Cross-Border Payments: Understanding RBI Guidelines for Wholesale and Retail
By Jitesh Agarwal
In today’s hyper-connected, digitised world, geographical boundaries no longer hinder many activities, including payments. Cross-border transactions, the transfer of assets or funds from one jurisdiction to another, have become increasingly commonplace. Correspondent banks and payment aggregators act as intermediaries between the involved financial institutions, facilitating the seamless movement of money across borders.
The ecosystem
The cross-border payments ecosystem encompasses a diverse range of participants, including businesses, individuals, and merchants engaged in B2B (business-to-business), B2P (business-to-person), P2B (person-to-business), and P2P (person-to-person) transactions. Common methods of cross-border payments include wire transfers, international money orders, and credit card transactions.
Understanding cross-border payments
In the simplest terms, cross-border payments are financial transactions involving two parties with distinct national bases—the payer and the recipient. They encompass remittances as well as wholesale and retail payments. Currently, the most common means of sending money across borders include bank transfers, credit card payments, and alternative payment methods such as e-wallets and mobile payments.
There are two kinds of cross-border payments – wholesale and retail.
Wholesale cross-border payments: These are typically made between financial institutions to support the cross-border activities of their customers or their own operations, such as borrowing and lending, foreign exchange, and the trading of equity, debt, derivatives, commodities, and securities. These payments are also utilised by governments and larger non-financial businesses for significant transactions resulting from the import and export of goods and services or financial market activities.
Retail cross-border payments: Payments made across borders in the retail sector are usually conducted between individuals and corporations. These include person-to-person, person-to-business, and business-to-business transactions. Remittances, the most common form, involve money sent by migrants to their home countries.
The advantages and challenges
Access to international markets: Cross-border payment methods reduce the complexity of international fund transfers, enabling real-time access to global markets.
Cost-effectiveness: Compared to other methods, cross-border payment solutions can be more cost-effective, allowing businesses to save on transaction fees, currency exchange rates, and related costs.
Higher revenue and better growth opportunities: By selling goods and services internationally, businesses can increase their revenue and tap into new growth opportunities.
While cross-border payments offer numerous benefits, they come with their share of challenges that must be addressed.
Regulatory compliance: Applicable laws, rules, and procedures vary across jurisdictions, making regulatory compliance a complex and demanding task.
Currency conversion risks: When conducting business in foreign currencies, companies are exposed to the risk of fluctuating exchange rates, which can impact their bottom line.
Fraud risk: The lack of stringent laws regulating banking institutions in certain jurisdictions can lead to vulnerabilities that organised criminals may exploit to access wider financial networks, posing a significant risk of fraud.
The RBI’s guidelines
The Reserve Bank of India (RBI) recently issued norms to regulate entities engaged in cross-border payments, essentially bringing fintech operating in this critical industry and at scale under its direct regulation.
The new rules apply to entities that facilitate cross-border payment transactions for the import and export of permissible goods and services in India through online modes. This includes Authorized Dealer (AD) banks, Payment Aggregators (PAs), and PAs-CB involved in processing such transactions.
Key rules
Among the key measures introduced are fresh norms for merchant KYC (Know Your Customer). Non-bank entities providing PA-CB services must have a minimum net worth of INR 15 crore at the time of applying for authorisation and a minimum net worth of INR 25 crore by March 31, 2026, as per the stipulated Net Worth Criteria. Furthermore, all non-banks operating in this space are mandated to register with the Financial Intelligence Unit of India. Existing payment aggregators will also require RBI’s approval to continue undertaking cross-border payments. With the stringent net worth criteria, early-stage startups will now need to be separately regulated to continue operations. However, for startups in the gaming industry, there aren’t any new norms controlling the regulations/compliances.
India’s cross-border payments landscape
India has witnessed a digital payments revolution, with the Unified Payments Interface (UPI) transforming domestic transactions. In 2023, the UPI recorded over 22.7 billion transactions valued at a staggering $768 billion. However, replicating this success in the cross-border arena has proven challenging.
Traditional channels like wire transfers and correspondent banking still dominate a significant market share, often plagued by slow processing times, high costs, and a lack of transparency. Navigating complex foreign exchange regulations and KYC norms can be cumbersome for businesses and individuals alike. Compared to domestic payments, the cross-border space has seen limited technological innovation.
What businesses and individuals can expect
With advancements in technology and regulations, individuals and businesses can expect faster settlement times and potentially lower fees for cross-border payments. Improved traceability and real-time transaction updates will enhance transparency, giving users more control over their money. A wider range of payment options, including mobile wallets and digital platforms, will cater to diverse user preferences.
The road ahead
Despite the challenges, 2024 appears promising for the cross-border payments segment in India. The global surge of Real-Time Payments (RTPs), with transaction volumes projected to grow at a staggering 35.5% annually, is expected to reach India, potentially revolutionising cross-border transactions through near-instant settlements.
The much-anticipated UPI-PayNow linkage with Singapore promises faster and cheaper remittance options, paving the way for similar collaborations with other countries and boosting international trade and individual transactions. Additionally, fintech companies are leveraging RegTech (regulatory technology) to streamline compliance procedures, potentially reducing processing times and making cross-border payments more accessible.
As the world continues to become more connected and India’s cross-border payments landscape evolves, combined efforts from the government, regulatory bodies, and innovative FinTech companies can ensure a future of quicker, more affordable, and user-friendly cross-border transactions, benefiting businesses and empowering individuals to participate more actively in the global economy.
(The author is Jitesh Agarwal, Founder, Treelife, and the views expressed in this article are his own)
