RBI has asked card networks such as Visa and Mastercard to stop commercial card transactions under the Business Payment Solution Providers (BPSP) business, citing concerns about the legitimacy and inadequacy of merchant KYC and the end use of funds.
The central bank has written to the networks on a sub-segment of B2B (business-to-business) payments called BPSP, with queries on how it works and the participants involved. Meanwhile, it has also barred any such incremental transactions, sources told businessline.
Typically, payments are often made by corporates through RTGS and NEFT account transfers. BPSP allows businesses to accept card payments without having the required mechanisms. For instance, a business can make payments to its smaller suppliers using this mechanism, even though the latter do not have the infrastructure for accepting credit payments.
While BPSPs are regulated and licensed by RBI under the PA-PG (Payment Aggregators and Payment Gateways) guidelines, there are concerns on transactions being carried out without proper invoicing or KYC, making it difficult to track the source of money and where it is going.
“Visa received a communication from RBI on February 8 in what appears to be an industry-wide request for information on the role of BPSPs in commercial and business payments. It included direction that we hold all BPSP transactions in abeyance,” the network said, adding that it is “proactively engaged and continues to be in discussions with the RBI and our ecosystem partners to ensure compliance”.
The BPSP facility allows corporate credit card players to enable large payments directly to vendors or merchants’ bank accounts while also providing the a credit window of 15-45 days to the debtor. Traditionally referred to as ‘payouts’, BPSP is not a regulatory term but global nomenclature adopted by Visa and Mastercard for some of their commercial card services.
Card networks only provide the guardrails for such a facility, which some believe limits their liability. It is thus BPSP providers such as Enkash, Kodo and Happay card, which will be the most impacted by any potential crackdown on the segment. However, others said that these facilities are powered by the networks, who are equally liable.
“This has come under the scanner because KYC details are incomplete as per regulatory perspective. When payments are made by loading funds on Mastercard of Visa card, they have to be able to show where these funds are being used. This is absent if the transaction is routed through a fintech, which may not seek the required details. So transparency is little on the grey side,” said a senior cards industry official.
Industry players said the regulatory scrutiny follows instances of card-to-peer or card-to-business payments such as bills or rent, which are not allowed because either the merchants are unregistered or are not merchants to begin with. Further, in some cases payments were made to a parent merchant and then distributed as standalone transactions to underlying merchants, which is against the regulatory use case of card payments, which only allow PoS (point of sale) transactions.
“Card transactions are specifically restricted to P2M payments and are thus governed by certain guidelines. For merchants, you need to follow a different KYC process and onboard them as merchants, which involves risk profiling and transaction monitoring,” said Arpit Ratan, Co-founder & CBO at Signzy.