RBI's Guidelines on Recurring Payments in India May Send the Tech Sector Reeling

Starting end of September, many people in India started getting their inboxes flooded with emails notifying them that their card payment was declined or would be declined and their subscription would be cancelled. Netflix stopped working for some. For some others, Office 365, Adobe, Spotify, Zoom, Google workspace, Amazon Kindle Unlimited or Prime, all stopped working or sent threatening emails. To most Indians, this came as a surprise, even though the information and the new mandate of RBI has been on the grapevine for two years.

The central bank of India–the RBI–launched new guidelines for e-mandates which makes it mandatory for the user to re-authorize any payment made via a debit or credit card, with an AFA (Additional Factor of Authentication), namely an OTP (One Time Password). No recurring payment would be allowed without re-authorizing the payment and a new e-mandate with the merchant with AFA.

There are 4 players involved in this ongoing fiasco: The RBI, the banks, the merchants and the users. Except for the RBI, all other players stand to lose from this new guideline in the short term. In the long term, it is aimed at making online transactions more secure for users, to 'save' them from fraudulent charges on a card, and from recurring payments they may not want. That is the goal. Whether that goal will be achieved or not is yet to be seen. So far, it has only caused a lot of emails and declined payments.

Technology Sector & the Creator Economy in India

In the last 2-3 years, there has been a discernible move towards subscription pricing in many types of products and services in India—including software, groceries, OTT platforms, Music streaming, publications, and the creator economy. Creators on YouTube, Facebook and other social media rely on their subscribers for their business. Substack was the most recent addition to the subscription model of monetization in the creative space. Stripe and Razorpay incentivized the creator economy further by allowing no-tech or low-tech startups and individuals to create their own subscription pages, which they could offer to their subscribers for supporting them financially.

Just from March to July 2020, OTT platforms saw a whopping 30% increase in subscriptions, growing from 22.2 million to 29 million paid subscribers, as per India Brand Equity Foundation.

As per Statista, video subscriptions dominated digital content market in 2020, clocking ₹42 billion in revenue. This was expected to grow to ₹83 billion by 2023.

YouTube, the video giant, has been looking at expanding the creator economy in India as well. Apart from advertisements, which remain a staple source of revenue, the creator economy was where they planned to lay focus in India. From Feb 2020 to May 2020, there was a 100% growth in the creator revenue at YouTube in India, enabled through super chats, channel memberships and super stickers. In the last 1.5 year, YouTube content creators have seen a 6X rise in revenue in India, some reported as making up to $100K annually.

These are not trivial figures. India's creator economy has been showing a very rapid growth, and has been a life-saver for many creators during the pandemic. In a time of great financial and public health uncertainty, the creator economy has supported both–the creators, as well as those who consume valuable, unique content.

Can Merchants and Banks Handle it?

Only a few Indian banks are so far 1oo% prepared to comply with the new RBI guidelines. For all other banks and their customers—well, it's a jungle out there. Some payments simply will not go through because the tech to enable that has not been enabled, either on merchant side, or on the bank's side, or both.

While many tech and media companies, like Netflix, have been quick to enable a payment portal that allows the AFA to authorize recurring payments, other companies, like the New York Times, have failed to do that so far. This means, that the payment portal at NYT does not ask for an OTP when the payment method is updated. Many non-Indian companies did not see the new guidelines coming at all, and are even now not seemingly updated with the new mandate. This has led to failed subscriptions, cancellations, and in the coming months, may lead to lower readership/ viewership.

PayPal as a medium of payment will no longer work on these portals either. So far, PayPal was a reliable method of seamless recurring payment to non-Indian companies. The new RBI guidelines have temporarily eliminated middle-providers like PayPal.

Meanwhile, Stripe has taken quick and decisive measures to enable AFA and complete failed transactions on its payment gateways. After its beta launch in India in 2020, Stripe has led the way in allowing small businesses and creators to create subscription pricing on their websites with low-tech.

What Does the Future Hold?

The question remains: what will happen to the creator economy if India's new payment guidelines disrupt it? Can the creator economy and the digital media industry survive this major disruption? More importantly, even if it can survive, can it thrive, and show the same type of growth? The importance of incentives and dis-incentives cannot be over-emphasized here. A sudden and sharp increase in failed memberships and a corresponding fall in revenue will not send friendly signals to tech giants and other companies looking at expanding their businesses in India. So much for "ease of doing business."

So far, the RBI guidelines seem to be moving in the direction of throwing the baby out with the bath water. It is hurting the same consumers it is meant to protect from fraud. The pandemic saw a surge in the digital economy. There was a measurable increase in digital payments and ecommerce in the pandemic era. But the new RBI guidelines seem to be at odds with the vision of expanding the digital economy.

When it comes to fraud, it is impossible to eliminate all ways of committing fraud, because the fraudsters would find some other way of committing the same crime. India already has more stringent guidelines for online payments than other countries, with the OTP requirement on most payments. As far as subscriptions go, the only form of "fraud" that can possibly happen is when the user forgets to cancel a subscription they no longer want. That is, technically, speaking, not "fraud." It can easily be resolved with sending notifications and reminders ahead of the charge.

In a time of so much uncertainty, economic lows, distress, anxiety and financial instability, it is ironic that the RBI is focusing on making digital payments more complex and difficult, rather than less. But then the path to financial success is paved with taxes and regulations and guidelines. Indians have survived and thrived, historically, not because our governments make it easy for us to do so, but because we have the grit to succeed in spite of them. Hopefully, the future will reflect the same.