India: ‘Two Factor Authorization' Requirement Relaxed: Welcome Step In The Demonetization Era

Last Updated: 16 December 2016
Article by Aaron Kamath, Rakhi Jindal and Vivek Kathpalia
  • Earlier, all online transactions through credit / debit cards issued in India were subject to a mandatory 'second factor authorization'.
  • Reserve Bank of India directs that this additional factor authorization requirement may be relaxed, at the option of the customer, for transactions of up to INR 2,000 (approx. USD 30).
  • Banks and authorized card networks directed to educate customers about risks involved in opting not to be subject to the additional factor authorization. 

Introduction

India continues to be one of the high-cash usage economies with more than 78% of the transactions executed with fiat currency1. While there may be various reasons which may be attributed to the slow adoption of digital payments in India ( such as low internet penetration, challenges in ensuring use of banking facilities by all), the Government of India has been taking significant steps and has launched several initiatives to promote the transition to the digital payments. This includes the recent step taken by the Government of India to demonetize existing INR 500 (approx. USD 7.5) and INR 1,000 (approx. USD 15) denominations of currency in lieu of fresh INR 500 and INR 2,000 (approx. USD 30) notes being circulated.

India's central bank, i.e. the Reserve Bank of India ("RBI") has on December 6, 2016, issued a notification through which the requirement of an 'additional factor of authentication' ("AFA") for card not present ("CNP") transactions up to INR 2,000 (approx. USD 30) could be relaxed by banks and authorized card networks, at the option of the customer ("New Notification").

RBI's Mandate Prior to the New Notification

Earlier, the RBI had directed2 banks to mandatorily put in place an AFA on information that is not visible on the credit / debit cards used in CNP transactions. This 'second factor' authentication, as commonly known to the public, is based on information known or available to the card holder but is not printed on the card. Since this mandate by the RBI, banks have implemented the AFA requirement primarily though one time passwords being immediately sent to the users' registered mobile number, or through use of internet passwords. This mandate by the RBI was applicable to all credit / debit cards issued in India and where there was no outflow of foreign exchange contemplated. Further, this mandate was applicable to all recurring transactions contemplated between merchants and cardholders.

The New Notification

The New Notification3 issued by the RBI relaxes the requirement of AFA for CNP transactions of up to INR 2,000 (approx. USD 30). Authorized card networks and card issuing banks may choose to relax the AFA requirement for customers upon taking their consent. Customers opting for this facility would need to go through a one-time registration process with the issuing bank. Further, lower transaction limits may be set by the customer in opting out of the AFA requirements.

In adhering to the New Notification and facilitating and giving customers an option to opt out of the AFA requirements, banks and authorized card networks would need to: 

  1. Conduct 'velocity' checks to ascertain the value and frequency of transactions in which the AFA requirement is not carried out,
  2. Educate and make customers aware that it is optional for them to opt out of the AFA requirement and that they are free to use other forms of AFA requirements (although the RBI has not specified other forms of AFA requirements that may be adopted),
  3. Educate and make customers aware of the mechanism and risk involved in opting out of the AFA requirements, and
  4. Indicate the maximum liability of the customer in the event of them opting out of the AFA requirements. 

In addition to the above, the New Notification provides that banks and authorized card networks should bear the full liability in the event of a security breach or compromise in the authorized card network.

Analysis

The immediate take-away from the New Notification is that customers availing of this facility would not need to re-enter the card details for every transaction on a merchant website and also go through an AFA by way of a one-time password or internet password. In such cases, customers will not be required to re-enter the card details for every transaction at merchant locations and would only need to use their login credentials to avail of the facility.

The issuance of the New Notification is a welcome step by the RBI in the wake of 'demonetization' in India and should encourage the adoption of digital payment methods. It is clear that the RBI has made an attempt to aid customer convenience for low value card transactions, given the current liquid cash crunch in the country. This facility is an added convenience for customers in making digital payments to e-commerce website operators, radio taxi operators, depositing money in e-wallets, and in other online transactions through their credit / debit cards. Other initiatives introduced by the Government of India to foster financial inclusion and promote digital payments include the Unified Payment Interface, National Automated Clearing House, RuPay and the Bharat Bill Payment System.

Further, as per recent media reports,4 the Government is also contemplating waiving service tax chargeable on services by an acquiring bank in relation to settlement of an amount up to INR 2,000 (approx. USD 30) through debit or credit cards, in a bid to promote digital transactions.

Only time will tell us the net effect of such initiatives aimed to foster financial inclusion and promote digital payments.

Footnotes

1 Digital Payments 2020, The Making of A $500 Billion Ecosystem In India (BCG & Google), July 2016 available at http://image-src.bcg.com/BCG_COM/BCG-Google%20Digital%20Payments%202020-July%202016_tcm21-39245.pdf

2 Vide Notification RBI/2014-15/190 dated August 22, 2014; "Security Issues and Risk Mitigation measures related to Card Not Present (CNP) transactions"; available at: https://rbi.org.in/scripts/NotificationUser.aspx?Id=9183&Mode=0; along with other circulars and notifications.

3 Vide Notification RBI/2016-17/172 dated December 6, 2016; "Card Not Present transactions – Relaxation in Additional Factor of Authentication for payments up to 2000/- for card network provided authentication solutions"; available at: https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=10766&Mode=0

4 Government to waive service tax on card transactions of up to Rs 2,000, dated December 8, 2016. Available at: http://economictimes.indiatimes.com/wealth/personal-finance-news/government-to-waive-service-tax-on-card-transactions-up-to-rs-2000/articleshow/55870033.cms

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 Mondaq.com.

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

Authors
Aaron Kamath
Vivek Kathpalia
 
In association with
Related Topics
 
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
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
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

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 or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq 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 of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions