The Reserve Bank of India (RBI) on October 31, 2023, issued a new framework to regulate Payment Aggregators processing cross-border transactions for trade in goods and services. This new regulation (PA-CB) will apply to all entities, including AD Banks, that are involved in settlement of import and export payments.

Previously, guidelines for payment aggregators were spread across multiple RBI circulars that permitted Online Payment Gateway Service Providers (OPGSPs) to have existing partnerships with AD Banks to facilitate repatriation of foreign exchange earnings related to exports and payments for imports.

With the new PA-CB Regulation from RBI, all entities enabling cross-border payments for trade in goods and services will now be directly regulated.

The Regulation categorizes these service providers into three types:

• Export only Payment Aggregators (PA-CB-E)
• Import only Payment Aggregators (PA-CB-I)
• Payment Aggregators facilitating both exports and imports (PA-CB-E&I)

The regulation outlines specific requirements for each kind of Payment Aggregator based on whether they handle export, import or both types of transactions.

The new PA-CB Regulation stipulates compliance requirements for non-bank Payment Aggregators providing cross-border payment services:

Entities must register with Financial Intelligence Unit-India (FIU-IND) before applying for RBI authorization, which they need to do by April 30, 2024 to continue operations.

Existing Payment Aggregators can continue providing services until they receive RBI approval.

They must adhere to RBI's March 2020 guidelines on export-related online payment gateways regarding enhanced transaction values.

Within 60 days of the PA-CB circular date, or before commencing any new business activity, non-bank Payment Aggregators must obtain approvals from RBI's Department of Payment and Settlement Systems, Central Office.

Any proposed changes to business activity categories also require 60 calendar days advance notice to these RBI departments.

Additionally, the PA-CB Regulation specifies net worth requirements for non-bank Payment Aggregators:

• Existing non-bank Payment Aggregators must have minimum net worth of ₹15 crore when applying to RBI, and reach ₹25 crore by March 31, 2026
• New non-bank Payment Aggregators need ₹15 crore minimum net worth for RBI authorization, rising to ₹25 crore by the end of their 3rd year of operations

For import transactions, the Regulation mandates:

• Import-only Payment Aggregators maintain an Import Collection Account with a Category-I AD bank
• Payments must first be received in an escrow account before transferring to the Import Collection Account for crediting foreign exporters
• Imports can be paid through any approved Indian payment system, except small PPIs

For export transactions, the PA-CB Regulation requires:

• Export-only Payment Aggregators maintain Export Collection Accounts (ECA) in Indian Rupees or foreign currency (with separate accounts) with a Category-I AD bank. Export proceeds are credited to the ECA and then transferred to the Indian merchant's account
• Settlement in non-INR currencies is permitted only for directly onboarded merchants
• All Payment Aggregators must conduct Customer Due Diligence for merchants directly onboarded by them, including e-commerce operators for both imports and exports. Additionally, for imports above INR 2,50,000 per unit, Buyer Due Diligence is mandated
• Payment Aggregators cannot facilitate payments related to prohibited/restricted goods and services under India's Foreign Trade Policy

The PA-CB Regulations consolidate various cross-border payment channels under one framework:

Previously, businesses had limited options like correspondent banks, MTSS, RDA and post for import-export e-commerce payments, as noted by the World Bank. The Regulations address this by requiring all entities facilitating such payments to register as PA-CBs.

It mandates FIU-IND registration at a time when cross-border payment violations via side channels have surfaced. This aligns with recent KYC directives requiring reporting of suspicious transactions. A Delhi High Court interim order also established fintech entities like PayPal as "payment system operators" under anti-money laundering laws.

Thus the Regulations plug loopholes to ensure no illegal money transmission.

PA-CB’s Due-Diligence: Earlier, fintechs were only subject to due diligence by partner Banks. Now PA-CBs face direct RBI scrutiny, enhancing oversight.

Import of Services Relaxation: While the earlier OPGSP circular allowed only goods/software imports via such payments, the Regulations permit import of other services too.

Revised TCS on LRS Monitoring: The revised LRS-TCS rates effective October 2023 also warrant monitoring cross-border personal remittances. The PA-CB framework lets the government account for these flows, ensuring adequate taxation.

Conclusion

The PA-CB Regulations empower non-bank entities to directly facilitate cross-border transactions without Bank intermediaries, albeit under stringent RBI governance like domestic aggregators.

This tradeoff improves transparency and accountability in such flows by mandating FIU registration and escrow/settlement methodologies. It will help curb money laundering risks.

So while Indian businesses welcome streamlined, confidence-instilling guidelines for cross-border trade, fintech payment aggregators face the challenge of meeting substantial compliance burdens if they are to harness this opportunity.

Overall, the regimen ushers much-needed structure around accountability and traceability into overseas payment flows though at the cost of regulatory overhead for the facilitators. The impact is a formalized framework at that expense to pave the way for trusted global commerce.