India: Online Credit Card Security: Clarificatory Directive For E-Payments

  • Online Credit Card Payments - RBI clarifies the requirement for use of 2nd level authentication by merchants / vendors.
  • 2nd level authentication required where the underlying transaction is domestic – i.e. between two Indian residents.
  • Transactions using an Indian issued card, and between Indian residents to be settled in Indian currency by an Indian acquiring bank.

On August 22, 2014, the Reserve Bank of India ("RBI") issued a directive1 ("RBI Directive") clarifying the requirements for additional authentication / validation for credit card transactions. In response to the questions raised by the Association of Radio Taxis in a letter to the RBI earlier this month, the RBI Directive specifies that the RBI mandated additional authentication / validation requirements will apply, in every card not present ("CNP") transaction, where an Indian credit card is used to pay for a transaction that is essentially between two Indians.

Credit cards, with their origin in the early 1900s, have been in use in India since the 1980s and have seen an immense growth in the number of users, as well as merchants accepting credit card payments over the past few years. The growth of online services and marketplaces has provided further impetus to the use of credit cards for everyday transactions.


With both E-Commerce and telemarketing growing rapidly in India, an increasing number of businesses, whether service or product based, require payment online or via phone – leading to CNP transactions.

A CNP transaction is essentially one where the merchant does not have access to the card being used because the customer and the merchant / service provider are not physically in the same location, making it difficult for the merchant / service provider to verify the identity of the customer. There could be situations in which payments and transactions are completed without the knowledge or authorization of the actual holder of a credit card. A CNP transaction would include transactions online, over the phone, over mail etc.

Taking heed of the growing number of incidents of credit card fraud, especially via online payment portals, the RBI issued a notification in February 20092, mandating the use of an additional authentication / validation system (also referred to as 2nd level authentication / 3D verification) for online CNP transactions. The additional authentication / validation was to be obtained using information that was not visible on the credit card itself, i.e. information known or available to the holder of the card but not printed on the card. One time passwords, internet banking passwords are examples of 2nd level authentication. Further, banks were also required to put in place an online alert system which would notify the cardholder of any CNP transaction for INR 5000 or above. The requirement for this system of additional authentication, was also extended to interactive voice response (IVR) transactions, typically carried out over telephones, and the requirement for online alerts has been extended to all CNP transactions.


In October 20103, the RBI issued a clarification which provided that the requirement for additional authentication would apply to all transactions where:

(a) The card was issued in India; and

(b) There was no outflow of foreign exchange contemplated.

Therefore, where both of the above requirements were met, additional authentication / validation became mandatory – irrespective of whether the payment gateway / website which processed the transaction was domestic or international. However, the requirement did not apply where:

  • the cards in use were issued outside India, even if such cards were used on Indian websites.
  • the cards issued in India were used to buy goods / services outside India.

Online merchants have not been too happy with the 2nd level authentication requirement for several reasons, important of which were:

  • Obtaining a second level authentication requires more time and effort for a customer as opposed to a simple click through transaction
  • An increase in the rate of transaction failures, as the customer's bank may not always be able to process the authentication.

Also, 2nd level authentication particularly affected merchants who needed to receive periodic payments from customers, such as a monthly subscription charge. Sans the 2nd level authentication, the customer's credit card would be debited automatically. With the introduction of this authentication requirement, the customer was required to enter the one-time password or any other login / password combination for each transaction, which made it easier for a customer to cancel the subscription if she/he chose not to continue subscription. In this respect, the introduction of the 2nd level authentication was a welcome measure considering the number of consumer complaints against merchants/websites that refuse to cancel subscriptions despite the consumer explicitly asking them to do so.


It appears that some players in the industry – both merchants and service providers, may have structured their businesses by receiving payments in an offshore entity. Since the authentication requirements do not apply to transactions with entities outside India, additional authentication / validation would not be required. In such cases, while the prices may be displayed in INR at the time of purchase of the product / services by the customer, the amount is paid in foreign currency. Some of these structures may have been validly structured by relocating operations outside India, while some may have been structured only by arrangement with the payment gateway operators.

Recent news reports also suggest that one industry segment that was particularly affected by such practices was that of radio taxis. Domestic radio taxi service providers in India, like any other domestic service providers, were required to ensure that the additional authentication requirements were met for CNP payments. However, an international company having tie up with taxi drivers in India and operating an online app for bookings, appears to have structured its operations in a manner where the 2nd level authentication was not required even for payments to be made to the taxi drivers.

An association of radio taxis has brought such practices to the attention of the RBI recently, and the said RBI Directive seems to be a reaction to this complaint.4


The RBI Directive issued last week re-iterates its previous clarification on international payments, and states that despite the same, many companies appear to be effecting CNP transactions without additional authentication / validation measures, by following business / payment models which are resulting in foreign exchange outflow, even where the underlying transaction itself:

  • consists of a card that is issued in India;
  • is used for the purchase of goods and services offered by a merchant / service provider in India.

Addressing such transactions, the RBI Directive states that:

"Such camouflaging and flouting of extant instructions on card security, which has been made possible by merchant transactions (for underlying sale of goods / services within India) being acquired by banks located overseas resulting in an outflow of foreign exchange in the settlement of these transactions, is not acceptable as this is in violation of the directives issued under the Payment and Settlement Systems Act 2007 besides the requirements under the Foreign Exchange Management Act, 1999"

The RBI Directive further provided that where cards issued by banks in India are used for making CNP payments towards purchase of goods and services provided within the country, such transactions should be settled in Indian currency and the acquisition of such transactions should also be through a bank in India.

Merchants have been given time until October 31, 2014 to comply with the instructions of the RBI.


Though the RBI Directive has clarified that 2nd level authentication is mandatory for transactions undertaken for an Indian issued card used towards the purchase of goods and services provided within the country, a number of models commonly adopted by E-Commerce businesses may not always satisfy such a requirement. For example there are a number of global platforms based on a market place model, that aggregate content, services and even products for an international market and make them available to the customers for download or sale.

If an Indian resident offers certain content, say a mobile application on a platform based outside India, and another Indian resident purchases the software application, through the platform via an international payment gateway – would the transaction be considered as one between two residents that falls within the ambit of the RBI Directive? Or would it be considered a transaction between an Indian resident and the foreign platform – which does not fall within the ambit of the RBI Directive? It remains to be seen how the RBI will address such questions. Further, in the coming months it will also be interesting to observe whether the RBI considers easing the process of conducting online / CNP transactions, perhaps waiving the 2nd level authentication for transactions involving smaller amounts.


1 DPSS.PD.CO. No.371/02.14.003/2014-2015

2 RBI / DPSS No. 1501 / 02.14.003 / 2008-2009

3 RBI / DPSS No.914 / 02.14.003 / 2010-2011


The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

In association with
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.