In recent years, digital payments have constantly been on the rise. Especially after the world stepped into the 2020 lockdown, people hugely prefer digital payments for many reasons like easy accessibility, convenience, and contactless payment. The COVID-19 pandemic has changed a lot of things in India, with digital payments being one of the most important ones. According to a report by the Economic Times, digital transactions skyrocketed by a staggering 33% to reach 7,422 crores in FY 22.
However, as the number of digital transactions has surged, people are increasingly becoming victims of cybercrime and unauthorized auto-debits. As a result of several incidents of auto-debit transactions being carried out without the customer’s knowledge or permission, the Reserve Bank of India issued some guidelines to protect the cardholders and end-users from such malpractices.
In this blog article, we have discussed in detail RBI’s new auto-debit guidelines and their impact on various stakeholders.
What Are The New RBI Guidelines for Auto-Debit?
On October 1, 2022, the Reserve Bank of India (RBI) announced new guidelines for auto-debit transactions for card-issuing banks to adhere to. RBI’s new rules stated that there would be no automatic recurring payments for any service, including utility bills, phone recharge, DTH, and OTT subscriptions, among many others.
These new regulations were established to control recurring payments made through credit cards, debit cards, and prepaid instruments.
Here are 5 things you should know about RBI’s auto-debit guidelines, as of Oct 2021:
1. Banks to Inform Customers in Advance
Under the new rules, banks are now supposed to inform the customers about recurring payments 24 hours before the due date of such payments. The banks can proceed with the transaction only after they get a confirmation from the customer. Customers can also change the mode of communication (SMS, email, etc.) for receiving such pre-transaction notifications.
2. Additional Factor of Authentication (AFA) for transactions above Rs. 5,000
Once the card-issuing bank sends a pre-debit alert to customers for recurring payments above Rs. 5,000, the bank will require an explicit approval from the customer through an Additional Factor of Authentication (AFA) in the form of OTPs.
3. One-Time Registration
Customers only need to register once, after which they can conduct transactions without an additional authentication factor. They can also specify the validity period for subsequent transactions when registering.
4. Choose To Opt-Out
In the pre-debit notification sent by the bank, the customers now have an option to opt-out of the transaction. They are also free to view, modify or cancel the auto-debit transaction set on their card.
5. Exemption For the New Rules
These new auto-debit regulations will not apply to any standing orders made using bank accounts for mutual funds, SIPs, or equated monthly payments for loans.
June 16, 2022: RBI hikes the limit amount for recurring transactions
Eight months after introducing the new auto-debit guidelines, the RBI, on June 16, 2022, hiked the limit amount for recurring transactions from Rs. 5,000 to Rs. 15,000. Customers can now use their debit or credit card for higher-value transactions like education fees or insurance premiums without needing an additional authentication factor like an OTP.
6. Why Did the RBI Announce These Guidelines?
The RBI has announced these auto-debit guidelines to increase the ease of transactions and protect customers from online fraud, especially on third-party platforms where payment-related fraud is more common. RBI’s primary motive behind this move is to provide safe and secure digital payments.
These regulations will
- provide customers more control over their recurring transactions,
- increase customer convenience, and
- create transparency throughout the entire procedure.
Impact on cardholders and businesses
Cardholders: Before this announcement, customers could make auto-debit transactions without having to approve them or re-confirm them every time. All cardholders must authenticate recurring transactions above Rs. 15,000 through an additional verification factor like an OTP. Due to this, they must re-register themselves with their payment instruments. The first recurring transaction will be executed through an additional factor authentication (AFA). After this, they don’t have to verify every auto-debit transaction.
Several cardholders also began experiencing problems with auto-debit on their cards since their card-issuing banks were not adhering to RBI regulations.
Businesses: Many businesses were hit hard due to the imposition of these guidelines since they could not onboard new customers who made payments using cards. They had to alert their customers with messages like “Cards not accepted for recurring payments” through their websites.
So, in order to bring on new clients and convince them to sign up for auto-debits, subscription businesses were pushed to consider alternative payment methods. UPI quickly replaced debit/credit cards as the preferred payment method, followed by e-mandate linked to bank accounts.
Many people have reacted positively to this move by RBI as, finally, cardholders have the freedom to start, modify, or decline recurring transactions. Unregulated merchants and illegal auto-debit transactions are less likely to occur in this setup as all recurring transactions above Rs.15,000 need an additional factor authentication (AFA) from customers to be executed successfully.
Though there has been some disruption in the payments space, RBI’s new mechanism will eventually find its way in the long run!
FAQs on RBI’s new auto-debit guidelines
To help you understand the guidelines better and steer clear of any of your doubts, we have answered a few FAQs on the auto-debit guidelines announced by RBI:
- What is an e-mandate?
An e-mandate acts like a set of standing instructions issued by an individual to a third party, allowing the third party to collect recurring payments from the individual’s bank account without constant payment reminders or permissions. Businesses are more likely to use e-mandates to handle recurring transactions with their customers.
- Will international transactions be affected?
Yes, the new auto-debit guidelines also apply to international transactions. A cardholder must approve all domestic and international transactions through an additional factor authentication.
- What happens if the cardholder fails to approve the transaction?
The card-issuing bank will automatically decline or cancel the transaction if a cardholder does not approve the transaction. The customer must directly pay through the merchant’s website or app. Any claims relating to non-payment or late payment of fees imposed by the merchant will not concern the issuing bank.
- What kind of services will be impacted by these guidelines?
Auto-debit or auto-credit payments made for digital platforms, utility bills, OTT platforms, orders from e-commerce platforms, and other similar transactions are more likely to be affected by RBI’s new auto-debit guidelines.