In India, the subscription business with recurring payments was gaining traction due to its all-in-one bundled offering — convenience, choice, and consent — until a major change in the auto-debit option took effect on October 1, when the Reserve Bank of India (RBI) issued a framework for how businesses and banks must handle recurring credit and debit card payments. The new framework (first unveiled in 2019) suggests users must reauthenticate and authorize payments every time they renew their subscription.
One could argue that the new rule shattered the well-functioning arrangement that provided customers with convenience and companies with regular revenue in one fell swoop while also stifling innovation.
What’s The Fuss About?
As a result, many people are asking one question: Was this regulatory change necessary?
It was, without a doubt!
The RBI issued this new directive to mitigate risk and to enhance customer convenience. The previous payment model lacked a few things, such as:
- Transparency — Unlike in the past, clients will be notified far in advance of any transactions that may affect their accounts, allowing them adequate time to fund their accounts or cancel such subscriptions, if necessary, which was previously not the case.
- Security — Financial fraud is on the rise because of “man-in-the-middle attacks,” which are essentially phishing. Merchants/billers store card data on their end to provide a single-click autopay experience for recurring subscriptions. However, the customers have no clue where and when the money is being paid out, and they have no record of these mandates.
- A common method across payment intermediaries — India’s present payment system has various players/intermediaries facilitating auto-debit transactions. There was no standardized way through which customers could manage their recurring payments.
This new approach will create a unified payment process among merchants, payment networks, and card networks. It will allow these participants to first issue a mandate, debit the account, and manage the mandate for future payments. Most importantly, with this regulation, providers will not be able to charge money without explicit customer consent. Customers will receive advance notifications and can opt out of auto-debit through their bank.
This All Sounds Good; What Went Wrong?
Basically, banks dropped the ball. First, banks failed to implement the regulation on time. And, when the regulator didn’t relent, many of them struggled and continue to struggle to make the shift.
- The uneven rollout caused significant disruption to the otherwise robust recurring payments industry.
- The regulators misjudged the magnitude of the impact on businesses and customers alike.
- Despite several warnings from regulators, some ecosystem players, such as banks, did not prepare themselves for the change.
So, What’s Next?
Currently, most major banks have already implemented an e-mandate framework and are live for customers. The list is long, including American Express, Axis Bank, Bank of Baroda, Bank of India, HDFC Bank, HSBC, ICICI Bank, IndusInd Bank, Kotak Mahindra Bank, RBL Bank, SBI, and YES Bank.
Most smaller banks, on the other hand, are not ready. They will have a tough time ahead since many of them may not be ready by the end of 2021. For example, they can work with payment providers. Companies like BillDesk, PayU, and Razorpay have built solutions such as SiHub, Zion, and Mandate HQ, respectively. These platforms reduce the time to go-live for any card-issuing bank that wishes to enable recurring payments for its customers.
Digital e-commerce players, media outlets, and software-as-a-service startups running subscription services can go for e-NACH. This electronic payment clearing solution allows users to set up recurring payment mandates of up to INR 1 lakh per day. These solutions surely stand to solve the infrastructure bottlenecks.
A Silver Lining In This Cloud
This new auto-debit framework may appear to be a mandated trouble for banks, but it has one positive. The new framework provides an opportunity for banks and acquirers to get more people on board to make digital payments. As per RBI data, people in the lower-middle-income category in India pay an average of 42 utility bills each year, only three of which are paid online. Banks can educate them and register them on their platforms to complete utility payments digitally. It’s a significant opportunity for digital onboarding for banks, and they must seize it.