Cross Border Payments in India – Wholesale, Retail & RBI Guidelines

Introduction 

Financial transactions involving two parties with distinct national bases—the payer and the recipient—are referred to as cross border payments. These transactions can be conducted through various methods, such as bank transfers, credit card payments, e-wallets, and mobile payment systems, and encompass wholesale payments and retail payments.

What Are Cross-Border Payments in India?

Cross-border payments refer to financial transactions where money is transferred from one country to another. In the context of India, cross-border payments involve the movement of funds across international borders for trade, remittances, investments, or other financial activities. These payments play a crucial role in facilitating global commerce and economic integration, enabling businesses, individuals, and governments to settle debts, transfer funds, or make investments beyond their national boundaries.

Cross-border payments play an indispensable role in connecting businesses, governments, and individuals across the globe, enabling international trade, remittances, and financial cooperation. In India, the cross-border payments ecosystem has evolved significantly, influenced by regulatory changes, technological advancements, and global integration. This #TreelifeInsights article explores the current state of cross-border payments in India, the challenges faced, and the trends shaping the future of this critical sector.

Cross Border Payments Ecosystem

Types of Cross Border Payments in India

Simply put, cross-border transactions are transfers of assets or funds from one jurisdiction to another. Correspondent banks, payment aggregators act as intermediaries between the involved financial institutions. The cross-border payments ecosystem includes B2B, B2P, P2B and P2P merchants. Common methods of cross-border payments include wire transfers, International Money Orders, Credit card transactions. In India, such payments encompass wholesale (between financial institutions and large corporates) and retail (individual and business transactions like e-commerce payments or remittances) payments:

Wholesale Cross Border Payments

Wholesale cross-border payments in India refer to large-value financial transactions made between financial institutions, businesses, and corporations across international borders. These payments typically involve high-value transactions for international trade, investment, and financing. In India, wholesale cross-border payments are vital for settling large sums related to imports, exports, corporate mergers, and foreign investments.

Wholesale Cross Border Payments involve high-value transactions among financial institutions, corporates, and governments. These payments are critical for: (i) trade and commerce (including import and export); (ii) interbank settlements for foreign exchange and derivative trading; and (iii) government to government transactions, often tied to international aid or agreements. 

Retail Cross Border Payments

Retail cross-border payments in India refer to smaller financial transactions made by individuals or businesses for goods, services, or remittances across international borders. These payments typically involve lower amounts compared to wholesale payments and are commonly used for e-commerce purchases, international remittances, and payments for services like travel, education, and online subscriptions.

Retail Cross Border Payments cater to smaller-scale transactions and include: (i) remittances; (ii) person-to-business payments (for e-commerce, online services or overseas educational expenses); and (iii) business-to-business payments between SMEs and international suppliers or partners.

Benefits of Cross Border Payments in India

• Access to international markets: Reduces complexity related to international fund transfer, enabling accessibility on a real time basis 
• Cost savings: cross-border payment methods can be more cost effective than others, allowing businesses to save money on transaction fees, currency exchange rates, and other related costs
• Increased revenue and growth opportunities: By selling goods and services internationally, businesses can increase their revenue and tap into new growth opportunities.

Features of Cross-Border Payments in India

• Currency Exchange: Cross-border payments often require conversion of local currency (INR) into foreign currencies like USD, EUR, or GBP, making foreign exchange a critical aspect of these transactions.
• Regulatory Framework: The Reserve Bank of India (RBI) plays a pivotal role in regulating and overseeing cross-border payment systems in the country. These regulations ensure transparency, security, and compliance with international financial standards.
• Payment Systems: Platforms such as SWIFT, NEFT, and RTGS are commonly used for cross-border transactions. The introduction of Blockchain technology and Real-Time Gross Settlement (RTGS) systems is further streamlining these payments in India.

Key Roadblocks

• Regulatory compliances: Applicable laws, rules and procedures vary in every jurisdiction. As such, compliances may become challenging to follow. 
• Currency conversion risks: When conducting business in foreign currencies, companies are exposed to the risk of fluctuating exchange rates 
• Fraud and security risks: Lack of stringent laws to regulate banking institutions leads to organized criminals target vulnerabilities at certain banks in certain jurisdictions to use them to access wider networks.

RBI Guidelines on Cross Border Payments

India’s cross-border payment framework is heavily regulated by the Reserve Bank of India (RBI) to ensure transparency, compliance, and the safe movement of funds. This brings fintech platforms engaged in cross border payments within its ambit as well, and includes any Authorized Dealer (AD) banks, Payment Aggregators (PAs), and PAs-CB involved in the processing of cross-border payment transactions. 

The important guidelines include:

1. Payment Aggregators and Payment Gateways Regulation (2020)¹:
   • Payment aggregators (PAs) and gateways facilitating cross-border transactions must comply with stringent governance and net-worth criteria.
   • PAs must ensure robust security measures and grievance redressal mechanisms.
   • Latest Regulatory Update: Non-bank entities providing cross-border services must have a net worth of ₹25 crore by March 2026.

2. Liberalized Remittance Scheme (LRS):
   • Under the LRS, resident individuals can remit up to USD 250,000 annually for investments, travel, education, and gifting.
   • Facilitates individual access to global markets and services².

3. Foreign Exchange Management Act (FEMA):
   • FEMA governs the compliance of foreign exchange transactions, ensuring alignment with anti-money laundering (AML) and Know Your Customer (KYC) norms.
   • Supports smooth cross-border fund transfers under permissible categories.

4. Additional Measures:
   • Mandatory reporting of cross-border transactions through authorized dealer banks.
   • RBI approval required for startups and entities dealing with large-scale cross-border payments.

Indian Landscape for Cross Border Payments

India has witnessed a digital payments revolution. The ubiquitous Unified Payments Interface (UPI) has transformed domestic transactions, boasting transaction values reaching INR 200 lakh crore in FY 23-24³. Some notable achievements include:

1. Unified Payments Interface (UPI) Expansion:

• UPI-PayNow is a cross-border connection between India’s Unified Payments Interface (UPI) and Singapore’s PayNow that allows for real-time, cost-effective money transfers between the two countries. The UPI-PayNow collaboration with Singapore sets the stage for India’s digital payment system to gain global recognition⁴.
• Cross-border UPI integration is expected to reduce transaction costs and enable real-time remittances.

2. Real Time Payment Systems (RTPs):

• With transaction volumes projected to grow annually by 35.5%⁵, real-time systems are set to revolutionize cross-border payments, ensuring near-instant settlements.

3. FinTech Innovations:

• FinTech platforms are driving efficiency by offering competitive rates, lower transaction fees, and enhanced transparency⁶.
• Blockchain technology, used by companies like Ripple, is becoming a preferred tool for secure and cost-efficient transactions⁷.

4. RegTech Advancements: 

• Regulatory technology (RegTech) simplifies compliance by automating reporting and monitoring requirements for cross-border transactions⁸.

Benefits and Challenges to the Road Ahead

Benefits

Challenges

Access to Global Markets: Simplifies international trade by enabling seamless fund transfers. Cost Efficiency: Innovative payment solutions minimize transaction and currency conversion costs. Real-Time Transparency: Enhanced traceability and updates instill confidence among users. Financial Inclusion: Expands access to global banking services for individuals and SMEs.

Regulatory Complexity: Different jurisdictions impose diverse regulations, complicating compliance for businesses. Frequent updates to laws add to the burden on smaller players. Currency Volatility: Exchange rate fluctuations can erode transaction values, especially for high-volume transfers. Fraud and Security Risks: Vulnerabilities in the global payment ecosystem make cross-border transactions a target for cybercriminals. Infrastructure Gaps: Disparities in payment processing systems across countries can delay transaction settlement.

Future of Cross Border Payments

The future of India’s cross-border payment landscape hinges on leveraging cutting-edge technology and regulatory collaboration. Some promising developments include:

• Increased Collaboration: Partnerships like UPI-PayNow will set the blueprint for India’s integration with global real-time payment networks.
• Blockchain Adoption: Blockchain is likely to drive down costs and enhance transparency for high-value wholesale payments.
• Improved User Experience: With streamlined platforms and reduced costs, businesses and individuals will enjoy faster, simpler transactions.

What to Expect for Individuals and Businesses

• Faster and Cheaper Transactions: With advancements in technology and regulations, expect faster settlement times and potentially lower fees for cross-border payments.
• Greater Transparency: Improved traceability and real-time transaction updates will enhance transparency, giving users more control over their money.
• More Payment Options: A wider range of payment options, including mobile wallets and digital platforms, will cater to different user preferences.
  

Conclusion

India’s cross-border payment ecosystem is at a transformative juncture, with innovations in digital payments, blockchain, and RegTech paving the way for a more secure and efficient system. The RBI’s guidelines ensure compliance and transparency, while collaborations like UPI’s global integration promise to enhance India’s footprint in the global economy. While challenges remain, the combined efforts of the government, regulatory bodies, and innovative fintech companies promise a future of faster, more affordable, and user-friendly cross-border transactions. This will not only benefit businesses but also empower individuals to participate more actively in the global economy. All in all, India is poised to lead the next wave of cross-border payment innovations, empowering businesses and individuals to thrive in a connected world. 

Frequently Asked Questions for Cross Border Payments

1. What are cross-border payments, and why are they significant?

Cross-border payments refer to financial transactions between parties in different countries. They are crucial for international trade, remittances, and global financial cooperation, connecting businesses, governments, and individuals worldwide.

2. What are the primary types of cross-border payments?

• Wholesale Payments: High-value transactions between financial institutions, corporations, and governments, such as interbank settlements and international trade payments.
• Retail Payments: Smaller transactions including remittances, e-commerce payments, and person-to-business or business-to-business payments.

3. What are the benefits of cross-border payments?

• Access to global markets for businesses and individuals.
• Cost efficiency with competitive transaction fees and exchange rates.
• Increased revenue opportunities through international sales.
• Real-time transparency and enhanced trust among users.

4. What challenges are associated with cross-border payments?

• Regulatory Complexity: Diverse compliance requirements across jurisdictions.
• Currency Volatility: Risks due to fluctuating exchange rates.
• Fraud Risks: Vulnerabilities to cybercrime and inadequate security measures.
• Infrastructure Gaps: Inefficient systems in certain regions delaying settlements.

5. How does the RBI regulate cross-border payments in India?

The Reserve Bank of India (RBI) ensures compliance and security through:

• Payment Aggregators and Gateways Regulation (2020): Enforcing governance and security standards.
• Liberalized Remittance Scheme (LRS): Allowing individuals to remit up to USD 250,000 annually for investments, travel, and education.
• Foreign Exchange Management Act (FEMA): Regulating foreign exchange transactions and adhering to anti-money laundering (AML) norms.

6. How has UPI impacted cross-border payments in India?

UPI’s domestic success is now extending globally:

• UPI-PayNow Collaboration: Enables seamless, real-time, and low-cost transfers between India and Singapore.
• Global Expansion: Expected to reduce transaction costs and enhance the efficiency of cross-border payments.

7. What technological advancements are driving cross-border payments?

• Blockchain Technology: Ensures secure, cost-efficient transactions for wholesale payments.
• Real-Time Payment Systems (RTPs): Facilitates near-instant settlements.
• RegTech Innovations: Automates compliance and reporting for smoother operations.

8. What are the RBI guidelines for startups and businesses handling cross-border payments?

Startups and businesses must:

• Report all cross-border transactions via authorized dealer banks.
• Obtain RBI approval for large-scale cross-border payment activities.
• Ensure adherence to AML and KYC norms.
  

References:

1. [1] https://www.rbi.org.in/commonman/English/scripts/Notification.aspx?Id=724 
   ↩︎
2. [2] https://pib.gov.in/PressReleasePage.aspx?PRID=2057013 
   ↩︎
3. [3] https://pib.gov.in/PressReleasePage.aspx?PRID=2057013 
   ↩︎
4. [4] https://pib.gov.in/PressReleasePage.aspx?PRID=2057013 
   ↩︎
5. [5] https://www.fsb.org/uploads/P211024-1.pdf 
   ↩︎
6. [6] https://www.pwc.in/assets/pdfs/consulting/financial-services/fintech/point-of-view/pov-downloads/the-evolving-landscape-of-cross-border-payments.pdf 
   ↩︎
7. [7] https://ibsintelligence.com/blogs/fintech-revolutionises-cross-border-payments-fueling-indias-rise-in-global-trade/ 
   ↩︎
8. [8] https://www.pwc.in/assets/pdfs/cross-border-payment-aggregatorsregulations-and-business-use-cases.pdf 
   ↩︎