An Overview on Online Payment Gateway Service Provider (OPGSP)

March 27, 2023
5 min read

Early in 2010, the RBI published a set of rules titled "Processing and Settlement of Export Related Receipts Facilitated by Online Payment Gateways" to address the growing volume of e-commerce transactions in India. According to these regulations, only the Authorized Dealer Category-l (AD Category-l) banks were empowered to provide the offer to repatriate export-related remittances in connection with exports of goods and services by entering into standing agreements with online payment gateway service providers (OPGSPs). 

Later in 2015, the  RBI allowed for processing and settlement of import and export-related payments facilitated by online payment gateway service providers., wherein "it has been decided to permit AD Category-l banks to offer similar facilities of payment for imports by entering into standing agreements with the OPGSPs." This was done to broaden the scope of regulatory coverage. In order to provide quasi-regulatory control over the OPGSP's operations, the AD Category 1 banks function as a layer between the OPGSP and the RBI. While the introduction of the OPGSP regulation does attempt to solve the Payment gateway friction faced by the exporters, it is still riddled with challenges and does not provide for a smooth payments experience in the space of cross border transactions for several emerging and new age business scenarios.  

Despite the introduction of OPGSPs in India, handling the risk of returns and chargebacks is a problem which remains to be solved and the primary reason why many banks are still not utilising the OPGSP framework to its full potential. Therefore, most software companies in India were forced to rely on one of the 3 – a) Use a foreign payment gateway like PayPal, Stripe – which involved massive transaction costs; b) Set up a subsidiary office in a foreign country or c) Incorporate in a foreign country and sell globally from there including India. The latter seem like very attractive options compared to a, while also providing ancillary benefits such as international presence for the business. 

Currently, the OPGSP facility is the primary means of payment for more than 3 lakh Micro, Small, and Medium-Sized Enterprises (MSME) exporters throughout the nation. Despite a recession in the global economy and recent geopolitical tensions in Europe, India has become a leader in small value online service exports since the penetration of internet and cellphones in the remotest parts of the nation. Therefore, the RBI initiative to simplify the handling and settlement of payments related to imports and exports is appreciated by the industry, however a lot more needs to be done. 

Earlier this year, RBI released draft guidelines on the Online Export-Import Facilitators (OEIF) which potentially could replace the OPGSP framework. OEIFs are defined in the draft guidelines as payment aggregators or payment gateways that enable online remittances for low-value exports and imports of physical goods and digital goods. While several parts of this draft are quite progressive and well-received by the payments industry, there are some aspects which are not fully clear, and some aspects which seem to take a very conservative view. 

The RBI has proposed to raise the transactional thresholds for imports and exports, respectively, from USD 2,000 to USD 3,000 and from USD 10,000 to USD 15,000. The timeline for transferring cash from the nostro account held by the authorised dealer bank (AD bank) outside India to the appropriate exporter's bank account in India has been reduced from seven to five days for export transactions. Both these changes are quite positive, and will make OPGSPs more useful to exporters.

While the RBI intended to further streamline the OPGSP regime for small value digital payments related to import/export transactions through e-commerce and safeguard the interests of Indian stakeholders, some provisions under the Draft Guidelines subject the OEIF entities to a more arduous regime than the prior OPGSP regime. Examples of this include the necessary authorization under Payment and Settlement Systems Act, 2007, for OEIFs which facilitate payments related to imports, mandatory compliance with the baseline technology recommendations for OEIFs that facilitate export, compliance with the RBI's KYC requirements for  overseas importers. In addition to increasing some indirect compliances that apply to PA firms, this could also present practical difficulties for the OEIF entities interms of implementing the guidelines. 

Separately, RBI has not defined the term "digital products". This raises a question of interpretation about the definition of "digital products," such as whether the term can be applied to software, services, and digital products like non-fungible tokens and crypto-products. To ensure that there are no interpretational difficulties, the final framework should be very specific about these definitions.

The term "export of services" has been removed from the scope of the proposed legislation, which is the most significant modification. Previously able to provide channels for both commodities and services, cross-border payments providers can now only do so for physical goods and digital products. With this latest planned shift, 65% of Indian e-commerce, which includes small service exports and foreign exchange earnings totaling INR 15,000 Cr annually, could be negatively impacted. If put into practice, this might have an effect on more than 3 lakh direct jobs and 10 lakh indirect jobs that small service exporters established.

India has long been a leader in services exports, with its market share continually growing. The pandemic-induced habit of working from home has further propelled the nation's thriving gig economy. As a result, a large number of households and MSMEs are dependent on  income from service exports. There has been a development in minor value exports of services including teaching, accounting, online web services, consulting, and various training and life skill improvement programmes, among others. All of these industries have enormous growth potential. India's percentage of global services exports in 2015 was 3.1%; it increased to 3.9% in 2021 and is anticipated to increase further as India aims to export $1 trillion by 2027. 

The services sector in India is made up of a mixture of small value service exporters comprising independent contractors, business owners, and experts, in addition to the significant contribution of high value IT and BFSI exports. The resurgence of India's interest in free trade agreements is also boosting the export of services and increasing the emphasis on digital collaboration. As significant businesses including travel, health, hotels, education, and entertainment are anticipated to quickly recover from the epidemic. India is hoping to export services worth $350 billion in 2022–2023,  an increase of 40% over the previous fiscal year. Most industry experts are calling for reinstating “ export of services” within the scope of the proposed regulation.

While some claim that the exclusion of services under the new guidelines was unintentional, others think that the RBI's decision to exclude payments for services may have been an attempt to use the expanding cross-border transactions market to support the use of the Unified Payments Interface (UPI) and CBDC to drive the next wave of innovation in the cross-border payments market.

The industry, which had previously struggled under adverse conditions, has now recovered thanks to its tenacity and the government's strong support. Policymakers' support for this group can only lead to more opportunities, higher productivity, more jobs, and a thriving economy. The payments industry is eagerly awaiting the final guidelines, and there is a lot at stake across all the payers, therefore, clarifying the exact scope of the obligations imposed in the final guidelines will be helpful.