ODR — The Next Big KYC?

Once upon a time, there was a teacher named RBI (Reserve Bank of India)— gentle and approachable, more of a mentor than a disciplinarian. The teacher’s classroom was a marketplace of banks and financial institutions, alive with innovation and enthusiasm.

In those early days, RBI encouraged its students to explore and experiment with new ideas. Digital payments, mobile banking, and fintech startups thrived, and the classroom buzzed with activity as everyone strove to outdo each other.

But as the class grew, so did its challenges. Some students began to cut corners, prioritizing profits over customer welfare. Fraud, data breaches, and unethical lending practices started to emerge, turning the once-harmonious classroom into a chaotic environment.

Realizing the need for a firmer hand, RBI transitioned from the role of a gentle mentor to that of a strict disciplinarian. The carefree days were over; it was time to enforce rules and ensure fair play. RBI introduced stringent regulations — akin to a rigorous curriculum — to restore order and integrity.

Why the Sudden Curriculum Change?

The shift was crucial for safeguarding the interests of customers within the financial ecosystem. A single player’s failure could trigger a ripple effect across the entire system. As the guardian of this ecosystem, RBI had to step in decisively.

Furthermore, the rapid pace of technological advancements introduced new risks. Cyber threats, data privacy issues, and the rise of shadow banking required a robust regulatory framework. RBI needed to balance innovation with stability and security, ensuring that the classroom’s innovative spirit was not compromised.

The transition to a stricter regulatory stance wasn’t without resistance. Some students grumbled about increased paperwork and stringent compliance requirements. However, RBI’s role had become essential in maintaining the classroom’s integrity and trust.

From Lenient to Strict Teacher: How RBI’s Approach Changed

1. From Nominal Penalties to Substantive Actions

Historically, RBI imposed relatively low penalties, which were deemed insufficient. For example, penalties in the range of Rs 5–15 lakh were imposed for currency derivatives issues in 2011. Recent actions, such as ordering a reputed finance company to halt its gold loan operations, reflect a shift to more substantial penalties and restrictions.

2. Strict Enforcement Actions

RBI’s recent actions, such as the severe restrictions imposed on popular Indian Banks due to IT risk and information security deficiencies, and similar measures against several Indian banks and financial institutions highlight a much stricter enforcement stance. These actions demonstrate the RBI’s commitment to rigorous enforcing of regulations.

3. Focus on Governance and Transparency:

The emphasis has shifted towards improving governance and transparency within the financial sector. The creation of the Unified Department of Supervision and increased scrutiny of digital transactions reflect this focus, aiming to address systemic weaknesses and enhance overall robustness.

4. Regulatory Actions as Behavioral Tools:

RBI now uses its regulatory powers not only to penalize but also to enforce behavioral changes. This includes halting new customer acquisitions or product launches to compel compliance and instill discipline among financial institutions.

So, when you notice all these happenings, it is quite clear that RBI is focusing on a certain aspect that could be the next KYC in the making.

And the above approach has a distinct pattern of “Compliance” written all over it.

Yes, you guessed it right!

We are talking about Digital payment compliance aka Online Dispute Resolution (ODR).

RBI issued a directive on August 6th, 2020, to implement an ODR system for all digital payments and the key requirements include:

• Multiple Channels: Customers must be able to lodge disputes through various methods (e.g., call centers, mobile apps, IVR, SMS).
• Access: Dispute options should be easily accessible through a link or mechanism provided by the Payment System Operator (PSO) or Payment Service Provider (PSP).
• UPI Integration: Third-Party App Providers (TPAPs) must include a feature for raising disputes, directly linked to the PSO’s ODR system.
• Minimal Input: Customers should enter minimal details to file a dispute, with the system auto-populating the rest while protecting privacy.
• Tracking: Each dispute must be assigned a unique reference number for tracking.

Following this, RBI also released Streamlining of Internal Compliance monitoring function on January 31, 2024, which states:

Financial institutions aren’t using enough technology to monitor their compliance with RBI rules. Spreadsheets and macros are still the norm and any tech that connects these processes remains scattered across the workflow.

And RBI’s requirement for this problem is that Banks must use advanced software to automate compliance checks. This software should:

• Make it easy for different teams (business, compliance, IT) to work together.
• Identify, assess, and track compliance rules.
• Flag any rule-breaking.
• Provide clear reports to management.

What Banks Must Do?

• Review their current compliance systems by June 30, 2024.
• Upgrade or replace systems to meet the new requirements.

In short, RBI states that Banks need to use better technology to make sure they follow RBI rules.

Why these Circulars Now?

Because as digital payments rise, so does their share of disputes, affected customers today are venting out their worries on social media tagging the respective financial institutions, lamenting their losses, and yet getting no reprieve. Also, the RBI ombudsman has been witnessing a steady increase in these complaints prompting them to take silent yet stringent action.

So, if you are a financial institution looking to be in the good graces of RBI by becoming ODR compliant, then we do have a solution coming in part 2!

Keep a Lookout