Why has RBI put restraints on a certain card network?
- The Reserve Bank of India (RBI) has ordered a certain card network to stop “unauthorized payments” made using business cards.
Key Highlights
- The regulator said that the card network was allowing businesses to make payments to entities that were not authorized to accept card payments
- Which was a violation of The Payment and Settlement Systems (PSS) Act, 2007.
- The RBI also raised concerns over non-compliance of Know Your Customer (KYC) norms in such transactions.
What is a card network?
- Card networks connect banks, merchants, and customers (card users) to one another so that transactions can be carried out smoothly and securely.
- Card networks are operating in the background every time a customer uses her card to make a payment.
- There are five authorized card networks in India: Visa, Mastercard, RuPay, Diners Club, and American Express.
- While the RBI did not name the card network that it has restrained,
- It said that so far, only one card network has operationalised the arrangement that enables corporates to make unauthorised card payments via business cards in the country.
What was the alleged modus operandi?
- In a statement, the RBI said that it had “noticed” that a card network had an arrangement that enabled businesses
- To make card payments through certain intermediaries to entities that did not accept card payments.
- Thus, the intermediary was accepting card payments from corporates for their commercial payments
- And was then remitting the funds via IMPS (Immediate Payment Service), RTGS (Real-Time Gross Settlement), or NEFT (National Electronic Fund Transfer) to non-card accepting recipients.
The RBI’s concerns
- Under Section 4 of the PSS Act, such a payment system requires authorisation, which had not been obtained in this case.
- “The activity was, therefore, without legal sanction.
- First, the intermediary in such an arrangement pooled a large amount of funds into an account that was not a designated account under the PSS Act.
- Second, transactions processed under this arrangement did not comply with the ‘originator
- Beneficiary information’ requirements, as stipulated under the ‘Master Direction on KYC’ issued by the RBI.
What steps has the RBI taken now?
- The RBI has advised the card network to keep all such arrangements in abeyance until further orders.
- It has, however, clarified that no restriction has been placed with respect to the normal usage of business credit cards.