Recurring pain: On RBI’s decision on auto-debit transactions

Synopsis: RBI must re-examine its auto-debit restrictions

Introduction

Recently, the Reserve Bank of India’s (RBI’s) new rules controlling recurring payments on credit or debit cards came into force.

The new rules mandate advanced notification by banks to customers for executing recurring payments which are of value of ₹ 5,000 and above. It is meant for seeking the latter’s approval for taking forward any such transaction.

Under this new system, for any transaction of more than ₹ 5,000, banks will send onetime passwords (OTPs) to customers. Currently, auto-debits are allowed under the new system without one-time passwords for payments under Rs 5,000.

The broad purpose of the new rules is to ensure that holders of credit or debit cards are not constantly hit by recurring charges without their consent.

While the RBI’s motivation in attempting to protect consumers from unwanted payments on their cards is laudable, any regulation can only be judged by its outcomes.

What are the issues and challenges associated with the RBI’s move?

Impact on small Enterprises: Many auto-debits failed for customers and smaller enterprises that depend upon online payments sharply revised their revenue estimates downward.

Rationality being Questioned: The RBI has not given any reasoning for its decision to bring such low-impact transactions under the compliance rules.

Lack of consultation with relevant Stake holders: Smaller enterprises, start-ups, and end-users were not given a voice in the process.

What are the other alternatives available?

There are multiple other mechanisms that might be considered. For example, banks could have been mandated to keep a record of recurring payments on a customer’s net-banking portal, where they could access it and turn it on and off as desired.

Alternatively, the new protocols could be limited to recurring payments over a certain threshold.

What is the way forward?

First, pre-authorisation of debits must be clear and transparent, users should be clear where their personal data is being held, and it should be easier to cancel subscriptions through payments operators.

Second, RBI as a consumer-facing regulator will have to work harder to expand its consultation process before introducing new rules.

Third, having observed the problems caused by the new rules, the RBI must swiftly respond, and work out how to make them more palatable for smaller enterprises and consumers.

Source: This post is based on the article “Recurring pain” published in Business Standard on 5th October 2021.