For sending money to and from India, things are about to get quicker. Because the RBI no longer requires pre-approval for these partnerships between banks and non-banks and is now saying the banks are totally responsible for making sure the rules are followed, the new rules could mean faster launches of services and a smoother experience for customers. Investors might see a growth in digital international money flows, but will also find banks are now being much more careful about who they work with.
The main point of this change is a definite transfer of responsibility. Non-bank businesses don’t need the RBI’s permission beforehand to work with Authorised Dealer (AD) Category I banks for sending money out of the country. Instead, the banks have to make sure the money is being sent legally and that everything is transparent while the transfers happen.
What changed and why it matters
Previously, in and after 2016, each partnership between a non-bank company and a bank needed specific approval from the RBI before money could actually be sent. The RBI has now removed that approval step, and says banks must follow instructions when they use another company in an online system for sending money from a current account for things that aren’t related to buying and selling goods (non-trade).
This simplification isn’t just for show. Now that approval isn’t slowing things down, how quickly things happen depends on the banks and their partners. The RBI’s way of operating is to make international money transfers simpler, as long as people are protected and the rules are followed.
Banks take the compliance front seat
The new rules put all the responsibility for following FEMA (Foreign Exchange Management Act) regulations and doing complete “Know Your Customer” checks on AD banks. For the industry, this puts the responsibility with those who already have the knowledge of the regulations, but it also means banks have to be very careful in their investigations and could have problems with how quickly they add new customers.
The RBI explains that “online” includes websites, online services, software, and apps. This covers the places where most difficulties and exchange rate decisions occur for people sending money.
Mandatory customer disclosures online
The framework raises the bar on transparency. Third-party online platforms working with AD banks must prominently display key transaction information to customers before they proceed:
– Forex rate quoted by the AD bank
– Validity period of the rate
– Total estimated transaction cost
– Exact foreign exchange amount to be credited
– Maximum time for beneficiary to receive funds
These requirements to provide information aren’t just extra things to add on. They are aimed at the most common problems with international transfers: not knowing the price, rates that change, and not being sure when the money will arrive. For investors, being told exactly what’s going on can cut down on disagreements and make people use the service again.
Implications for fintech and payments players
The difficulties with the process have moved from getting approval from the RBI to checks done by the banks. Non-bank companies can now make partnerships without having to wait for the RBI to say yes, but how quickly they can start will depend on how quickly the AD banks put the rules in place and approve their partners.
Because banks are in charge of legal compliance, they will probably be more careful about who they work with and how the process is designed. This could improve the standard of all the services, and still help the RBI to make sending money out of the country simpler.
What investors should watch next
How AD banks understand and put the rules into practice for websites, apps and mobile apps will determine the actual effect of this. Having a clear understanding of FEMA, KYC, and what information must be provided gives the entire industry a standard set of instructions. How quickly new partnerships are made and how easy it is for the user to find the required information will show how quickly the benefits will become available on a large scale.
In short, the RBI’s decision on Wednesday to remove the need for prior approval for partnerships with non-banks, and the insistence on banks managing compliance and openly telling customers about the process, fundamentally changes how the money transfer market works. We can anticipate new services to launch more quickly, banks being the center of how risks are managed, and a much clearer emphasis on the price and timing of each transfer.
