From Disruption to Compliance: RBI’s Payment Aggregator Overhaul

[Siddharth and Pranoy are students at Gujarat National Law University.]

The Reserve Bank of India (RBI), on 15 September 2025, issued a comprehensive regulatory framework for governing payment aggregators (PAs) (Master Directions on Regulation of Payment Aggregators). Prima facie appearing to be just another rulebook; in reality, this framework heralds a watershed moment in the fintech sector. Characterized by unencumbered innovation via multiple startups improving upon the existing products and services available, this sector will now be governed by a model built on strict oversight, steep financial requirements, and consumer protection. These directions have though introduced much appreciated clarity, they have also imposed competitive constraints on small players, while insulating banks and dominant players. 

The directions bring in a significant wave of changes, which will have consequences beyond mere compliance. The emphasis is now on creating companies that can thrive in a highly regulated environment at the cost of rapid, disruptive development. Consolidation is the most likely result, with a small group of big companies controlling the payments ecosystem. After years of rapid growth in the fintech sector, the entire world is now experiencing a stark change in the regulatory environment, in the favour of more stringent regulations. The RBI's message is clear: fast innovation isn’t the key to success anymore, responsible growth satisfying operational and financial regulatory requirements will be rewarded.

The Bedrock of the New Framework: A Two-Tier System by Design

At the center of the master directions lies a deliberate difference of treatment of banks and non-banking entities involved in the PA business. This difference in treatment is the new regime’s defining characteristic, reflecting the RBI’s apparent view that banking institutions subject to comprehensive RBI oversight are crucial to financial stability. This difference in treatment is effectuated through rules pertaining to the following: authorization, capital requirements and fund management rules, each of which imposes heavy competitive burdens on non-bank players while largely insulating banks.

The set of rules relating to authorization are the first steps in the chasm dividing banking and non-banking entities. Because their current banking license is considered sufficient, banks are allowed to operate as PAs without obtaining further approval. On the other hand, non-bank organizations have to go through a distinct licensing procedure that is time-bound and resource-intensive. Strict deadlines have been established by the RBI: all non-bank PAs must apply for permission by 31 December 2025, or cease operations by 28 February 2026. While banks gain from regulatory consistency and predictability, fintech businesses face immediate strategic uncertainty as they must overcome financial and procedural barriers just to continue operating.

By virtue of the second set of rules, capital becomes a prerequisite for market access. While applying, non-bank PAs must have a net worth of INR 15 crore, which must increase to INR 25 crore within 3 years post approval. This threshold is a barrier to entry for startups. It will force smaller incumbents to rely on outside funding or divert money from innovation. In contrast, banks, who are already bound by strict prudential standards, don’t face any new obstacles, which strengthens their advantage. In effect, capital gets transformed from being a vehicle for expansion to a gatekeeping device that dictates market participation.

The third set of rules concern fund management. Non-bank PAs are to hold all customer funds in an escrow account with a scheduled commercial bank. This rule plugs interest generation on balances, forbids mixing settlement and operational funds, and restricts flexibility in operations like cash-on-delivery. Consequently, non-bank PAs will be compelled to rely on banks for both the upkeep of escrow accounts whilst simultaneously being disadvantaged due to banks benefiting from competitive information. When combined, these three pillars solidify a two-tiered market system in which banks occupy the center while non-bank PAs are under increased financial and regulatory pressure to merely stay in business.

The Innovation Paradox: Stability at the Cost of Disruption

The new regime introduces an innovation paradox. On one hand, it brings stability and consumer protection. A single rulebook and strict safeguards can boost confidence: investors like clear regulations, and customers like knowing their money is safe. Analysts suggest that in the long run, this could actually strengthen innovation in secure, high-quality payments. After the initial adjustment, the digital payments space may mature: “consumers will gain confidence, and payments innovation will rest on firmer grounds”. The RBI itself expects PAs to behave like banks, with rigorous KYC, risk controls, and dispute mechanisms, which could elevate the industry’s credibility.

On the other hand, the entry bar is now very high. For a seed-stage startup, needing INR 15 crore upfront means investors must be conservative, focusing on meeting compliance instead of trying radical new ideas. Many fear this will dampen the Wild West era of payments. Instead of dozens of scrappy startups trying disruptive models, we may see fewer players making incremental improvements. 

But from another angle, the same stable setup also raises the bar for anyone trying to enter the market, which can choke off innovation at its earliest stage. For young businesses, the INR 15 crore net worth requirement right at the start is a very tough hurdle, forcing them to spend energy on ticking regulatory boxes rather than refining how their product actually fits the market. Instead of fueling bold or radical innovations, this rule tends to encourage small, incremental improvements by players that already have deep funding. The effect could be that innovation, rather than bubbling up from fresh startups, begins to trickle down mainly from a handful of larger incumbents, slowing down the pace at which the entire sector evolves.

The actions of retailers and business associates will reinforce this dynamic. Key reliability indicators in the new system include regulatory approval and observable financial strength. Larger corporate clients will favor established PAs with a track record of compliance because of the obvious indications of credibility provided by an RBI license and the required INR 25 crore net worth. As a result, market leaders receive a larger share of transactions, which feeds a vicious cycle in which larger companies grow in size and smaller businesses become less significant. A concentrated market environment, controlled by a select few banks and leading fintech companies, is the most likely outcome, given the RBI's updated regulations.

A Global Outlier: India’s Escrow-Heavy Gamble

The approach towards fintech regulation in India stands in stark contrast to other jurisdictions such as the United Kingdom, European Union, and Singapore, wherein payment companies are offered several options in order to protect customer funds, which include means such as insurance coverage and bank guarantees. However, India has chosen a different path by mandating all non-bank PAs to place all customer money in separate escrow accounts maintained by scheduled commercial banks.

The design of RBI’s master directions is a reflection of a unique regulatory mindset. The main concern of the RBI appears to be the prevention of misuse of customer funds and providing complete security safeguards by the strict separation of money. This mindset does have its own costs, which aren’t insignificant. Fintech companies in our country are poised to face operational challenges that their international counterparts don’t face. Earning returns on money held in the aforementioned escrow accounts has been made impossible, putting pressure on their internal economies of scale. Additionally, flexibility in the use of protection methods better suited to particular operations has also been denied.

Companies possessing complex payment flows face substantial hurdles. Burgeoning platforms and small-scale businesses are faced with limited options under this framework, which essentially makes a trade-off by prioritizing safety of customer funds and overall system stability, at the expense of freedom in capital management and the development of new business strategies.

Conclusion: A New Era of Regulated Maturity

In rewriting the rulebook, the RBI has signaled a shift from rapid fintech proliferation to regulated maturity. Now, being the fastest innovator is secondary to being compliant and well-capitalized. Under the Master Directions, only well-heeled firms, banks or big fintechs with deep pockets will easily meet the licensing, capital and escrow criteria. This inevitably means fewer players at the top. We’re likely headed toward a payment ecosystem dominated by a handful of large banks and leading startups, rather than the dozens of bootstrapped operators that populated India’s payments scene a few years ago.

That said, the unified framework could still bring longer-term benefits. For consumers, this might translate into safer transactions, quicker refunds, and also having a single process to handle complaints across different merchants. Observers in the industry point out that over time such standardization may actually encourage new forms of innovation in higher-level services — for instance, more sophisticated fraud detection or integrated cross-border payment options — since companies would be able to invest with a bit more regulatory certainty.

At the end of the day, RBI’s underlying message is clear enough: “responsible growth” is more important than running ahead at reckless speed. For fintech founders and entrepreneurs, this basically means having to rethink parts of their business models — putting compliance more firmly into the DNA of the organization, raising deeper pools of funding, or perhaps joining hands with banks. The payments revolution in India is not anywhere near finished, but the next stage is likely to play out at a steadier, almost cautious, pace under the regulator’s watchful eye.