A nodal account is a special bank account required to be opened by intermediaries. And, this post aims to highlight its emergence and importance.
The rapid evolution of the digital age has paved the way for new and complex business models. These include a marketplace, payment gateway providers, aggregators, etc., that connect consumers to the vendors and hold money on their behalf.
Businesses holding money on behalf of vendors are termed as intermediaries. These intermediaries hold a certain commission. After that, disburse the rest to entities such as vendors and logistic partners.
Few real-world examples on intermediaries
Due to this complex interlink of unknown
Recognising this issue, RBI introduced guidelines for the formation of nodal accounts.
A nodal account
RBI nodal account guidelines for a marketplace
To regulate payments in the marketplace ecosystem, RBI has issued guidelines around operating nodal bank accounts.
- These guidelines apply to Intermediaries (read as marketplace platforms or aggregators) that collect money from customers on behalf of the vendors
- These guidelines safeguard the interests of customers that make payments through an online or offline payment
mode,and also ensuring that the vendors providing the goods or services are duly paid
Businesses that facilitate delivery of services immediately, need not comply with these guidelines. For example, the sale of travel tickets.
All nodal accounts are internal accounts of the bank. They facilitate the collection of payments by intermediaries from customers.
Permitted credits/debits in nodal bank accounts
- Payments from customers buying goods or services
- Transfers into nodal accounts based on pre-determined terms and conditions
- Refunds for failed or disputed transactions
- Payments by a marketplace to various vendors
- Transfers from nodal accounts based on pre-determined terms and conditions
- Transfers representing refunds for failed, disputed transactions, requested
- Commissions to the intermediaries at pre-determined rates
There is a need to supervise the functioning of nodal accounts. Hence, RBI mandates a quarterly audit for every nodal account. Audits have to be submitted within 10 days of the end of each quarter.
RBI guidelines mention transferring of funds from nodal accounts within 2 working days. However, many a time it might not be convenient to do so, even for the vendor. In such cases, the marketplace, the payment service provider and the vendor may get into an agreement.
How to audit a nodal account?
Nodal accounts need to be audited by a third party auditor engaged by the intermediary. The auditor needs to be separate from the accountant that does the regular accounting for the intermediary.
The audit needs to certify 2 primary set of declarations:
- Payee wise amounts transferred out of the account during the audit period
- Payee wise classification of the closing account balance during the audit quarter
Apart from this exception for cases such as losses due to fraud, chargebacks, pending disputes and refunds may need to be highlighted to justify the closing balance.
Many a time, especially where the accounting may not be very complex, the onus of accounting may be passed on to the bank by paying audit fees. This is negotiated as part of the nodal account agreement with the bank.
How can you set up and operate a nodal account?
Nodal bank account services are provided by most of the larger authorized banks.
After you satisfy a bank’s strict criteria on business reputation, transaction volumes, compliance requirements etc., a nodal account will be set up. Setting up of the account requires signing a nodal bank account agreement which details the terms of operations and responsibilities.
It is common practice for intermediaries to open a current account with the bank while setting up nodal accounts. In theory, nodal accounts don’t require the intermediary’s KYC, since it legally belongs to the bank. However, in practice, KYC will be provided if you are setting up a current account.
Operation of nodal accounts can be challenging. Every step like the addition of beneficiaries and approval of transactions needs bank intervention. It can be a slow, time-consuming process. And also, there is little scope to automate these repetitive functions via an API.
Financial technology companies are solving these problems with their innovative suite of payment solutions.
The huge expansion of the internet-based economy has paved the way for a variety of emerging business models. Marketplace, cab service aggregators, logistics platforms and fin-tech aggregators to list a few.
The flow of money and its disbursement is a complex process. Hence, we need payment solutions which are a lot more advanced than traditional payment gateways
If one were to peak into this flow, the system a marketplace invests in would need to handle:
- Collection of payments from end customers through different modes into own account or nodal account. Businesses prefer not handling money that doesn’t belong to them.
- Defining commissions among vendors, intermediaries and the marketplace
- Taking care of adjustments in payment flow for transaction-specific elements like discounts, chargers, fees, etc.
- Disbursing quick payments from the marketplace to vendors (based on different agreed payment terms) for the supply of goods or services
- Handling marketplace reconciliations
- Meeting all compliance requirements, such as nodal account audits
It would take considerable effort, time and resources for a marketplace or business to implement such a system. that checks all the above-mentioned points. Taking into account this dilemma, Cashfree engineered a solution.
Cashfree’s Marketplace Settlements lets you as a marketplace focus on building your business. And, it takes care of all your collection, disbursal, compliance needs and the nodal account. We provide an elegant, simple and powerful API that your business can leverage on.
Marketplace Settlements works in 3 simple steps
Cashfree Marketplace Settlements features
- Ensures faster settlement to vendors within a T+2 settlement cycle (“T” is the day on which the seller will be notified that the goods have been delivered.)
- Connect your marketplace with Cashfree Payment Gateway to automate accepting and releasing payments in an integrated system
- Works with other payment gateways and even for cash on delivery orders
- Allow international vendors to sell through your marketplace without any hassle, and still, follow a T+2 settlement into the vendors home bank account
- Integrate with our simple and beautiful API’s and get running in under 30 minutes
- Cashfree’s Marketplace Settlements runs on Cashfree’s managed nodal account and doesn’t need you to worry about auditing and compliance
- Accept only what you earn into your account, make accounting easy
- Tax computations are faster and simpler by accessing marketplace earnings per transaction
- Know about all your earnings through a detailed report