RBI likely to issue license framework for point-of-sale players soon, 3rd party operators may be affected, says report

The Reserve Bank of India (RBI) is soon likely to introduce guidelines for issuing licenses in the point of sales (POS) business, creating a new category within financial services, as per a Hindu Businessline report.

This licensing framework aims aims to enhance regulation in the offline payments sector, to ensure fairness in operations, and establish a level playing field between online and offline payment operators, the report said citing sources.

Regulated entities like banks and non-banking financial companies (NBFCs) currently operating in the POS business will not be affected, the sources added. However, third-party operators — BharatPe, MSwipe, Paytm and PineLabs — are expected to be hit, and would need to obtain a license to continue their operations.

Addressing Market Dynamics

The rapid growth of third-party operators in the offline payments sector has increased the need for regulatory measures, the report noted. Banks have also been using third-party POS for the sake of ease of doing business, it added.

These operators manage daily average balances of ₹400 crore, compared to ₹1,000 crore in the online space. An industry stakeholder quoted in the report said that there was a need to implement regulatory changes before the offline market "becomes too big".

Similar to payment aggregator licenses, POS operators may be required to meet certain criteria, including a minimum net worth of ₹25 crore and compliance with RBI's  other stipulations.

The RBI did not respond to queries, the report added.

Livemint could not independently verify the report.

Challenges and Concerns

The need for a licensing framework stems from three key concerns within the industry. Firstly, there has been a rise in cash loans on credit cards, leading to large, one-time swipes at POS terminals. There are suspicions that some merchants may be offering cash in exchange for these transactions, raising questions about know-your-customer (KYC) procedures and regulatory oversight, a POS company executive told the paper.

Secondly, discrepancies in data storage practices among POS operators pose security risks. Varying data retention periods, ranging from 90 days to over a year, highlight the need for standardisation and alignment with security protocols, another industry executive said.

Thirdly, there are apprehensions regarding fund management by third-party players. Delayed settlements to merchants and the risk of unregulated entities mishandling funds underscore the importance of regulatory intervention to mitigate potential risks, one source said. Though no such case has been found yet, it is a concern.

If the proposed licenses become mandatory, it is not yet clear if players like Paytm and BharatPe, who are awaiting the central bank's approval for payment aggregator services, will be permitted to operate in the offline POS segment.