The payment gateway friction in cross-border trade of Software products
The payment gateway problem in exporting online from India
It is not easy for Indian Software product companies to export products online and receive payments in India. This is true for both the downloadable Software product or Software as a Service (SaaS).
Experts say there is no legal or policy hurdle from RBI. Yet, there is friction. An Indian payment gateway service provider denies foreign currency cross-border transactions from India to a startups or small company. Only exceptions could be some large companies.
As part of ‘PolicyHacks’ at iSPIRT, we attempted to attend to the issue of recurring billing in a previous blog here. This blog is another continued effort in this direction. It is based on a discussion with experts from payment solution companies. Embedded below is a video discussion with Krish Subramanian, Cofounder of Chargebee and Kiran Jain of Razorpay.
The options available and adopted by most small Software product companies’ today are:
- Use a foreign payment gateway like PayPal, 2 Checkout, Skrill etc. Or
- Setup a branch office or a subsidiary in a foreign country
- Incorporate in a foreign country and sell globally from there including India
The option #1 above of using international payment providers comes with a heavy transaction cost. The services are not of same order as one can avail being in US or Europe.
So, option #2 and #3 becomes much attractive. This leads to exodus of Indian Software product company’s to USA, Singapore or Europe etc. India stands to lose in the game.
Krish mentions that, “the Indian companies are forced to move abroad to seek the frictionless experience in the payment part, where they allow month on month and do seamless upgrades and downgrades”. He further adds up, “Indian companies being in India do not get the level playing field, even when the strengths of product are very similar to a foreign product. Even using a solution like 2Checkout being in India does not provide seamless upgrade and downgrade. Hence, many companies go and incorporate outside”.
This problem, therefore, is one of the ‘biggest hurdle’ to the ‘stay-in-India’ concept for startups. It is vital that policy makers pay attention and remove friction to this problem for startups to believe in ‘India Story’.
Kiran Jain of Razorpay mentioned that the added attraction for Indian Software product company to move abroad is that, “an Indian company selling on international payment gateway from outside India does not have to comply with service tax”.
This is another level playing field problem. Being in India the Software product sales online is subject to service tax. On other hand being a foreign incorporated company and selling a B2C product the service tax is totally exempted. This is so in current policy framework and is going to stay same in the proposed GST framework.
Although, this is not directly related to the payment gateway problem, it does add-up to the exodus of Startups problem. This issue has been covered in an earlier blog here. It is a policy agenda item on list of taxation issues (of iSPIRT) to be addressed by Government of India and also an item on Stay-in-India checklist.
The cross-border online trade of Software product is directly a Payment Gateway issue. Let us further understand what are the underlying causes, policy issues, possible resolutions and suggestions.
Is there a regulatory hurdle? If not, then what is the cause of problem?
Kiran says, “RBI came up with OPGSP guidelines in 2014”. And, “this policy allows the operation of International payment gateways”, that can facilitate both the foreign currency cross-border transactions and recurring billing. According to Kiran, many Indian banks have capability to provide platform which can accept international cards and multi-currency systems. Few banks support up to 17 different foreign currencies, though the settlement is all done in US dollars.
Why are banks not giving it? Kiran said that in last one year in USA, out of $28.33 trillion online transactions, $16.33 billion were classified as frauds. Indian banking system does not have a capability to incur such losses, “that is the threat to Indian banks”. This threat is the result of ‘returns’ or ‘charge-back’.
In case of delivery of downloadable Software product, at least there is a trail of transaction that can establish that the Software was really downloaded and if unsuccessful the Software can be delivered again. However, in case of services it may be difficult to handle the consumption trail at least in B2C transactions. In B2B transactions, such problems normally do not arise.
Hence, handling the risk of returns and charge-backs is the problem to solved. Solving this will encourage India banking systems to offer free and fair cross-border international payment gateway services.
What is the solution to problem?
Large players by virtue of volume or by offering a risk covering instruments can easily avail the service from banks themselves.
Small and Medium players can use payment aggregators. PayPal and 2Checkout are nothing but aggregators. Thy have infrastructure built in USA. In India they provide services under OPGSP guidelines. Their relationships with issuing banks in USA enables them to provide services in India.
Kiran says, “as on date we have many aggregators in India”. But, “we have not seen any Indian aggregator moving to US and partnering with banks like Wells Fargo or Worldpay”, who could build “an infrastructure trail in US and bring it to India and start providing cross-border payments”.
This will be a powerful option according to Kiran. This option can be used to ease out cross-border multi-currency payment system aggregation. This will give exporters alternative to PayPal and 2Checkout etc.. This will also reduce transaction costs by at least 30%. Now, an Indian merchant pays 4 to 6% plus the currency conversion costs as a compared to the 2.9% + 30 cents per transaction in USA.
The other advantage of Indian aggregator with US infrastructure will be the better understanding of the Indian merchants and the risks involved. Hence, better placed to manage the risks. “Today PayPal looks at every merchant as risky merchant”, says Kiran. The Indian players can have option of either aggregating the merchants on PayPal model. Or offer facility directly to mid and large players. In later case the entire risk engine is managed by the aggregator. The risk engine will take care of detecting the fraud cards, stolen cards, charge-backs cards as these will not be the capability of a merchant.
In the aggregator model, it is possible to play on volumes by on boarding a large number of small and mid-size merchants. This way an aggregator can easily go to a bank and say my charge-back to sales ratio is just about 1.76%.
Kiran further adds that as an alternative risk mitigation mechanism an Industry body could register small and mid-size Software product companies (merchants) and provide some kind of a certified credit rating. This could help banks and aggregators to assess the risk associated with the individual merchant.
Krish feels, a Govt. body like MSME could build a registration system of merchants with past history, people involved etc. (this could be like extending the Performance and Credit rating scheme of MSME). “This could act as a KYC”, says Krish for the aggregator, payment gateways and banks.
Are there Indian Aggregators offering such services?
As mentioned above, banks offer services in a limited way to large merchants. Aggregators like RazorPay also provide services but again with conditions attached.
Kiran says,“Razorpay provides the services on selective basis. We do not offer the option of card details to be held by merchants”. He further informed that merchant account with many charge-backs are suspended and that cases with one-off charge types may be allowed.
So, there is conditional availability of Indian service providers of cross-border online payment gateways.
Concluding remarks and iSPIRT views
“It is a crying shame if many startups still incorporate outside India just to get a level playing field”, says Krish Subramanian. He also listed following observations:
- there is an option that is emerging (in terms of aggregators);
- there are no regulatory hurdles per say;
- it is more about risk mitigation;
- the risk mitigation is about creating awareness by closely working with banks;
- it is also about creating awareness amongst merchants themselves to be able to understand reasons why banks act in certain way and about clarity on pricing, return and refund policy etc.
- creating overall awareness in eco-system
iSPIRT views on the overall situation on the given problem and present policy status are as follows:
- For India to be a Software product nation, Indian resident companies should be able to carry out cross-border trade and receive foreign currency payments onlineseamlessly without opting for incorporating a subsidiary outside India
- For a healthy Software product ecosystem, it is vital that Software product companies have access to several options of payment gateway service providers with differing service offerings
- RBI alone cannot solve this problem.RBI policy of OPGSP allows the payment gateway players to provide services in India. The inherent risk does not encourage service providers to offer cross-border payment services. RBI may have to become more reformative in encouraging Indian international payment gateway providers.
- Government of India needs to intervene and devise an integrative policy that:
- promotes an ecosystem of Indian cross-border payment providers
- build a mechanism that helps banks and OPGSPs to mitigate their risk without hurting consumer interest
- support Software product companies in their cross-border trade by a proactive policy
MeitY can incorporate enabling policy measures in National Software product policy and offer an Indian Software product company registry that has an inbuilt mechanism to ascertain and certify a Software product company’s credibility. Also financial instrument like an Industry corpus fund could provide a common bank guarantee, that can be backup with surety bonds from individual product companies for a defined threshold.
In a digital world order, cross-border trade is going to be highly dependent on easy availability of international payment solutions. Indian merchants able to scale their international trade with ease is vital for India to be retain leadership in Software trade.