In today's Finshots we see why the RBI extended an in-principal approval to a select few payment aggregators

The Story

Imagine you’re setting up an e-commerce store, intending to sell your best art. In which case, you’ll be expected to offer various payment options to potential buyers —think  credit, debit cards, UPI, net banking, and digital wallets.

Now your buyer doesn’t care how you set it up. They just want to click a button or swipe on their phone and get done with it. All they want to see is a payment success screen and have their brand new painting delivered asap!

But as a seller, you know that beneath this outward simplicity, there are a lot of complex processes running in the background. A well-wisher tells you that you might have to start by speaking to multiple banks and card issuers to integrate the payments with your business. You’ll need to work with payment gateways that will handle the tech to ensure that the transaction flows smoothly. You’ll need to set up something called a merchant account — a special type of bank account that can receive all the digital money and hold every last detail related to the transaction. Then you’ll need another bank account where the actual cash will drop in. You’ll need to negotiate fees for all these services individually. And since you’re dealing with multiple such entities, they may all have their own frequency for settling your money. Maybe the manner in which they send you transaction reports varies considerably. And that means you end up spending time looking at your books just to make sure everything is in order. And if things go wrong, you’ll have to run from pillar to post to sort it all out. It’s a downright hassle.

Now for a moment, let’s assume there’s someone who can do all the dirty work for you. All you need to do is sign up directly with them and only them. You can then forget the multiple banks, card issuing companies, payment gateways, and everyone else. This one entity will help you accept all kinds of digital payments. And you won’t even need to go through the pain of setting up merchant accounts and stuff. This entity will have its own merchant account through which it’ll receive the money. And then it’ll transfer the money to your chosen bank account. You won’t have to negotiate fees with multiple folks anymore and you can just deal with this one entity for all your digital payment needs. They save you time, paperwork, and some money too.

It sounds like a lifesaver, right? Well, these entities aren’t made up. They actually exist and they’re called Payment Aggregators (PA).

Like you, the PA can help millions of sellers. And if people find it easier to accept digital transactions, the tribe of digital sellers will grow. Because despite the growth in digital payments, 89% of transactions still happen via cash. So if the PAs do a good job simplifying the experience of accepting online payments, digital transactions will get a fillip.

Anyway, now that we’ve got the basics out of the way, let’s see what happened on Friday. RBI just granted the first-ever set of approvals for a PA licence in India to fintech firms Razorpay, Stripe, Pine Labs, and 1Pay.

But wait…didn’t India have any PAs of its own until now?

Actually, we did. PAs have been around for quite a while now. Heard of BillDesk? Well, they’ve been in this business since the 2000s. And many other fintech companies like Razorpay, PhonePe, and Paytm have emerged in the recent past as well. All of them have helped sellers get their businesses online in the blink of an eye.

But the only problem?  Even though these folks handled a lot of money in their own accounts, they didn’t quite come under strict RBI regulations. Quite unlike banks. So in 2020, after watching the digital services boom, the RBI simply decided that everyone who called themselves a PA needed to first get a licence. They were worried that many companies were operating in a rather shady manner (by not verifying details of merchants or by even indulging in crypto payments). And the RBI wanted to put an end to all this.

So they invited applications for the licence and set out the criteria — including mandating a minimum net worth and enforcing the “fit and proper” rule — to make sure people who float payment aggregators continue to be in good standing without being implicated in legal matters. And finally, they evaluated these proposals (reports suggest that over 180 entities jumped in line to prove their worth) and extended the in-principal approval to a select few.

But why is everyone in such a rush to acquire a PA licence?

Well, let’s look at Zomato — a food aggregator that also wants to become a payments aggregator. Sometime last year, the company set up Zomato Payments Ltd. It wanted to provide all kinds of payment options to the app’s users — including Buy Now Pay Later. And we wrote about why it wanted to make such a foray:

On the order value of ₹400, the (third-party) BNPL company pockets anywhere between ₹4–8. And what the BNPL company gains, Zomato loses. Now on the face of it, it may seem like a paltry amount. But what if you keep adding this sum over millions of orders? Well, it could be worth crores of rupees. And no one wants to simply lose crores of rupees.

In a similar vein, imagine that Zomato sets up its own payment aggregator solution. It could save on so much money no? Money that they would otherwise have paid to third-party companies? They could even offer a better experience. So it’s all on the cards.

Oh, and what happens if the RBI denies permission to entities that have so far been doing PA duty?

Well, they’ll have to wind up their operation within 180 days. Tough luck!

Until then…

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