Banks start canceling services for auto-debit to duck RBI penalty

Faced with the prospect of attracting huge fines by the regulator, banks have started canceling the service of e-mandates for auto-debit of funds from cards.

Leading private banks started sending messages to their customers that they will have to pay on their own for services they want to avail, instead of the banks deducting the fee on their behalf.

For example, Axis Bank sent a communication to its customers that said, in accordance with regulatory requirements, “processing of e-mandates for recurring transactions,” registered on credit or debit card, “without Additional Factor of Authentication (AFA), will be discontinued w.e.f. April 1, 2021.” It advised the customers to pay at the merchant website or application themselves.

Axis Bank also came with a frequently asked question (FAQ) on the issue that said “all standing instruction set up on your credit and debit card (both domestic and international) will be declined w.e.f April 1, 2021 till next notification from bank regarding the same.”

However, customers can continue to pay for these transactions as per the billing frequency through their card account at the merchant website or application.

“Standing Instructions (SI) using cards given on Netflix, Amazon, Vodafone bill pay, Insurance payments will get deactivated. However, SI registered using bank accounts for House rent, Mutual Funds, SIPs will continue,” the FAQ read.

HDFC Bank told its customers that utility bills can still be auto-paid by adding the biller to its net facilities. But standing instruction on recurring payments would be canceled. While Axis and HDFC Bank were the early notifiers, all other banks are expected to follow suit by Wednesday, 31 March.

“The banks don’t have the bandwidth to follow these instructions. We cannot notify a customer five days in advance and let him modify the payment option. That is the job of the payment processor,” said a senior banker.

The move comes after it was made clear by the Reserve Bank of India (RBI) that it was not going to budge from its stand on the new norms kicking in from April 1, 2021. As per the notification, issued first in August 2019, recurring payments through debit, credit cards will now require banks to check with customers by notifying them and getting their approval before processing such transactions.

The RBI is of the opinion that they have given enough time to banks to comply with the norms. So, in case, the banks fail to comply with the norms, then they will be penalised by the regulator. As per RBI rules, per instance of violation of norms attracts a fine of Rs 5 lakh. So, considering the millions of customers banks have, the penalty can be quite huge.

In December, 2020, when RBI increased the limit of e-mandate on recurring transactions from Rs 2,000 to Rs 5,000, it had said, processing of recurring transactions (domestic or cross-border) using cards / PPIs / UPI under arrangements/practices not compliant with these instructions shall not continue beyond March 31, 2021.

According to a person familiar with the RBI thinking, banks have been given enough time but did not show any intent in complying with the norms. “The banks do not have to bring in new technology for this. Rather, this is just a question of intent. If the banks are unwilling to act on their part, then they will have to face heavy fines by the RBI,” said the person.

The RBI, the person said, was more concerned about the safety of the customers’ funds, rather than convenience. Such auto-debits have given rise to many complaints in the past, the person added.

The RBI guidelines will impact other players such as the OTT platforms, e-commerce platforms, and especially the merchants, who rely heavily on recurring subscriptions and payments as their primary revenue stream.

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An Amazon India spokesperson said, “Starting April 1, banks and networks are migrating to the e-mandate framework issued by RBI. This may lead to the failure of automated payments set up on our customer’s credit/debit cards and in turn impact auto-renewal of the prime subscription. We continue to work closely with our banking partners to resume the convenience of auto-renewals for uninterrupted access to Amazon Prime”

“From a preparation point of view, some banks are ready. But banks being ready is one part of it. Payment Aggregators, or other players such as Netflix or Amazon Prime, they also have to be ready. As per the new RBI regulation, there will be a pre-debit notification where the bank has to intimate 24 hours in advance to the customer saying there is an auto-debit that is to be done”, said a banking source.

“Most of the players in the ecosystem are not ready. Every stakeholder has agreed with the new norms but the amount of work that is required to be done by the banks, aggregators in the backend for system readiness is not there. On the acquiring side, there are limited large banks that process such transactions and they are also not ready as of now. It will be a huge disruption because there are a lot of utility bill payments, insurance premiums mapped to standing instructions”, said Pankaj Dedhia, Chief Business Officer, Infibeam Avenues.

In a letter to Niti Aayog, the Internet and Mobile Association of India (IAMAI) have requested the Niti Aayog to provide the non-bank entities such as payment aggregators, merchants another 3 – 6 months to comply with the norms.

“We would like to reiterate that merchants and non-bank entities are completely reliant on the issuer banks for the upgradation to the new infrastructure to further align with the compliance requirements at their individual ends, we believe that non-extension of the timeline will cause an abrupt disruption to the businesses within the ecosystem.