Startups, merchants face disruptions due to RBI guidelines on auto-debit rule

© Faizan Javed
Startups, merchants face disruptions due to RBI guidelines on auto-debit rule

Startups, merchants and tech platform providers are facing difficulties following the implementation of the Reserve Bank of India’s (RBI) framework for processing e-mandates for recurring online card transactions. The new rules that require customers to authenticate such transactions came into force on October 1.

The rules stipulate that for transactions up to Rs 5,000, customers will have to set up an additional factor authentication with a one-time registration process. If it is above Rs 5,000, customers will have to authenticate such transactions every month, 24 hours before the transaction hits.

According to startups and merchants, the new regulations are disrupting their customer acquisition process and operations as these entities have subscription-based services for consuming tech services and internal operations.

While the recurring card norms are not difficult to implement, that is not the case with the 24-hour prior intimation clause given the complexity behind the transaction with multiple parties (banks, networks and merchants) involved, said Vishal Mehta, strategic partnerships and payments, Microsoft, a member of the Merchant Payments Alliance of India (MPAI).

MPAI is a recently established industry body accepting online payments. Founding members include BookMyShow, Disney+ Hotstar, Facebook, Future Generali, Microsoft, Netflix, Spotify, Times Internet and Zoom, who provide subscription and recurring payment services to their customers and have been affected by the guidelines.

Hurdle for new customer acquisition

Many startups and direct-to-consumer (D2C) brands spend heavily on online media platforms like Facebook and Google. These platforms provide ad credits against specified amounts that can be automatically topped up if they hit a pre-set threshold.

But the RBI regulations meant that companies such as Facebook had to overhaul their systems, resulting in downtime, said Deepak Agarwal, founder of Auric, a D2C beverage start-up.

Given that social media advertising drives a lot of traffic, the impact on startup and D2C businesses is huge because all ads will have to be re-optimised. In the last 10 days we are still at suboptimal performance and we will have to go through optimisation again over next four weeks, Agarwal said.

Qin1, an edtech company, echoed similar concerns. New customer acquisition was hit in the first week of October, said founder Aarti Gupta. According to Gupta, platforms have come up with stop-gap arrangements but these are not sustainable and transactions have been failing even after authentication, which impacts new customer acquisition.

Using auto top-ups is no longer possible and customers will have to do so manually using one-time transactions as the 24-hour pre-debit notification period is pointless for an auto top-up, said Mehta of Microsoft.

While the regulator intends to curb fraud and increase security for consumers through this move, banker-turned-angel investor Deepak Ahuja believes it is solving a problem that didn’t exist or may not be significant enough.

How prepared are banks?

Most of the platforms have tied up with specific top-tier banks and not all banks’ cards support the transition to the new rules, said Gupta.

MPAI recently said with the preparedness of the banking sector remaining questionable (only five to six banks are partially compliant with the e-mandate), there is bound to be customer inconvenience and value erosion in merchant-customer relationships.

However, bankers say most top lenders are ready. Some 80 percent of issuing banks and 60 percent merchants are ready today and the transition will happen over a period of time, said a senior official at top issuing private bank, requesting anonymity.

The official added that any new technology implementation takes time, especially in the initial phases, but as the nature of frauds has been evolving rapidly, the RBI decided to go ahead with these guidelines.

On September 27, Moneycontrol had reported how banks are gearing up for the transition and working with merchants for industrywide adoption.

The way forward

A senior industry official on condition of anonymity said some international merchants are exploring routing recurring payments to overseas entities. The overhead charges (foreign exchange fees) could be either borne by the merchant or passed on to customers.

MPAI has also suggested to the regulator that merchants can integrate and provide a seamless customer experience only once the banks and payment players are ready.

Our main pitch to the regulator is to give merchants three months’ extension from the deadline given to banks and payment entities, said Mehta of Microsoft.

However, most players said the ship has sailed and the only way forward is to face the initial disruptions until the whole process gets streamlined.