INDIA Law and Practice Contributed by: Shilpa Mankar Ahluwalia, Purva Anand and Ansh Jain, Shardul Amarchand Mangaldas & Co
2.3 Compensation Models Compensation models across key product offerings typically take the following forms. • PPIs/debit cards/credit cards/UPI all charge Mer - chant Discount Rate (MDR) – ie, charges payable by the merchant to the payment acquirer and/or the card network/payment system operator (PSO). For cards, transaction interchange fee, interest and float income, and card issuances act as additional income lines. • Digital lenders charge loan processing fees and interest from their customers, which are usually linked to the volume and tenor of the loan. Digital lenders can also levy additional penal charges for defaults, in a manner that is reasonable and only for material non-compliances. Penal charges must not be used as a revenue enhancement tool. • PAs/PGs charge the e-commerce marketplaces and merchants for their payment aggregation services and/or technological support provided. These charges are in some instances contractu - ally passed on to the customer transacting on the e-commerce or merchant platform. To promote indigenous payment instruments, the GOI has mandated zero MDR for certain transactions. This could impact the cost competitiveness and revenue flows of foreign fintech players, in comparison with domestic fintech players. The overarching regulatory requirement surrounding disclosures in connection with these compensation models mandates that: • REs (such as banks and NBFCs) adopt a “fair prac - tices code”, to be made available on their websites (in English as well as in the vernacular language), setting out the process for loan applications and the key terms and conditions associated with the lending product (including all charges, fees and interest rates); • all lending institutions provide a “key fact state - ment” in a standardised format for loan process - ing – such standardised format must specify the annualised percentage rate for the lending product (which is inclusive of all charges, fees and interest
rates in connection with the credit product offered by them); and • REs (such as PPI issuers, payment intermediar - ies, banks, NBFCs) adopt a suitable CGRM and designate “nodal officers” to address customer complaints, so as to ensure fairness in operation of such products, including the compensation models employed by them. 2.4 Variations Between the Regulation of Fintech and Legacy Players Taking a holistic view of the regulatory framework (see 2.2 Regulatory Regime ), it appears to treat both new fintech players and established players (such as banks) impartially. However, there is a significant discrepancy when it comes to banks’ ability to conduct Aadhaar-based E-KYC checks for customer onboarding, a capabil - ity that is not extended to non-bank players (such as NBFCs). This discrepancy imposes additional compli - ance costs on non-bank players. Nevertheless, the RBI has taken steps to address this issue by allowing non-bank players to obtain authorisations to conduct Aadhaar-based E-KYC authentication, enabling them to utilise the services provided by the Unique Identifi - cation Authority of India (UIDAI) for E-KYC purposes. Further, the RBI’s impetus on CKYCR may potentially reduce disparity in costs between bank and non-bank players. Access to credit information is another area where there was a significant discrepancy between REs and certain “specified entities” (which fulfil the criteria prescribed by the RBI), as against other third-party entities (see 2.13 Conjunction of Unregulated and Regulated Products and Services ). However, the RBI now expressly allows third-party entities to access the credit information of persons from CICs, as the authorised representative of such persons, with their consent. The RBI has coupled this access with robust security, due diligence and monitoring measures. 2.5 Regulatory Sandbox RBI Framework and eligibility The RBI issued a Regulatory Sandbox Enabling Framework in August 2019 permitting eligible fintech
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