Table of Contents
The Payments Digest aims to provide a view on key developments in the payments regulations space each month. With this edition, we introduce a new section sharing our data on beneficiary bank downtimes, also accessible via our Status Page with live data on unscheduled bank downtimes.
PART I: The new recurring payments framework- what options do merchants have?
Quick take: UPI AutoPay and eNACH are two immediately available options for merchants, even as the industry turns to third party mandate management to re-enable compliant card based SIs.
Card based recurring payments or standing instructions (SIs) have been widely hit as the industry becomes compliant with the RBI’s new e-mandate framework which came into force from October. First, immediate options available to merchants are UPI AutoPay and eNACH. Customers can access these (directly/indirectly) via debit cards, net banking or Aadhaar. Both permit instant mandate creation online and have relaxed AFA requirements. Their respective features are outlined below:
Second, to look at the reason behind the new framework- mandate frameworks via NACH & UPI AutoPay are both, in a sense, managed centrally by the NPCI. Requirements like mandate creation, validating every debit, cancellation, etc. are managed from a single ‘mandate management system’ or ‘MMS’ with the NPCI. Card based SIs however were often managed by individual merchants & payment aggregators, which would send debit instructions for a recurring payment each time for the banks to process.
The absence of a similar central repository/authority for customers/banks to manage their SIs led to the new regulations. Issuing banks will thus take up this role as a ‘central authority’, & need to set up a system with requirements like a 24 hour pre-debit notification & a single dashboard for customers to view and manage all their mandates across all merchants, including foreign merchants. With banks being unprepared to set up the infrastructure & onboarding that this necessitates, third party MMSs are being created by PAs & other players, to aid banks with managing their mandates. For merchants & PAs, (i) the existing flow will continue as is for processing the mandate, and (ii) a second flow via the third party MMS to the banks will get added for creating, validating and otherwise managing the mandate.
PART II: The increase in IMPS transaction limits to Rs.5 Lakhs
Quick take: The enhanced limit will likely see funds transfers below Rs. 5L also move to IMPS, to tap into its benefits as an instant, 24×7 and trackable (via the MMID) service.
IMPS quickly became popular post its launch in 2010. It allowed instant funds transfers 24x7x365, unlike NEFT and RTGS back then. It was also accessible via multiple modes- m-banking, internet banking, ATMs, SMS, etc. NEFT & RTGS are both 24×7 now, but in terms of settlement time can still take 30 minutes to 2 hours. For IMPS, its speed thus remains an advantage, despite costing more. Another advantage is that IMPS transactions use an ‘MMID’, an ID which eases tracking these transactions, in turn easing resolution of routing issues, payment failures and fraud. Today, IMPS forms the underlying rails for UPI, bank account verification & several payments-as-a-service offerings. M-wallets also use it for wallet-to-wallet funds transfers.
The 2 Lakh cap first came in 2014, making IMPS more popular with smaller businesses for their payments needs, like for SMEs, MSMEs, civil corporations, domestic remittances, etc. The pandemic lockdown in fact affected IMPS volumes due to migrant worker remittances being hit. Larger & mid-size businesses rely on RTGS. Now, 24×7 RTGS has led to a related increase IMPS settlement cycles, thus reducing credit & settlement risks and introducing the ability to handle an increase in transaction volumes. This in turn has allowed the cap to be enhanced to Rs. 5 Lakh, opening IMPS to newer use-cases and increased transactions.
Comparing Key Features of NEFT, RTGS & IMPS
|Limits||No Limit (avg. bank imposed limit is Rs.10L)||Min. Rs. 2L, no upper limit||Rs. 5L|
|Charges (approx, varies from bank to bank)||Re.0 for online transfers||Re.0 for online transfers||Rs.3-Rs.15|
|Settlement||1-2 hours (batch based)||30 min-1 hour||Instant|
|Volume of Transactions (March-August 2021)||1.82 Billion||965,319.85 Billion||1.99 Billion|
|Value of Transactions (March-August 2021)||1342.39 Billion||612,500.48 Billion||1804.73 Billion|
PART III: NBFC scale based regulations- will this impact the payments industry?
Quick take: The main impact of the new framework will be for NBFCs themselves, aiming for strengthened governance and risk management, with increased stringency of regulations per layer.
NBFCs have been regulated more lightly than banks, but rapid developments in the NBFC sector in terms of their size, operations, technological sophistication and product innovation in the last few years have called for a change. Lending has emerged as an important activity, with NBFCs becoming important supplemental channels for credit intermediation. As per the RBI, these have increased from 12% of the balance sheet size of banks in 2010 to 25% now. In terms of numbers, there are over 9500 NBFCs today. These have also released APIs for lending, collection, payments, customer due diligence, etc. acting as partners for BaaS & other API based services.
The payments industry plays a role here, such as facilitating NBFC loan disbursement and collections. For example, channels like RTGS, NEFT, UPI, NACH, etc. are utilised here. The new regulations do not majorly impact these relationships, the primary impact being on the NBFCs themselves, calling for strengthening governance and risk management for them. Aiming to address the changing risk profile of NBFCs, the new regulations reclassify them into 4 layers based on their systemic significance and perceived risk.:
Applicable regulations will increase in stringency per layer. Individual applicable regulations are largely retained, like those for account aggregators, while new requirements are prescribed where required, like new capital requirements, prudential guidelines, corporate governance, etc. Specific changes for example include increased net-owned fund requirements to Rs. 1 Crore for NBFC ICCs, MFIs & Factors, a reduced NPA classification for all NBFCs to 90 days, and a ceiling of Rs. 1 Crore for IPO subscription related borrowing. These guidelines will come into force from April 2022.
Others: RuPay CoFT, Regulatory Sandbox, SEBI on intermediate pool accounts, BSE adding TReDS, etc.
- RuPay tokenisation via NTS: The NPCI has launched an ‘NPCI Tokenisation System’ or NTS platform for tokenisation of RuPay cards. This is in line with recent RBI norms of Card-on-file tokenisation, discussed in the previous edition. Acquiring banks, merchants, aggregators, etc. can get certified with the NPCI as ‘Token Requestors’ to save the Token reference number. Actual card data will be stored at the RuPay Network Secure Vault.
- RBI enables ‘on tap’ regulatory sandbox applications: The RBI enabled ‘on tap’ applications for closed cohorts of the regulatory sandbox. Presently, this has been enabled for the first cohort on retail payments. The RBI has also selected ‘prevention and mitigation of financial fraud’ as the theme for the 4th cohort.
- SEBI disallows intermediate pool accounts for mutual fund transactions: SEBI has disallowed the practice of intermediate pooling in nodal accounts by mutual fund distributors, investment advisors and stock brokers/clearing members for MF transactions from April 2022. Funds are to be credited directly to investor accounts. For ease of transactions, funds can still be routed through RBI authorised payment aggregators (PAs) or SEBI recognized clearing corporations. The AMFI will soon issue guidelines with SEBI to address risks of co-mingling of funds at the PA level.
- BSE to add TreDS to MSME services: The Bombay Stock Exchange has announced that it has received in-principle approval from the RBI to set up and operate TReDS under the PSS Act. TReDS basically facilitates financing/discounting of trade receivables of MSMEs through multiple financiers. The BSE now aims to add TReDS to its MSME services, which include dedicated platforms for SME equity distribution and for mutual fund distribution. Via TReDS the BSE aims to provide an option to MSMEs to manage their working capital more efficiently.
- Upcoming regulations: Apart from this, the RBI has announced that it will be issuing frameworks for retail digital payments in offline mode and for geo-tagging of payment system touch points.
Cashfree Payments’ Data on Beneficiary Bank Downtimes
Impact of downtimes on the Payouts service and its mitigation
With increasing instances today of bank system outages and downtimes affecting digital payment services, the ecosystem is searching for resolution to prevent the erosion of merchant/ customer confidence. Banks are looking at measures like building technical capacity, and the regulator is turning to steps like regulatory measures (the Payment Security Controls require minimising technical declines). Cashfree Payments has adopted certain measures on its part to tackle this issue.
Payouts is an API based disbursement solution we offer, which relies on the rails of IMPS, NEFT, RTGS and UPI, and is operationalized via multiple integrations with banking partners. It is used for instance for employee wage payouts, vendor payments, instant refunds, loan disbursals, insurance claim settlement, etc., via funds transfers to bank accounts, cards, UPI or wallets. This service requires the efficient functioning of each entity involved- the remitter banks (transaction is originated here), beneficiary banks (transaction is settled here), the NPCI, etc.
Frequent bank downtimes naturally have a direct impact on the Payouts service. For the period of April 2021-August 2021, we have recorded 13601 beneficiary bank downtimes of less than 15 minutes, and 1132 downtimes of more than 15 minutes in relation to our Payouts service. To mitigate the effect of beneficiary bank downtimes, we use an internal system that combines monitoring of beneficiary bank downtimes and periodic checks thereafter once transaction failures reach a defined threshold. By queuing payout instructions until the bank is back online, we are able to keep the number of failures in check, ensuring also an unaffected merchant/customer experience with digital payments. Remitter bank downtimes are more easily managed, since multiple banking integrations allow us to route a payout transaction through an alternative banking partner. Live data on unscheduled bank downtimes we detect is accessible on the Cashfree Payments ‘Status’ Page, available here.
- Consolidated Data for April-August 2021: The table below consolidates our internal data on the ‘incidents’ created between a period of April-August 2021 for the Payouts service. An ‘incident’ is created once the number of failed transactions reach an internally defined threshold.
- Data for September 2021: Going forward we will publish consolidated data for each month via this graph below. As mentioned earlier, for live updates on unscheduled bank downtimes, you can visit the Status Page.:
That’s all for this edition. Stay safe.
This edition has been authored by Asheeta Regidi with inputs from Varun Goradia, Abhishek Jain, Amlan Chanda and members of the Product team at Cashfree. Assisted by interns Urmil Shah and Pravi Jain.
- BSE Media Release: BSE receives in-principle approval from RBI for TReDS business, dated 5 October 2021
- Media Report by Rachel Chitra, IMPS transfers in April plunge to 2-year low, Times of India, dated 11 May 2020
- Media Report by Dinesh Unnikrishnan, HDFC Bank’s digital outages: 7 key takeaways from RBI action, MoneyControl, dated 3 December 2020
- Media Report by PTI: HDFC Bank submits action plan to RBI, hopes to fix outage issue in 3 months, Business Standard, dated 23 January 2021
- NPCI Circular: Enhanced Per Transaction Limit for IMPS Transactions from Rs. 2 Lakh to Rs. 5 Lakh, NPCI/IMPS/OC-103/2021-22, dated 11 October 2021
- NPCI Press Release: NPCI launches NTS platform for Card tokenization, dated 20 October 2021
- RBI FAQs: Trade Receivables Discounting System (TReDS), dated 1 January 2020
- RBI Notification: Availability of National Electronic Funds Transfer (NEFT) System on 24×7 basis, RBI/2019-20/111, dated 6 December 2019
- RBI Notification: 24×7 Availability of Real Time Gross Settlement (RTGS) System, RBI/2020-21/70, dated 4 December 2020
- RBI Notification: Tokenisation – Card Transactions: Permitting Card-on-File Tokenisation (CoFT) Services, RBI/2021-22/96, dated 7 September 2021
- RBI Notification: Scale Based Regulation (SBR): A Revised Regulatory Framework for NBFCs, RBI/2021-22/112, dated 22 October 2021
- RBI Press Release: Enabling Framework for Regulatory Sandbox, 2019-2020/417, dated 13 August 2019
- RBI Press Release: Statement on Developmental and Regulatory Policies, 2020-2021/721, dated 4 December 2020
- RBI Press Release: RBI releases Discussion Paper on Revised Regulatory Framework for NBFCs- A Scale-Based Approach, 2020-2021/984, dated 22 January 2021
- RBI Press Release: Regulatory Sandbox – Announcement of Theme for Fourth Cohort and Review of Enabling Framework, 2021-2022/1006, dated 8 October 2021
- SEBI Circular: Circular on Mutual Funds, SEBI/HO/IMD/IMD-I DOF5/P/CIR/2021/634, dated 4 October 2021
- SEBI Circular: Discontinuation of usage of pool accounts for transactions in units of Mutual Funds on the Stock Exchange Platforms, SEBI/HO/IMD/IMD-I DOF5/P/CIR/2021/635, dated 4 October 2021
- Website of Cashfree Payments: Payouts for growing businesses
- Website of NPCI: IMPS FAQs