E-mandate Processing: Prescriptive Regulation, Laissez-Faire Adoption

With September 30th only a few days away, we are at the cusp of one of the most disruptive shifts in how subscribers of subscription-based services make recurring payments. The Reserve Bank of India appears to be granting no further extensions in its deadline for a recurring payment framework to be adopted by banks and there is growing uncertainty on how this transition will play out over the next couple of days. Uniquely, the industry whose revenue is impacted by this migration are not banks, which are merely responsible for setting up the enabling framework and payment infrastructure. Instead, those impacted are the service providers who rely on recurring subscriptions, ranging from insurance payments, electricity/ water/ gas/ other utilities’ payments, cloud storage providers, edu-tech providers, online news subscriptions, over-the-top video on demand services and the work-from-home essential video conferencing.

The RBI’s diktat, therefore, affects the bottom line of an industry dependent on banks to set up infrastructure to facilitate payments and provide market access, and impacts the ability of consumers to effectively consume these services in a safe, secure and seamless manner.

When the RBI decided to intervene in determining how Indian subscribers make online payments in August 2019, the RBI stated that the framework proposed “ensured that the changing payment needs of customers were accommodated by adequately balancing safety, security and convenience of such transactions.” Today, with two days to the compliance deadline, uncertainty over how payments will be made after October 1st looms large.

The repercussions on consumers and subscription-based service providers if banks do not comply on time, appear to be squarely contrary to the consumer interest-based objectives of the RBI. Ironically, the service providers impacted by this policy pivot have no ability to goad non-compliant banks, which their customers bank with, to ensure adherence with the RBI’s instructions. This is further compounded by the fact that banks appear to have the ability to elect not to provide these services as the conditions to be fulfilled by banks apply only if they provide the e-mandate services. This effectively means that the RBI has created a framework of voluntary compliance for banks (in that the banks can choose not to offer recurring payments as a service, in which case they do not have to comply with the RBI directive), with no alternative for customers to use recurring payments. In other words, if banks choose to not provide recurring payments as a service, there are no permissible alternatives available for customers.

While some banks have stated that they would be setting up a framework to enable online payments, smaller and regional banks may potentially not implement this framework thereby depriving access to recurring payment service providers to their customers. Given that these services were relied upon so heavily during the pandemic, the regulations envisaged by the RBI before the pandemic and the goals it sought to achieve, deserves a rethink.

If recurring payment systems are discontinued or reduced on account of noncompliance by banks, subscription-based service providers would revert to quarterly or annual subscriptions which may not be affordable to segments of the population thereby depriving access to amortized payment for services for the consumer, and depriving market access for subscription based service providers who have no other means to collect payments given the distribution of its customer base. One of the unintentional consequences of the pandemic has been the adoption of cashless and contactless payments across industries in a stark departure from the traditional reliance on cash-based payments. For many customers who are new to technology and online payments, the complexities associated with a high-friction process of registering e-mandates or making payments directly to merchants month on month, will not only reduce the average revenue per user, but may unintentionally cause a loss of customers for services with elastic demand.

An adoption of a recurring payments framework only by a handful of banks would therefore result in a grossly disparate access to recurring payments to only the customers of such banks. Such a disparate adoption of enabling frameworks by banks, coupled with the lack of any guidance on interoperability and a lack of fiscal incentive for smaller banks to adopt this framework raises serious questions about whether the RBI has considered the impact of its mandate beyond the entities regulated by it. Given that there appears to be little incentive, if any, for banks to comply with this framework, it is incumbent upon the RBI to assume responsibility for exercising oversight for the migration to a framework suggested by it, in public interest and which serves as the backbone of payments for an entirely different industry. Regulatory intervention must ensure that the objectives sought to be achieved do not cause disparate inconvenience to and exclusion of customers, especially those who are not technologically savvy, or cause harm to the revenue of industries far beyond the realm of its regulatory ambit.  

Akash Karmakar, Partner, Law Offices of Panag and Babu