Payout trouble: More fintechs, banks likely to be probed for irregularities

Crackdown on payout API misuse in banned real money gaming may widen probe to payment aggregators and smaller banks amid heightened regulatory scrutiny

After the arrest of Fino Payments Bank chief for alleged irregularities, more digital payments firms and smaller banks are likely to be under the scanner as part of a crackdown on payout API-related transactions in the banned real money gaming sector, sources said.

 

The industry is also expecting heightened scrutiny of payment aggregators and intermediaries such as gateways, with probes likely to extend to smaller banks that may have processed such transactions in the past. Executives told Business Standard that payout APIs were integrated with intermediaries and banks, then misused to automatically send bulk payments that distribute betting proceeds while making the transactions appear legitimate.

 

“People wanting to do such transactions know which entities may support them and shift their integrations to such banks and payment aggregators,” a senior executive at a payments company said, requesting anonymity.

 

The focus on such dealings comes at a time when an investigation by the Directorate General of GST Intelligence (DGGI) has led to the arrest of Fino Payments Bank’s managing director and chief executive officer (CEO) Rishi Gupta.  ALSO READ | Fino MD's arrest highlights GST liability risks in digital payments chain

 

Sources said that such arrangements enabling bank and non-bank integrations with entities posing as merchants typically occur at the sales or merchant acquisition stage and may not necessarily involve bank chiefs.

 

“There are social media groups where some blacklisted merchants are asked to be labelled as whitelisted ones so that they can start accepting payments and use payout APIs. There are more such payment aggregators involved in such transactions, and another small bank that is likely to be investigated,” a second source explained.

 

Industry sources added that many small banks are new to a more complex digital payments stack and may not necessarily have the nuance to tackle problematic transactions owing to a weak risk evaluation mechanism.

 

Adding to the challenge is how such transactions flow within the ecosystem, since they look legitimate at first and may not trigger an alarm unless specific patterns — such as bulk late-night transactions and varying ticket sizes — are recognised in the first place.

 

“People involved in this know which banks and payment aggregators have weak compliance and transaction limits. It is a nexus between the offshore gaming companies wanting to process these transactions and the bank’s integration officials. It goes to that level and everyone takes a cut,” one of the sources quoted above said.

 

All these challenges come at a time when there are over 50 licensed payment aggregator firms in the country.

 

People in the industry said that payments, while a thin-margin business, are now highly regulated, and only those with adherence to all levels of compliance will survive.

 

There are also concerns of companies miscategorising merchant category codes (MCCs) within the industry.

 

“Payments are highly regulated now. We are also very watchful of the kinds of transactions that happen through the platform, but it is not easy to identify where some payments happen because of misclassification of certain merchant category types,” another person said.

 

Last month, an alleged Rs 13,000-crore illegal online gaming network operating through compromised payment rails led to the arrest of Hyderabad-based fintech entrepreneur Pankaj Sharma.