Focus: GS-III Indian Economy, Economic Development
Why in news?
- The Reserve Bank of India (RBI) on 17th March 2020, said it will regulate in entirety the activities of payment aggregators (PAs) and provide baseline technology-related recommendations to payment gateways (PGs) in view of the important functions of these intermediaries in the online payments space as also their role vis-à-vis handling funds.
- Existing non-bank entities offering payment aggregation (PA) services shall apply for authorisation on or before June 30, 2021.
- The central bank has also lowered the minimum capital requirements for payment aggregators to Rs 15 crore at the time of application for the licence from Rs 100 crore it had proposed earlier.
- As per RBI guidelines, compulsorily convertible preference shares can be either non-cumulative or cumulative, and they should be compulsorily convertible into equity shares and the shareholder agreements should specifically prohibit any withdrawal of this preference capital at any time.
Payment Aggregators (PA)
- Payment aggregation, also known as merchant aggregation, is a business model in which a third-party payment provider is also known as the ‘payment aggregator’ signs up merchants directly under its own merchant identification number (MID) to process transactions through a single master account. For example, Google Pay, Amazon Pay, PayTM etc. One merchant account is used to represent a number of merchants opposed to the traditional model which disburses a merchant account to each merchant. Merchants processing transactions under an aggregator are known as sub-merchants.
- In simple terms, a payment aggregator empowers merchants by providing them the means to accept credit card payments and online money transfers without an individual merchant account with a bank or financial services provider.
- PAs are entities that facilitate e-commerce sites and merchants to accept various payment instruments from the customers for completion of their payment obligations without the need for merchants to create a separate payment integration system of their own
How does Online Transaction Work?
In an online transaction, there are typically 3 parties involved.
- Payment aggregator
- Let’s say, a customer wants to recharge his cellphone online. In this case, the customer will either go to the official website of the service provider or he would choose to recharge from a third party application.
- The dashboard essentially consists of a list of various mobile phone service providers from where the customer can select his provider, choose the amount and proceed with the payment.
- The customer can choose any of the online modes of payment such as a credit card, debit card, net banking, wallet etc. The payment aggregator provides the customer with a dashboard consisting of an array of banks and payment options to choose from. The customer then selects the relevant option and proceeds with the payment.
- All this happens in a fraction of a second. In reality, the customer pays the aggregator and the aggregator pays the merchant. Digging further into the technical aspects of this process, the payment aggregator platform requires a payment gateway to receive online payments. The gateway encrypts the data to keep it private and sends it to the payment processor. Further, the payment processor sends a request to the customer’s issuing bank to check to see that they have enough credit to pay for your order. The bank responds with a yes or a no depending on the account balance. Finally, you get a message on the app saying the transaction was successful or not!
Why Would You Need A Payment Aggregator?
- As a merchant, if you want to expand your business by accepting all modes of online and credit card payments with minimal fuss and in a short span of time, then a payment aggregator is the best choice.
- A payment aggregator platform eliminates the need of setting up individual online payment process by allowing merchants to accept credit card and bank transfers without having to set up a merchant account with a bank or a card association.
- The payment aggregator platform can also hold consumer card details to allow for faster purchases or hold money in an account to allow for future purchases.