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Understanding online payment transaction

Online payment transactions undertaken through various modes such as net-banking, credit/ debit card payments and e-wallets, etc. have gained prominence these days. Certain companies have started issuing various kinds of cash cards and mobile wallets as well. This chapter discusses legal regulation of commonly used channels for electronic payments.
 

In India, systems enabling credit card operations, debit card operations, smart card operations, money transfer operations or similar operations are governed by the Payments and Settlement Systems Act, 2007 (PSS Act). These systems qualify as a ‘payment system’ as they enable payments to be made between payers and beneficiaries, and involve a payment, clearing or settlement service. Under the PSS Act, any entity operating a payment system must apply to the RBI to obtain a prior authorization. The following entities have obtained authorization from RBI:

  • Credit card payment networks, such as the American Express Banking Corporation, Diners Club International Ltd., Master Card International Inc., and Visa Worldwide Pte. Ltd.
  • Cross-border money transfer services such as Western Union Financial Services Inc.
  • Pre-paid payment instrument issuers – such as ITZ Cash Card Ltd., Airtel M Commerce Services Ltd. (for their mWallets) mobile wallets, Sodexo SVC India Pvt. Ltd. (for the popular ‘Sodexo’ meal vouchers and smartcards). Regulation of prepaid instruments is discussed in greater detail below.

The full list of authorised operators can be accessed here.
 

1. Regulation of prepaid instruments such as gift vouchers, mobile wallets and cash cards
 

Various business entities have begun to issue prepaid instruments to users in the form of smart cards, magnetic stripe cards, internet accounts, internet wallets, mobile accounts, mobile wallets, paper vouchers and similar instruments. New businesses such as en e-commerce website may consider issuing prepaid instruments to encourage loyalty from their customers. Some may even consider issuing payment instruments of their own which are valid at a variety of locations – e.g. Sodexo passes, or they may start a new prepaid wallet/ cash card service. In such situations, the regulation governing prepaid payment instruments should be understood. 

RBI has issued Issuance and Operation of Pre-paid Payment Instruments in India (Reserve Bank) Directions, 2009 to regulate the issue of such instruments, in order to prevent a ‘shadow banking system’ from coming into existence, and for prevention of money laundering. The directions classify payment instruments into three types, as represented in the table below:

 

Type of payment instrument

Regulatory requirements/ preconditions for issue

Closed Payment System Instruments

A prepaid instrument for facilitating purchase of goods and services from itself – these instruments do not require an authorization from RBI. For example, issuance of gift vouchers by Flipkart will not require authorization from RBI.

Semi-closed Payment System Instruments

Any payment instrument which is redeemable at a select group of merchant locations (for availing third party services) – issuance of such instruments requires prior authorization from the RBI. Therefore, issuance of Sodexo meal vouchers (which are redeemable at select restaurants) will require an authorization from RBI.

RBI has issued various directions and imposed limits on the value of such instruments - readers who are interested in further details may access the RBI notifications here.

Open Payment System Instruments

A payment instrument which can be used at any merchant location or point of sale (i.e. shop or store) which accepts cards, and which permit cash withdrawals require RBI authorization and can only be issued by banks.

 

2. Regulation of payment gateways

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As per the directions, only amounts which were previously specified by the payment gateway to the merchant can be deducted by way of commission. The amount must be remitted to the merchant within 2-3 days of the transaction having taken place.

The directions specify what amounts could be received or spent from the account of the payment gateway – receipts should usually be the amounts received from customers when they make purchases and payments will be the amounts paid to the merchants. In certain cases, commission may have to be paid to another intermediary at a rate pre-determined under an agreement, or there a reversal of transaction in case of a disputed or failed transaction may have to be undertaken.
 


The CC Avenue Agreement – A Case Study

 

In order to receive online payment from customers for any products or services that are sold online, it is necessary to avail the services of a payment gateway. An e-commerce business (or any other business which accepts payments online) will be required to avail the services of a payment gateway. In this discussion, we discuss the terms of the agreement with CC Avenue in brief. The full version of the agreement has been uploaded on the system.


Responsibilities of the merchant – is the gateway liable for unexpected losses?

A reading of the agreement will indicate that CC Avenue in fact demarcates responsibilities for various processes pertaining to the online transaction, and for the most part, allocates them to the merchant (i.e. the business which intends to avail of its services). While it is a facilitator, the merchant (i.e. the business) has substantial responsibilities to ensure that transactions are carried out safely – such as the obligation to maintain a secure link with CC Avenue (when a transaction is being carried out) or to verify the IP address of CC Avenue in the confirmation message. Even losses on account of hacking or any other reason that is outside the control of the e-commerce site are required to be borne by the business itself.


Which goods can be sold using the payment gateway’s services? How should the amount be remitted to the merchant?

 

Any remittances from CC Avenue are payable after deduction of their annual charges, commission, applicable taxes and fees. In addition, CC Avenue strictly specifies what products and services cannot be sold using its payment gateway services –e.g. pornographic goods, unauthorized goods, multi-level marketing collection fees, etc. In case a customer refuses to pay on grounds that the product was defective or the payment for the transaction has already been made, or when a bank advises it that the credit card number does not match a real number on a file, CC Avenue will not be liable to pay.


CC Avenue also has the right to use the trademarks of the merchant in the course of marketing its services to other entities. Further, CC Avenue and the banks (whose cards are supported by the CC Avenue gateway) have the right to display their trademarks, notices, etc. on the website of the merchant.

 





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