The Indian E-commerce industry has been on an upward growth trajectory and is expected to reach $200 billion by 2026. The growth is mainly driven by increasing internet penetration and awareness about the ease and convenience of buying online. The COVID-19 outbreak is further driving the growth of e-commerce sales with millions of consumers shopping online from the safety of their homes. According to Goldman Sachs review of global e-commerce markets, Indian e-commerce is expected to grow over 18% in 2020.
RBI issues guidelines to regulate payment aggregators & gateways
The growth in e-commerce resulted in increased adoption of digital payments; To boost customer and merchant confidence, and their digital payments experience, RBI has issued a new regulatory framework to regulate payment intermediaries. These guidelines impact payment gateways & payment aggregators that are involved in collecting funds from the customers and transferring such funds to the relevant beneficiaries. With the new guidelines in place, the payment aggregators shall maintain the amount collected by them (from the customers) in an escrow account with any scheduled commercial bank. The guidelines also specify that such an escrow account should be maintained with only one scheduled commercial bank at any point in time.
An opportunity for banks to expand their paytech value proposition
These guidelines present an opportunity for banks to grow their escrow business and realize additional stream revenues by upping the ante with a payment tech stack that can split and route payments, enable quicker payouts to merchants, provide seamless reconciliation and reporting while complying with all the regulator guidelines. In this post, we shall discuss some of the capabilities that can help banks with both compliance and differentiation.
Leveraging split payment capabilities, the escrow account banker splits the transactions according to the pre-configured commission rates and route the funds to merchants. Some of the merchants could be e-commerce marketplaces and other platforms that have sophisticated business arrangements that involve multiple participants as part of a single transaction — buyer, seller, logistic partner, merchant(e-commerce marketplace). To split transactions involving multiple participants, banks will have to work with PAs to configure commission rates of all the participants as part of the merchant setup. For some of the merchants( e-commerce marketplaces), banks may need to consider several preconfigured values to arrive at the commission amount and split it accordingly.
After the split is successfully done, banks will need to schedule payouts(payments to bank accounts) to all the participants of a transaction. As part of the merchant set up, bank accounts can be configured for all the participants to which the payments are to be made. Payouts are scheduled to be paid at a pre-determined rate/frequency.
The RBI guidelines also set out the timelines for the settlement of payments to the merchants from the escrow account. In cases where there is an agreement between a merchant and PA on retaining funds in the escrow account until the customer refund period is expired, banks can allow PAs to configure such an expiry period for each merchant enabling them to seamlessly comply with the guidelines without any exception.
RBI allows banks to transfer the “core portion” of the amount in the escrow account to an interest-bearing linked account which can be an additional source of revenue for payment aggregators and can ultimately help banks to negotiate better terms with the payment aggregators. The average of the lowest fortnightly outstanding balances represents the “core portion” which is eligible to earn interest. These balances need to be reported regularly to RBI and banks should look at automating the calculation of the balances to overcome manual inefficiencies and errors.
Monitoring, reconciliation, and reporting
The escrow account will have a set of permitted credits and debits and banks need to ensure that all transactions adhere to these guidelines. Moreover, RBI asks banks to validate the purposes and ensure that payments are made to eligible merchants only. This requires banks to maintain a list of purposes and validate each payment against it along with checking the merchant eligibility( blocked/active/inactive/expired). Finally, reconciliation and reporting will be critical for PAs and banks will have to provide them seamlessly. E-commerce is growing at an unprecedented rate and it provides a business opportunity for banks to facilitate payments by crafting innovative paytech value propositions. To maintain their relevance and expand revenue stream, banks must focus on this highly-attractive growth opportunity and position their brands well in front of the digital native companies.