PayPal Compliance with RBI Guidelines

 The Reserve Bank of India (hereinafter “RBI”), the apex financial regulatory institution of India, on 16th day of November 2011 issued a notification regarding the Processing and Settlement of Export related receipts facilitated by online payment gateways. E-Commerce activities are already week as compared to the potential of the same in India due to many reasons like, inter alia, poor internet reach. The government has adopted numerous policies to increase the reach of Internet. . The new notification, in the author’s belief shall further slow down the pace of E-Commerce activities in the country.

Taking PayPal into exclusive focus, activities concerning PayPal have effected considerably. PayPal is an Internet based, trans-national payment gateway for its users which promises security to its users while making online payments. It also insures that the customers timely get their goods delivered by E-shopping portals. It further provides adequate redressal procedures/ policies if the good delivered goods are not as promised or alike. PayPal has established itself worldwide but due to the policies of the RBI, both E-Commerce and PayPal have been witnessing limited growth.

Major changes which were to be adopted by PayPal to comply with the RBI guidelines are stated under:

  1. The customer is to feed in his PayPal account his Permanent Account Number (PAN) and Purpose Code.
  2. Inter-link an Indian Bank with PayPal account.
  3. Reception of Export payment exceeding 500 USD shall be prohibited.
  4. Credit balance (if any) shall be by taken from the customer’s bank account before seven days.

Of all implemented as policies, the fourth count has been practised differently as said in the notification. PayPal daily reimburses its balances from the customer’s bank account, as suggested one week in the notification.

Blaming the above stated reasons, there are plethoras of practical reasons for the further decline of PayPal in India.

If the bank account of the customer is linked with his PayPal account, there arises an inherent threat to finance related Cyber crimes. Though PayPal claims to be providing the bulwark against Cyber Crimes due to its unique encryption, PayPal is surely beatable. The best example that could be established is the massive attack on PayPal during the uprising of Wiki leaks. This poses the personal account of the customer to a direct threat.

By interlinking the Bank account with the customers PayPal account (point 2 and 4 of the above); the customer is implicitly giving standing instructions to PayPal to eye upon the funds of the customer in his account. Leaving aside the cyber crime argument as already established, there will be automatic transactions between the bank and PayPal without the prior permission of the account holder. Since the customer cannot keep a constant check, there can be obvious problems like insufficient balance in account, additional bank charges due to amount less than the minimum balance and alike.

Further, the RBI restricts payment receipts of exported goods which exceed 500 USD. It is to be understood that such a cap on acceptance of payment is very low keeping in mind the nature of exports. Indian exports are largely in demand the world over and with such a low cap established by the central regulatory bank, minimized usage of PayPal is inevitable in the India.

PayPal, which has established itself worldwide, is unable to flourish due to the narrow policies adopted by the RBI. Although it is acknowledged that the policies are for the macro social welfare and is in compliance with the existing Indian laws, it is leading to the slower E-Commerce growth in the country. Though trade can be done without using PayPal, one will not be able to secure its payments and ensure the delivery of its goods. It is understood that even PayPal is not 100% secure when it comes to the confidentiality of its payment and its cliental, but the informal payment gateways other than PayPal neither establish confidentiality of the buyer/ seller, neither make the payment fully secure, as traditionally done by PayPal.

 Reported By Udit Seth