Why has RBI put restraints on a certain card network?

First, 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 authorised 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.

So, what are the RBI’s concerns?

A “close scrutiny”, the RBI said, revealed that “such arrangement qualified as a payment system”. 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,” the RBI said.

There were two other concerns as well, the regulator said.

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 and 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.

Although the RBI named no card network, Visa has issued a statement saying, “We have been directed by the regulator to ensure that all Business Payment Service Provider (BPSP) transactions be kept in abeyance till further notice. Hence, we kindly ask that all BPSP merchants registered by yourselves with Visa be immediately suspended till advised by us to the contrary.”

BPSPs offer business-to-business payment services to corporates using credit cards. It enables corporates to improve cash flow.

Visa also said that “any transaction authorised prior to the communication would be settled in the ordinary course of business”, and asked BPSPs to “send us a confirmation at the earliest that such merchants/ merchant IDs have been blocked and transactions ceased”.