Selecting a payment gateway is an essential decision that involves more than just its technical features. For businesses, the choice of a payment gateway must align with stringent legal and regulatory frameworks established by the Reserve Bank of India (RBI) and other governing bodies. Compliance is a legal obligation and a cornerstone for building consumer trust and ensuring sustainable operations.
This blog explores the key legal considerations that businesses must consider when selecting a payment gateway in India.
RBI authorisation under the Payment and Settlement Systems Act, 2007
The foundational legal requirement for payment gateways in India is authorisation under the Payment and Settlement Systems Act, 2007. The RBI mandates that non-bank entities acting as Payment Aggregators (PAs) must obtain explicit authorisation to operate. This ensures that the entity meets the necessary capital adequacy, governance and security standards.
According to the RBI’s guidelines, non-bank Payment Aggregators (PAs) must have a minimum net worth of ₹15 crore at the time of application. It will increase to ₹25 crore within three years. This financial threshold ensures that only entities with substantial financial backing can operate, thereby safeguarding the interests of merchants and consumers alike.
Compliance with RBI’s guidelines on payment aggregators and payment gateways
In March 2020, the RBI issued comprehensive guidelines regulating PAs and Payment Gateways (PGs). These guidelines encompass several critical areas:
- Capital requirements: Ensuring financial stability through mandated net worth thresholds.
- Escrow account maintenance: PAs must maintain an escrow account with a scheduled commercial bank to ensure the proper settlement of funds.
- Merchant onboarding: Strict KYC and Anti-Money Laundering (AML) procedures must be followed during merchant onboarding.
- Data storage and security: PAs and PGs must not store customer card credentials within their systems and should comply with data storage norms.
These guidelines are specifically designed to enhance the security and efficiency of the digital payment ecosystem, thereby protecting against fraud and cyber threats.
Adherence to data protection and privacy laws
While India awaits the enactment of a comprehensive data protection law, businesses must understand existing frameworks to protect consumer data. Payment gateways should implement data security measures, including encryption and secure storage, to safeguard sensitive information.
The RBI has emphasised the importance of data localisation, requiring that all payment data be stored within India. This measure is designed to improve data security and ensure better oversight of digital transactions.
Implementation of tokenisation standards
The RBI has emphasised the adoption of tokenisation to enhance the security of card transactions. Tokenisation substitutes sensitive card information with a unique token, reducing the risk of data breaches. Payment gateways must ensure compliance with RBI’s tokenisation guidelines to protect customer data.
Implementing tokenisation not only aligns with regulatory requirements but also enhances customer trust by ensuring that their payment information is handled securely.
Compliance with KYC and AML regulations
Payment gateways are obligated to perform thorough KYC checks and adhere to AML regulations to prevent fraudulent activities. This includes verifying the identity of merchants and monitoring transactions for suspicious behaviour.
The RBI mandates that PAs must conduct due diligence on merchants, including background checks and verification of business credentials.
Monitoring and reporting obligations
The RBI requires payment gateways to monitor merchant activities and report any anomalies or suspicious transactions. This proactive strategy helps identify fraud early and upholds the integrity of the payment system.
PAs must establish exceptional monitoring systems to track transaction patterns and flag any unusual activities. Regular reporting to the RBI is also mandated to maintain transparency and accountability within the payment ecosystem.
Handling cross-border transactions
For businesses dealing with international payments, compliance with the Foreign Exchange Management Act (FEMA) regulations is essential. Payment gateways must facilitate transactions in accordance with FEMA guidelines to ensure legal cross-border trade.
The RBI has introduced measures to promote the use of the Indian Rupee (INR) for cross-border transactions, including the establishment of Special Rupee Vostro Accounts (SRVAs). These initiatives aim to simplify international trade and enhance the global acceptance of INR.
Dispute resolution mechanisms
A good dispute-resolution mechanism is vital for maintaining customer trust and ensuring smooth operations. Payment gateways must establish clear processes for addressing customer grievances and resolving disputes in a timely manner.
The RBI mandates that PAs must have a dedicated grievance redressal system in place, including a nodal officer responsible for handling customer complaints.
Business continuity and disaster recovery plans
Ensuring uninterrupted payment services is critical for businesses. Payment gateways should implement strong business continuity and disaster recovery plans to minimise the effects of unexpected events.
The RBI requires PAs to conduct regular testing of their disaster recovery systems and maintain contingency plans to effectively manage potential disruptions. This preparedness is essential for maintaining operational resilience and customer confidence.
Legal resilience through strategic gateway partnerships
A compliant payment gateway is your first line of legal defence. Whether it’s adherence to RBI norms, data security mandates or tax and cross-border compliance, the right partner reduces legal vulnerabilities.
Payment solutions like Pine Labs Online exemplify this by offering tokenisation, PCI-DSS compliance, near-instant settlements and audit-ready reporting, all within a secure, API-first infrastructure. For businesses that demand seamless legal alignment without compromise, platforms like these deliver both confidence and compliance in every transaction.
