BPSP is a model where a business/company can use a corporate credit card to do its vendor payments. Visa operates BPSP, and MasterCard also has a similar model.

Why do businesses use commercial/corporate cards for vendor payments?

Same reason as why I use a credit card… Why use my own money when I get free credit period (plus reward points)

The problem: Did you notice the BPSP model looks just like Payment Aggregator model… but FinTech that is doing the fund movement is not an authorised PA. And that is the problem!

So, RBI has put a stop to this model.

Future: Considering business payments are important and drive big card volumes, RBI may come up with a framework for BPSP, or move such payouts under BBPS.

Let’s see how this will shape up.

B. P2P payments — Rent Payment

Few FinTechs allow a user to pay rent using a credit card.

This model came to prominence during the pandemic. In the beginning, this model gave ample opportunities for a user to convert his credit line (of credit card) to cash (bank account) without any cost, and earn plenty of reward points from the card issuers.

Later, the FinTechs/ConsumerTechs started enforcing checks — check rent agreement, surcharge fee on users, and card issuing banks either stopped or capped the reward points.

Still, rent payment using credit cards is a very popular model.

So what is happening now?

Here as well a FinTech/ConsumerTech (which is neither PA nor a marketplace) is moving the money. Although RBI hasn’t explicitly stopped this model yet, surely a hammer will fall on this one.

C. Recently, RBI asked Talk Charge to stop operating the wallet without proper authorization.

If we go by RBI’s Vision Document, then we can expect that RBI will scrutinise PPIs further including closed system PPIs. (Para 4.2.2)

Where is it written?

I have come across many business models where fancy merchants/FinTechs/ConsumerTechs want to move money with clever workarounds, and defend their stance with fancy jargon and unnecessary first principles.

At times, it becomes very difficult to explain that ‘this model is not right’.

It is possible that one tend to interpret the regulation/circulars… and at times, one might think that he/she can play in the ‘grey area’. (Fancy word: Regulatory Arbitrage)

So when in doubt, follow this thumb rule:

Whatever is not written in regulation means a NO

— Dilip Asbe (MD & CEO, NPCI)