Why has RBI put restraints on a certain card network?

Subject: Economy

Section: Monetary Policy

Context:

The Reserve Bank of India (RBI) has ordered a certain card network to stop “unauthorized payments” made using business cards.

More on news:

The network in question has allegedly allowed businesses to make payments through intermediaries to entities that cannot accept card payments.
RBI did not name the card network.
The regulator said that the card network was allowing businesses to make payments to entities that were not authorized to accept card payments, which was a violation of The Payment and Settlement Systems (PSS) Act, 2007.
The RBI also raised concerns over non-compliance of Know Your Customer (KYC) norms in such transactions.

What is a card network?

Card networks connect banks, merchants, and customers (card users) to one another so that transactions can be carried out smoothly and securely.
Card networks are operating in the background every time a customer uses her card to make a payment.
There are five authorized card networks in India: Visa, Mastercard, RuPay, Diners Club, and American Express.
While the RBI did not name the card network that it has restrained,only one card network has operationalised the arrangement that enables corporates to make unauthorized card payments via business cards in the country.

What was the alleged modus operandi?

The RBI said that it had “noticed” that a card network had an arrangement that enabled businesses to make card payments through certain intermediaries to entities that did not accept card payments.
The intermediary was accepting card payments from corporates for their commercial payments, and was then remitting the funds via IMPS (Immediate Payment Service), RTGS (Real-Time Gross Settlement), or NEFT (National Electronic Fund Transfer) to non-card accepting recipients.

What are the RBI’s concerns?

Under Section 4 of the PSS Act, such a payment system requires authorisation, which had not been obtained in this case.
The activity was therefore without any legal sanctions.
There were two other concerns as well.
First, the intermediary in such an arrangement pooled a large amount of funds into an account that was not a designated account under the PSS Act.
Second, transactions processed under this arrangement did not comply with the ‘originator and beneficiary information’ requirements, as stipulated under the ‘Master Direction on KYC’ issued by the RBI.

What steps has the RBI taken now?

The RBI has advised the card network to keep all such arrangements in abeyance until further orders.
It has clarified that no restriction has been placed with respect to the normal usage of business credit cards.
Visa has issued a statement saying, “We have been directed by the regulator to ensure that all Business Payment Service Provider (BPSP) transactions be kept in abeyance till further notice”
BPSPs offer business-to-business payment services to corporations using credit cards.
It enables corporations to improve cash flow.