What are the New RBI Rules and their Impact on Recurring Transactions?

The Reserve Bank of India (RBI) has introduced new rules for recurring payments using Credit or Debit Cards effective from October 1st, 2021. In addition, an extra security layer is added to protect the customers from online frauds, especially involving vulnerable third-party platforms.

The move prompted the stakeholders to reposition their processes to comply with the rules. The fundamental change mandates routing all eligible recurring card payments through the issuer bank. More on that later; let us first understand the concept of recurring payments.

Understanding Recurring Payments

As the name suggests, recurring payments are repetitive and are more popularly described as a subscription model. Most of the global IT and software companies have migrated to the cloud-based subscription business model in response to the COVID-19 pandemic.

Moreover, retail customers embrace recurring subscription services and products as the new norm in every industry. The question is whether or not Indian businesses are compliant-ready with the new RBI rules. So, let us find out which industries are most suited for this business model.

Industries Suited to the Recurring Payment Model

Recurring payments are conveniently spaced, mostly occurring in monthly schedules. But quarterly and annual, besides a custom schedule, is not uncommon. Some of the vital indicative industries where recurring payments are commonplace are:

  • Content and Entertainment Providers: The popular platforms are Netflix, Amazon Prime, Medium, Spotify, and Apple Music, to name a few.
  • SaaS-Based Tech Businesses: Google, Slack, Freshdesk, Salesforce, Microsoft (MS office), and Adobe, among others.
  • Healthcare and Financial Services: Insurance premiums across all insurers, loan repayments, mutual funds, and many more.
  • Utility Bills: Telecom service providers offer post-paid plans, besides other utilities like the electricity boards.
  • Retail eCommerce: The one sector where the model has made rapid inroads is eCommerce platforms.

The businesses on the recurring payment model must tweak their integrated merchant account software to provide consumers with the added flexible facility for an enriching experience. For example, Zaakpay offers comprehensive payment methods for its clients in the Indian context. 

Recurring Payment Types

Recurring payments are broadly classified into two categories – fixed and dynamic. Accordingly, they can invite separate pricing plans. You can check the payment gateway charges at Zaakpay pricing pattern before diving into the various types in detail.

  1. Fixed Payment: The payment amount is fixed every cycle, providing the businesses better upselling prospects.
  2. Dynamic Payment: The amount changes depending on usage. The category is further divided into:
  3. Metered Payment: The primary criterion is the usage displayed on the meter counter.
  4. Quantity-Based Payment: Volume-based as in SaaS platform or Cloud-based services.

How Does Recurring Payment Work?

The simplest method to subscribe to the recurring payment models is through a payment service provider. The comprehensive solution covers collecting, processing, security, and crediting the merchant account. The entire procedure is described in a few steps.

  1. The customer picks the recurring payment option from the available methods at the merchant’s online platform.
  2. The customer approves the terms and conditions, amount charged, payment schedule, fee, and the expiry date at the checkout point.
  3. Then, the customer enters the card information allowing storage with the merchant.
  4. The payment processor routes the transaction through the acquiring bank, card network, and issuing bank. Finally, the fund moves to the merchant account after all the three parties approve the transaction.
  5. Finally, notification and invoice reach the customer, confirming the recurring payment processed per the agreed schedule.

RBI Rules for Recurring Payments

After gaining good insights about recurring payments and how they work, it is time to learn about the new RBI rules implemented from October 1st, 2021. Moreover, it helps assess its impact on the Indian businesses on the recurring payment landscape.

  • The recurring payment will not be executed automatically per the agreed schedule.
  • Instead, each scheduled transaction is preceded by a notification from the bank 24 hours in advance.
  • The rule applies to Rs.5000 and above amounts recovered from Credit or Debit Cards.
  • The One-Time Password (OTP) validation allows the payment to go forward or is declined by the bank.

Thus, recurring payment customers must re-register with a digital mandate for every payment instrument, whether Debit or Credit Card, according to the central bank’s new guidelines. The first transaction is validated via the Additional Factor Authentication (AFA) to approve the auto payment request once the mandate is registered.

The rule allows the customer to exercise greater control while undertaking recurring payments using cards. In addition, the customer is empowered to fix the payment amount in advance and cancel the service if required. So, let us now take a closer look at how the new rules impact the payment system and, in turn, the businesses subscribing to it.

RBI Rule’s Impact on Recurring Payments

The immediate impact of newly implemented guidelines for recurring payments is felt in the following:

  1. Existing mandates for auto-debit or credit payments for insurance policies are not executed automatically.
  2. Subscriptions for OTT platforms like Netflix, and Amazon Prime, to name a few, fail.
  3. Retail businesses in eCommerce platforms where shoppers pay for their purchases in installments, especially the buy-now-pay-later facility, are discouraged.
  4. Automatic billing and collection used by utility services are under a cloud.

The above effects are only indicative, and the bearing is far more severe in business operations where recurring payment is the norm. In addition, merchants need to reposition their integrated software with altered payment gateway charges. So let us explore the significant business aspects where businesses stand to lose.

  • Cash Flow: With reduced recurring payment subscribers, the assured cash flow into the business is slowed, hampering operations.
  • Customer Retention: The feature is bound to falter temporarily until the new rules are fully implemented.
  • Predictive Income: Business owners grasp the predictive income as the automated recurring payment ensures revenues at a regular schedule. However, the present system fails to deliver on schedule, albeit initially.
  • International Services: Global operations are the most significant initial casualty. The international platforms fail to comply with the RBI’s new rules, whereas the entire world runs on recurring payments for SaaS products.

The implemented new RBI rules are meant to protect the customers from frauds in the vulnerable card payments, without any scope for review. Thus, the guidelines allow an additional check. Despite the teething issues in the wake of its implementation, Zaakpay has repositioned its integration procedures to accommodate recurring payments in the accounting. However, business continuity is assured in the long run after a few initial hiccups.