Why Are Companies Competing for Payment Aggregator Licenses?

In recent months, many payment companies and large merchant businesses have been securing Payment Aggregator license from the Reserve Bank of India (RBI). Companies like Razorpay, Cashfree, PayU, Amazon Pay, Google Pay, Tata Pay, Zomato, Policybazaar, Jio, EnKash, Cred, Groww, and Worldline are among those that have obtained these licenses. This sudden interest raises the question: Why are so many companies eager to get a PA license, and why does it matter?

How Did the PA Licensing Start?

Previously, payment gateway companies worked with banks and were not directly regulated by the RBI. These companies acted as middlemen, helping customers make payments to merchants. However, as digital payments grew rapidly over the past decade, the RBI saw the need to regulate these companies. The main reason was that these companies handle large amounts of customer money, and as digital payments became more important, the RBI wanted to bring these entities under its control to ensure safety and accountability.

What Is a Payment Aggregator?

A Payment Aggregator (PA) is a company that allows online merchants to accept payments from customers using various methods without needing to create their payment systems. When a customer makes a payment, the PA collects the money, holds it briefly, and then transfers it to the merchant’s account. This process makes it easier for businesses to accept payments and focus on their main operations without worrying about the technical side of payment processing.

Requirements for Becoming a Payment Aggregator

To get a PA license from the RBI, a company needs to meet certain requirements. First, the company must have a solid financial standing. Specifically, it must have had a net worth of at least ₹15 crore by March 31, 2021, and this should have increased to ₹25 crore by March 31, 2023. Additionally, the RBI requires that agreements between PAs, merchants, banks, and other parties clearly outline everyone’s roles and responsibilities. This includes how they will handle complaints, refunds, failed transactions, disputes, and customer issues.

Why Did the RBI Regulate Payment Gateways?

The RBI decided to regulate payment gateway companies because of their growing role in handling large sums of money. By licensing these companies, the RBI can better monitor them for any illegal activities, such as money laundering or suspicious transactions.

The RBI also had concerns about some payment gateway companies helping with transactions related to cryptocurrencies and online betting, which are areas of high risk. There were also issues with payment gateways not thoroughly checking the backgrounds of the merchants they worked with. Before the PA licensing, banks were ultimately responsible for these checks, but they often didn’t have the resources to verify everything. Now, with the PA license, the responsibility is clearly on the Payment Aggregators themselves.

Why Are Fintech Companies Interested in PA Licenses?

Fintech companies are keen on getting PA licenses because it helps them save money and gives them more control over their payment processes. Normally, companies have to pay fees to payment gateway firms for processing transactions. These fees can range from 0.5% to 2% of the transaction amount, which can add up to hundreds of crores of rupees each year for large companies. By getting a PA license, fintech firms can avoid these fees, leading to significant savings. Additionally, they gain better control over their payment systems, which is important in today’s competitive market.

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Why Are Large Merchants Interested in PA Licenses?

Large merchants, such as Zomato, Amazon, and Flipkart, are increasingly interested in acquiring Payment Aggregator (PA) licenses. The primary motivation behind this trend is the substantial financial savings these companies can achieve.

To illustrate, consider Zomato, which manages an enormous gross order value of ₹13,000 crore in a single quarter. Payment gateways typically charge processing fees that range from 0.5% to 2% of the transaction amount. For Zomato, a 0.5% fee on their quarterly order volume translates to an expenditure of ₹65 crore. Annually, this figure balloons to ₹260 crore. By obtaining a PA license and managing payments in-house, Zomato can avoid these significant processing fees, resulting in considerable cost savings.

Beyond the financial benefits, having an in-house payment system grants large merchants enhanced control over the entire payment process. This includes customizing the payment experience for customers, from the user interface to the speed of transaction processing. Merchants can tailor the payment experience to align with their brand’s identity and ensure it meets their specific operational needs.

Will Payment Firms Lose Business?

Despite the growing trend of large merchants establishing their Payment Aggregator (PA) divisions, standalone payment firms are not likely to face a significant loss of business. The payment processing market is expansive, and there remains a substantial demand for the services provided by independent PA firms. Many smaller merchants, who do not have the scale or resources to manage their payment systems, will continue to rely on standalone PAs for their payment processing needs.

Large merchants, while they may develop in-house PA capabilities, often choose to use multiple payment gateways to mitigate risks associated with transaction failures and technical issues. This multi-gateway approach helps ensure that transactions are processed smoothly and reduces the likelihood of disruptions. Even for these large merchants, maintaining relationships with standalone PA firms can be beneficial for negotiating better rates and terms, given the competitive nature of the payment processing industry.

Moreover, standalone payment firms are well-positioned to cater to a diverse range of clients, from small businesses to large enterprises. They offer specialized services, advanced technology, and flexible solutions that might not be feasible for all merchants to develop internally. As a result, standalone payment firms can continue to play a crucial role in the payment ecosystem, providing valuable services to those who need them.

Conclusion