Micro, small, and Solopreneurs may be greatly impacted by the Reserve Bank of India’s newly drafted guidelines on “Know Your Customer” (KYC) for PA (Payment Aggregators).
The PAs must do Contact Point Verification of small retailers or merchants, as per the drafts released by the central bank earlier this week. Additionally, PAs are required to confirm the bank account used to settle the funds for these businesses.
The Regulations said that for medium-sized retailers or merchants, the PAs must do CPV (contact point verification), and PAs are also required to collect and confirm one Officially Valid Document (OVD) belonging to the businesses and one belonging to the proprietor, beneficial owner, or the person holding attorney.
Additionally, it is required for all non-bank PAs to register with the Financial Intelligence Unit-India (FIU-IND). September 25, 2024, is the deadline that the RBI has set for all the parties involved to follow suit.
Small merchants or retailers are defined by the RBI as physical retailers (those who solely conduct in-person or closed proximity transactions), having an annual revenue of less than 5 Lakh, and not being registered for Goods and Services Taxes (GST). Medium-sized retailers are those who do not have a GST registration and have annual sales below the Rs 40 lakh level.
Large PAs will have difficulties, but smaller PAs may have a harder time justifying this extra expense. Furthermore, onboarding new merchants—especially those in the aforementioned categories—will take longer due to the additional and seemingly stricter KYC framework.
However, there is still a potential that some PAs will decide to forego dealing with these small and medium-sized businesses entirely to save themselves from this extra KYC procedure. To add even more complexity, small and medium-sized businesses, like social media solopreneurs, could decide to ask their clients to pay directly with UPI or personal numbers.
Vishwas Patel, MD of Infibeam Avenues and Chairman of the Payments Council of India, has stated that the KYC regulations are not economical and that they will communicate this to the central bank.
The draft notification would be sent to RBI by PCI in the upcoming week, according to a statement from Patel. “The KYC norms are now clearly defined, but some of our members are finding the KYC of the smaller merchants stringent and not cost-effective.”.
According to the founder whose fintech company just received a PA license, if the standards take effect, it might take longer to launch an online business. Small-scale business owners will also be impacted by this, particularly those who only have a website or use co-working spaces as offices. The founder told Entrackr, “It will further increase the cost of operations in addition to slowing the speed of onboarding.”
About an additional part of the guidelines that prohibit debits to non-merchant accounts that are authorized, the founder stated, “This limits the innovation potential and makes it more difficult for even larger business places like marketplaces”.
For example, Swiggy may like to use PA to collect payments from patrons, divide the amount, and deposit it into each restaurant’s account. This won’t be feasible going forward, and businesses (like Swiggy) will have to create this procedure themselves. Thankfully, for the time being, these are only draft recommendations. The industry is always consulted by RBI. We hope that the final rules will consider our opinions,” the founder continued.
Even while the RBI has an idea of how time-consuming the process could be, as evidenced by the indicated deadline of September 2025, the process is still merely a bureaucratic means for the RBI to distance itself from any accountability for fraud and other misdeeds.
PA’s disinterest in making an effort to perform physical verification would undoubtedly make things more difficult for smaller sellers.
