Non-fintech online PAs: Firms may reconsider payment aggregator biz

This comes as Zomato Payments, the wholly owned subsidiary of food delivery platform Zomato, voluntarily surrendered the certificate of authorisation issued by the RBI

Online payment aggregators (PAs), especially those for whom PA service is not a core business, may reconsider being in the trade owing to challenges of scale, profitability, and a high cost of compliance. 

This comes as Zomato Payments, the wholly-owned subsidiary of food-delivery platform Zomato, last week voluntarily surrendered the certificate of authorisation issued by the Reserve Bank of India (RBI) to operate as an online payment aggregator. 

Company executives and those advising players in fintech say while it is difficult to pinpoint what prompted the company to take the decision, it is perhaps a combination of factors like a firm waiting to focus on its core strength of food delivery and de-leverage its exposure to non-core business like payments.

Experts say some players may withdraw their PA applications or surrender their licences owing to aforementioned challenges.

“I would not be surprised if more payment aggregators do a rethink. This is something similar we saw eight years ago in the payment banks space. Lots of players came in and many of them gave up their licences,” said Ranadurjay Talukdar, partner & payments sector leader, EY India.

Zomato had cited “commercial viability” of its online payment aggregator business as it surrendered its licence. 

“At Zomato, we do not see ourselves having a significant competitive advantage against the incumbents in the payments space and hence we don’t foresee a business in payments space as commercially viable for us, at this stage,” the company told the exchanges. 

The company declined to respond to queries sent by Business Standard. 

Viability of online payment aggregator for non-fintechs

The rationale behind companies outside the fintech sector, such as those in e-commerce or other business-to-consumer business, to acquire the payment aggregator licence had been based on controlling the flow of transactions.

However, supporting a new fintech arm for their business other than running their existing operations opens up a new form of operating expenditure for a company. 

“There is a whole new operating expenditure (opex) or recurring expense that gets created for compliance, managing banking integrations, reconciliation, operations team, reporting when it comes to being a regulated payments entity. It turns out this additional cost is more than the third-party payments merchant discount rate (MDR) or commission cost saved,” said Rohit Taneja, founder and chief executive officer, Decentro, a fintech company. 

Moreover, companies acquiring the online payment-aggregator licence will fall within the broader purview of the banking regulator. This may require them to follow additional compliance apart from their core business. 

"(Firms) might be better off continuing with services of current payment aggregators because there will be no regulatory burden. They are only availing services of payment players who have to bear the regulatory burden,” Talukdar said. 

“One challenge is scale. There are so many strong incumbent players. Banks also have their own payment gateways.”

High cost of compliance

The RBI is tightening rules on taking on board merchants, and know-your-customer (KYC) norms. 

Players say the input cost in ramping up compliance is high, and creates friction in signing up merchants. Firms also have to invest in security and risk management. 

“Investment in building buffers against fraud becomes central to compliance, other than following existing norms. This includes newer frameworks such as artificial intelligence (AI), risk management, etc,” a company executive said. 

Taneja has a similar view. He says online payment aggregators have to devote capital and resources to legal and compliance personnel as well. 

Surge in online PAs

In the first four months of calendar year 2024 (CY2024), the RBI gave the nod to 21 companies to operate as online payment aggregator. This includes Zomato, which received the final licence from the banking regulator in January this year.

“It signifies a formalisation of the booming fintech landscape in India. Secondly, it might indicate an effort to foster competition within the payments space. With more licensed players, merchants can benefit from better pricing and a more comprehensive range of services,” Taneja said. 

Key challenges
 

 Non-fintechs with online PA licence bear regulator burden

 Compliance requires capital-intensive data storage, KYC procedures

 Challenges of scale, profitability in presence of strong incumbents in the space

 In 2024, 21 firms have received final nod to operate as online payment aggregators