RBI Cracks Down on Visa Payments to Non-Card Accepting Entities

On February 15, the Reserve Bank of India (RBI) issued a directive to Visa, a prominent card network, to cease making payments through intermediaries to entities that do not accept card payments. This decision was prompted by concerns regarding a substantial amount of funds being involved in such activities without legal authorization.

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Visa's Involvement

According to sources, Visa is the only card network in India that has implemented this arrangement thus far. Despite not explicitly naming Visa, the RBI's statement strongly suggests that the card network in question is indeed Visa. Visa has yet to provide an official statement on the matter, but it has indicated the possibility of issuing a response at a later time.

Suspension of Arrangements

Given the ongoing detailed examination of the matter, the RBI has advised Visa to suspend all such arrangements until further notice. This directive aims to ensure compliance with legal requirements and safeguard the integrity of the financial system.

Modus Operandi of the Arrangement

The RBI's statement sheds light on the specific arrangement that enabled businesses to make card payments through intermediaries to non-card accepting entities. Under this arrangement, the intermediary would accept card payments from corporates for their commercial payments and subsequently remit the funds to the non-card accepting recipients via IMPS/RTGS/NEFT.

Legal Concerns

Upon closer scrutiny, the RBI determined that this arrangement falls under the definition of a payment system. As per the provisions of the Payment and Settlement Systems (PSS) Act, 2007, such payment systems require authorization from the RBI, which was not obtained in this case. Consequently, the RBI deemed the activity to be without legal sanction.

Concerns Regarding Fund Pooling

The RBI expressed additional concerns regarding the intermediary's pooling of substantial funds into an account that was not designated under the PSS Act. This practice raised concerns about the security and transparency of the funds involved.

Compliance with KYC Requirements

The RBI also highlighted that the transactions processed under this arrangement failed to comply with the originator and beneficiary information requirements stipulated under the Master Direction on KYC issued by the central bank.

Clarification on Business Credit Card Usage

To avoid any confusion, the RBI clarified that its directive does not impose any restrictions on the normal usage of business credit cards. Businesses can continue to utilize their credit cards for legitimate commercial transactions without any hindrance.

The Reserve Bank of India's directive to Visa underscores the importance of adhering to legal frameworks and regulatory guidelines in the financial sector. By taking this action, the RBI aims to safeguard the interests of consumers and maintain the integrity of the payment systems in India.