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Payments Digest by Cashfree: May 2021

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Via our Payments Digest, we aim to provide a view on key payments policy initiatives taken each month. Discussions for Edition 5: The RBI relaxes KYC norms in view of Covid- what changes for business KYC?  The RBI releases a notification on virtual currencies- does this ease things for the crypto industry? Lastly, the RBI releases its Annual Report- how has the pandemic impacted digital payments systems this last year?

PART I: RBI relaxes video KYC and other norms- what changes for business KYC?

The RBI’s KYC relaxations this month bring welcome relief for businesses and individuals, helping KYC processes become more digital and contact-free. It introduces the following changes.

Video KYC for business KYC

If you are a business needing to open an account, access lending, etc., you can now use Video KYC (‘V-KYC’) to complete your business KYC process. This is specifically for when you do individual KYC as a part of business KYC, for example for the authorised signatories or beneficial owners of your company, or if you are a sole proprietor. Other checks, like licensing and registration checks, line of business checks, activity proof like GST or IT returns, etc., will all continue as per old processes. Thus some businesses may see completely digital processes when also using Digi Locker or C-KYC (as was recently permitted for businesses) for other checks. Smaller businesses, MSMEs, etc. in particular may benefit. Some risk-based discretion has been provided, so the exact process may still vary for different businesses and financial entities. For example, say you are a higher risk business, you may still see physical presence requirements.

(Related Read: What are the KYC procedures for merchant onboarding?)

Relaxing KYC updation processes

The RBI requires KYC to be updated from time to time, here 4 key changes are introduced:

  • First, if you are eligible to use V-KYC for your KYC (as an individual/ business), then you can now also use it for updating your KYC. 
  • Next, if you opened an Aadhaar OTP based eKYC account and need to convert it to full KYC, then you can use video KYC here also, saving the need for a physical visit to complete KYC. 
  • Third, the RBI has allowed a string of new modes to digitally update your KYC- you will be able to do it via your registered email/ mobile number, your financial entity’s app, net banking, via ATMs, etc. If you have no change to make, then a self-declaration will suffice, thus simplifying the updation process. 
  • Last, the RBI has introduced updates to address proof  via self-declaration, i.e., you declare your updated address, and the financial entity will verify your address via verification letters, contact point verification, deliverables, etc.

Even here, there may be variations in processes for different businesses or financial entities.

Changes to Video KYC in itself

Last, the V-KYC process has been eased. Changes include that it is no longer Aadhaar-dependent- the new process allows using documents via Digi Locker and C-KYC, thus allowing you to use other identity documents like passport, driving license, voter’s ID, etc. Your current address will also now be captured during the V-KYC process. For entities conducting V-KYC and service providers offering V-KYC processes, these will also need to take note of new infrastructure and security requirements specified. These include, for example, data localisation of V-KYC records and disallowing use of the cloud for hosting V-KYC infrastructure.

PART II: New RBI clarification on virtual currencies- does this ease things?

Turning to industry news, it has been deja vu for the cryptocurrency industry last month, with banks and other service providers withdrawing services again. Banking and payment services play a crucial role here, for example, fast paced crypto related trades require rupee deposits, API based payments for fast withdrawals and transfers, multiple bank accounts for a single trader, 24×7 access to financial services, etc. For banks, payments players and other financial players, this is a promising opportunity, however a go-ahead from the regulator is first essential. 

The current withdrawal of services was reportedly on account of some banks receiving internal indications from the regulator, like requiring them to review their exposure to the crypto industry. Retail customers in turn received bank notices questioning their crypto related transactions. Some of these cited the RBI’s April 2018 circular, which had first directed withdrawal of services from the crypto industry.

In view of this, the RBI thus issued a clarification. This, first, directs that the 2018 circular cannot be cited, given it was set aside by the Supreme Court in March 2020. Second, it asks banks to ensure that proper due diligence measures like KYC, AML/CFT, and PMLA and FEMA compliance is in place when servicing these customers. A welcome implication of this is that banks can choose to service such customers.

At a press conference, the RBI reiterated that it’s position on cryptocurrencies has not changed; that it still has major concerns. However, this does also mean that there is still no ban either, and cryptocurrencies remain unregulated. The notification confirms this, while also placing the onus on the banks until a final call is taken. Banks will need to figure out if they have the technical know-how to understand cryptocurrencies and work out effective ways to monitor them. Here, the crypto industry’s efforts to self-regulate are welcome, and hopefully will in turn aid banks in their efforts to monitor.

For banks that are willing to take the risk, it will be very welcome for the crypto industry and for crypto enthusiasts. For other banks, particularly those that have received contrary indications prior to the current notification, it is hoped that the regulator will provide some more clarity in the coming weeks. 

Lastly, the RBI also released its Annual Report for the year 2020-2021. This includes some interesting trends on the pandemic’s impact on digital payments this last year.  While most payments systems have individually recorded a decline in transaction volume and value in 2020-2021, UPI, as expected, has recorded significant growth in both. Overall, payments systems recorded a growth of 26.2% in volume and reduction of 13.4% in value, largely attributable to a 19.5% drop in RTGS transaction value, reflecting a slowdown in overall economic activity.  The graphs below compare the transaction volumes and value for different payment systems:

Key points include:

  • RTGS transaction volumes increased by 5.7%, while NEFT volumes increased by 12.7%.
  • Card transaction volumes declined by 19% for credit cards and 20.6% for debit cards, while value declined by 13.7% and 5.9% respectively.
  • For PPIs volume declined by 7.4% while value reduced by 8.3%.
  • UPI transactions increased by 78.3 % in volume and 92.5 % in value. 
  • Also for payments acceptance infrastructure, the number of PoS terminals has increased by 6.5% to 47.2 lakhs, and Bharat QR codes deployed increased by 76% to 35.7 lakhs. ATMs have also increased by 2.0% to 2.38 lakhs.

Others: Compliance timeline relaxations, RRA 2.0, M-wallet rules

  1. Relaxation in compliance timelines for payments systems: An update for the payments players- keeping in mind the impact of the second wave of Covid, the RBI also extended the following compliance timelines for payments systems till September 30th, 2021:
  • Application timelines for authorisation of non-bank payment aggregators- earlier this was June 30th, 2021.
  • Timeline for meeting the Rs. 15 crore net worth requirement for non-bank prepaid payments instrument issuers, this was March 31st, 2021. 
  • Annual submission of system audit reports by authorised payment systems operators, this was by May 31st, 2021.
  • Timeline for harmonisation of turn around time & customer complaints for failed transactions using authorised payment systems
  1. The  RRA 2.0 invites stakeholder responses by June 15th: The RRA 2.0, a body set up by the RBI that seeks to address issues like redundancies, duplications, unnecessary paper-based formalities, issues with the RBI website, etc., has invited suggestions by June 15th. For more details do read the April edition of the Payments Digest.
  1. The new m-wallet rules: As promised, the  RBI has issued the new rules for m-wallets (also discussed in April’s Payments Digest), specifically full KYC PPIs. This includes (i) mandatory interoperability via UPI and card networks, which is to be enabled by March 2022, (ii) balance limits have been increased to Rs. 2 Lakhs, and (iii) cash withdrawal upto Rs.2k per transaction and Rs.10k per month overall.

(Related Read: Payments Digest by Cashfree: April 2021)

That’s all for this edition. Stay safe.

Bibliography

  1. Case Law: IAMAI vs. RBI, Writ Petition (Civil) No. 528 of 2018, Supreme Court judgment dated 04 March, 2020.
  2. Cashfree Blogpost by Asheeta Regidi: What are the KYC procedures for merchant onboarding?
  3. Cashfree Blogpost by Asheeta Regidi: Payments Digest by Cashfree: April 2021
  4. Media Article: RBI Monetary Policy | Have major concerns about cryptocurrencies, no change in our position, says Shaktikanta Das, Money Control, 04 June 2021.
  5. Media Article by Abhinav Kaul: Indian crypto exchanges hit as banks turn cautious on virtual currencies, LiveMint, dated 18 May 2021.
  6. Media Article by Ashwin Manikandan and Apoorva Mittal: India’s cryptocurrency industry draws up ‘legitimacy plan’, ET Prime, dated 03 June 2021.
  7. Media Article by BI India Bureau: Indian banks are reportedly citing a three-year old quashed circular to persuade users against crypto, Business Insider, dated 31 May, 2021.
  8. Media Article by Vishwanath Nair and Ridhima Saxena: Banks Steer Away From Cryptocurrency Exchanges Under RBI Glare, Bloomberg Quint, dated 04 May 2021.
  9. RBI Annual Report: Chapter IX: Payments and Settlement Systems and Information Technology.
  10. RBI FAQ: 
  11. RBI Notification: Amendment to the Master Direction (MD) on KYC, RBI/2021-22/35, dated 10 May, 2021.
  12. RBI Notification: Amendment to Master Direction (MD) on KYC – Centralized KYC Registry – Roll out of Legal Entity Template & other changes, RBI/2020-2021/80, dated 18 December 2020.
  13. RBI Notification: Customer Due Diligence for transactions in Virtual Currencies (VC), RBI/2021-22/45, dated 31 May 2021.
  14. RBI Notification: Prepaid Payment Instruments (PPIs) – (i) Mandating Interoperability; (ii) Increasing the Limit to ₹2 lakh for Full-KYC PPIs; and (iii) Permitting Cash Withdrawal from Full-KYC PPIs of Non-Bank PPI Issuers, RBI/2021-22/40, 19 May 2021.
  15. RBI Notification: Prohibition on dealing in Virtual Currencies (VCs), RBI/2017-18/154, dated April 6, 2018.
  16. RBI Notification: Relaxation in timeline for compliance with various payment system requirements, RBI/2021-22/41, dated 21 May 2021.
  17. RBI Press Release: Annual Report for the year 2020-21, Press Release: 2021-2022/272, dated 27 May 2021.
  18. RBI Press Release: Constitution of the Regulations Review Authority 2.0, Press Release: 2021-2022/56, dated 15 April 2021.
  19. RBI Press Release: Group of Advisors to Regulations Review Authority invites feedback and suggestions, Press Release: 2021-2022/179, dated 07 May 2021.
  20. RBI Press Release: RBI sets up a Regulations Review Authority, Press Release : 1998-99/1173, dated 13 March 1999. 
  21. RBI Press Release: Statement on Developmental and Regulatory Policies, Press Release: 2021-2022/17, dated 07 April 2021.
Author

Head, Fintech Policy at Cashfree.

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