RBI puts brakes on taxi aggregator Uber, insists on 2-step validation for card payments

The hotly contested ride oftaxi aggregator Uber inIndia hashit a wallwith the RBI askingbanks to stop transactions in which additional authentication doesn't take place and money is sent to a foreign entity.

The central bank in a notice to all Indian banks said that it had come to their notice that such transactions were taking place and resulting in foreign exchange outflow were not acceptable as it was a violation of directives under the Payment and Settlement Systems Act 2007 and the requirements of the Foreign Exchange Management Act, 1999.

"In view of the above, it is advised that entities adopting such practices leading to willful non-adherence and violation of extant instructions should immediately put a stop to such arrangements," the RBI notice said.

The central bank also said that if a credit or debit card was issued by a bank in India and used for making purchases in India, the transaction must be on the records of a bank in the country and it should be settled only in rupees.

While the directive comes into effect immediately, the RBI has allowed existing businesses time until 31 October to ensure compliance failing which they could face legal action.

The central bank did not mention how the transactions had come to its notice but one of the most recent complaints that had landed at its door was from the Association of Radio Taxis of India, which had objected to US-based Uber using an international payment gateway to skip the two stage authentication process required for credit and debit cards.

Existing radio taxi operators, like Meru Cabs, Easy Cabs and others, had threatened to imitate the Uber model to ensure that they didn't have to follow the mandatory two-step verification for transactions for transactions booked on their apps.

The Uber app records a customer's credit or debit card details and allows the booking of a cab and transaction without the mandatory use of a OTP or secondary transaction password, allowing for greater speed in conducting transactions. This was reportedly done by the taxi aggregator by using a unit in the Netherlands, Uber BV, as the operating firm in order to make use of the country's favourable tax regime.

Experts quoted by the Business Standardhad suggested that there were two ways in which the app could be conducting the transactions:

- By sending the entire fare in the Netherlands after a transaction following which Uber deducts its commission and sends the driver/ taxi service provider their dues.

- Uber accepts the entire fare in a non-resident account in India and then pays the taxi provider after deducting domestic payments in its Netherlands unit.

The Google Play store in India and Amazon app also reportedly use an international payment gateway for their services in India and could also have to make changes following theRBI's notice, according to a Financial Express report.

While the services affected by the RBI notice will have another two months to comply with the directive, it remains to be seenwhetherit will affect their operations, especiallyin the case of Uber, that has been expanding in India reportedly at its quickestpace outside the US.

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Updated Date: Dec 21, 2014 13:00:27 IST