The Reserve Bank of India (RBI) recently announced the successful exit of four cohort entities from its regulatory sandbox for cross-border payments. This opens the door for innovations from these entities, which process inbound/outbound remittances and provide blockchain-based solutions, among others, to be adopted by the financial services industry.
The Cashfree Payments product, which is among four successful releases, is specifically aimed at simplifying cross-border investing. This essentially enables investment platforms, mutual fund companies, neo-banks and other consumer credit applications to provide their customers with a seamless and digitized “payment gateway” type experience to make investments abroad. This essentially allows investors to use normal domestic channels such as net banking and UPI to invest in international stock markets. It also incorporates end-to-end digitization of applicable compliance requirements under RBI standards, such as digital submission of Form A2 and other documentation requirements.
Three ways to facilitate the cross-border investment experience
Many fintech innovators are targeting retail investors by simplifying traditional methods of accessing markets via mutual funds, ETFs, investment platforms and via new-age services such as robo-advisory, apps dedicated wealth management and neobanking. For these disruptors, an end-to-end digitized experience is a key driver for customer convenience, but investing in foreign stocks normally comes with some essential offline and off-website components.
To illustrate, an example of a typical scenario would be where an investment platform in India has a link with a foreign broker – a regulated entity in another jurisdiction – allowing Indian investors to open foreign Demat accounts with them. To begin transactions, funds must be transferred from the investor’s Indian bank account to the overseas Demat account. For this, the transfer may require a prior visit to the physical bank branch for remittance authorizations, or a visit to the bank’s net banking portal to complete the actual transfer. There are also multiple documentation requirements prescribed by the Foreign Exchange Regulations of India, especially the
RBI Liberalized Remittance Scheme (LRS)which are the main regulations in force.
Cashfree Payments’ new offshore investment innovation, with the support of RBI easings through its regulatory sandbox, has enabled the creation of a new product that targets these issues to bring fluidity to these payments in India:
1. Digitized compliance under the LRS system
First, the product embeds LRS compliance directly into the payment experience; allowing individuals to file A2 forms and provide PANs and bank statements digitally, without having to leave their investment platform website. Meeting these documentation requirements is the first step in transferring funds overseas, which often requires a physical visit to the relevant bank branch.
To elaborate, investing in securities naturally comes with legal and compliance requirements, normally prescribed by SEBI, such as KYC requirements and opening a Demat account. With cross-border investments, the need to transfer funds overseas results in additional compliance requirements under the Foreign Exchange Management Act 1999and more precisely LRS.
The situation varies depending on the type of cross-border payment. For example: for imports and exports, buyers can enjoy a seamless and integrated payment experience on merchant sites, through the services of Online Payment Gateway Service Providers (OPGSP) under the RBI OPGSP Scheme. For individuals (i.e. not companies) transferring funds overseas for other purposes, such as investment in securities (capital account transactions) or, for example, payment study abroad expenses (current account transactions), the LRS applies.
Until now, LRS compliance was not an end-to-end digital process, due to mandatory preliminary checks, which licensed dealers (AD banks or specific banks authorized by RBI for capital and current account transactions ) must perform under the LRS. These include:
A ceiling of USD 250,000 per person per fiscal year
- Deposit of a Form A2 at the designated AD bank branch for the purchase of foreign currency
- Provide PAN (Tax ID in India)
- For capital account transactions, the person must hold the bank account with AD banks for at least one year
- Provide a bank statement for one year or tax returns for the previous year
- Listed as a permitted transaction under the LRS (for example, this may include the acquisition and holding of foreign shares, investment in shares of mutual funds or venture capital funds)
Other checks such as sanctions checks, verifying that the transfer is not made to a country on the FATF list, are also carried out by AD banks. All of these usually require physical visits, although a few banks have introduced some digitization here via net banking. The product tackles this as a first step in facilitating and removing friction from the cross-border investment experience.
2. Integrated payments via net banking and UPI
Next, the product allows an individual to pay, through net banking and UPI, and directly through the website of the investment platform (or other entity), much like payments through a typical payment gateway. The LRS enables fund transfers through multiple channels, including checks, demand drafts, account debits, and cards (debit/credit/prepaid). The most common, however, is the net banking route. This type of funds transfer requires the customer to execute the payment through their online banking portals, in some cases their apps, or directly from physical branches. The LRS product removes this friction, allowing direct payments from the same investment platform website, and adds UPI as a payment option here.
The addition of UPI brings significant convenience to Indian investors given its immense popularity (UPI process on
5 billion transactions per month). The advantage of UPI for capital account transactions is that, being essentially a bank funds transfer itself (UPI runs on IMPS, an instant funds transfer mechanism for banks in India), it allows the verification of bank account and account holder, as well as source of funds. This is an essential part of the checks under the LRS. In fact, this is why card payments cannot be used for capital account transactions because similar checks of the underlying bank account cannot be performed.
3. Bulk settlement for faster investment and lower costs
The new arrangement also allows the transfer of funds to take place the next day, a process that normally takes three to four days, enabling a faster start to investments for investors. Here, a reconciliation with AD banks allows investment platforms, stockbrokers and other entities to deposit funds converted into dollars with these banks, enabling bulk remittances at the end of the day. This makes it possible to buy stocks much faster than is possible through traditional investment channels.
Another advantage of bulk settlement as opposed to per-transaction settlement is that SWIFT fees are spread over a set of transactions, which reduces costs per sender.
The regulatory sandbox as an innovative tool
Sandboxes are an internationally familiar enough policy instrument, used globally to facilitate experimentation by providing regulatory easing in controlled test environments. The RBI sandbox, introduced in 2019, is modeled along these same lines. So far it has announced four cohorts, others focusing on retail payments, MSME lending and financial fraud, with applications invited on an ‘on the fly’ basis for all.
Cross-border payments present multiple challenges for fintech innovators – from enabling real-time payments, currency issues, transaction costs, processing delays and multiple compliance requirements are just a few. problems here. As a subject of the second RBI cohort, he allowed welcome relaxations and experimentation to bring convenience into this space.
This new innovation will thus enable multiple investment and consumer finance platforms to enable an integrated and digitized cross-border investment experience. Especially for low-value cross-border transactions, the lack of end-to-end digitization, documentation requirements and high fees are often a barrier. With a solution addressing these issues, it will be interesting to see if this leads to changes in Indian investment preferences and increased global trade.
For a full discussion of the latest political developments each month, see
Cashless Payments Policy Radar.