The Reserve Bank of India (RBI) recently announced the successful exit of four entities from its regulatory sandbox’s cohort for cross-border payments. This opens the door for the innovations of these entities, which address inward/outward remittance and provide blockchain based solutions among others to be adopted by the financial services industry.

Cashfree Payments’ product, which is one among the four successful exits, specifically targets simplifying cross-border investment. This essentially allows investment platforms, mutual fund houses, neobanks, and other consumer finance apps, to provide a seamless, digitised ‘payment gateway’ type of experience for their customers with making foreign investments. This essentially allows investors to use normal domestic channels like net banking and UPI for investing in international stock markets. It also incorporates end-to-end digitisation of applicable compliance requirements under RBI norms, such as digitally submitting the A2 form and other documentation requirements.

Three ways of easing the cross-border investment experience

Multiple fintech innovators are targeting retail investors through the simplification of  traditional methods of accessing markets via mutual funds, ETFs, investment platforms, and through new age services such as robo-advisory, dedicated wealth management apps, and neobanking. For these disruptors, an end-to-end, digitised experience is a key factor for customer convenience, but investing in foreign stocks normally comes with some essential offline and off-the-website components.

To illustrate, an example of a typical scenario would be where an investment platform in India has a tie-up with a foreign broker - a regulated entity in another jurisdiction - allowing Indian investors to open foreign Demat accounts with them. To commence transactions, funds must be transferred from the investor’s Indian bank account to the foreign Demat account. For this, the transfer may require a preliminary visit to the physical bank branch for permissions for the remittance, or a visit to the bank’s net banking portal to make the actual transfer. There are also multiple documentation requirements prescribed under India’s foreign exchange regulations, specifically the RBI’s Liberalised Remittance Scheme (LRS), which are the primary governing regulations.

The new offshore investment innovation from Cashfree Payments, with the support of  relaxations from the RBI through its regulatory sandbox, allowed the creation of a new product which targets such issues to bring seamlessness to these payments in India:

1. Digitised compliance under the LRS scheme

First, the product integrates compliance with the LRS directly into the payments experience; allowing individuals to file A2 forms and provide PAN and bank statements digitally, without having to leave the website of their investment platform. Compliance with these documentation requirements is the first step to transferring funds  abroad, which often requires a physical visit to the relevant bank branch.

To elaborate, investing in securities naturally comes with legal and compliance requirements, normally prescribed by SEBI, such as KYC requirements and opening a Demat account. With cross-border investment, the need to transfer funds abroad brings in additional compliance requirements under the Foreign Exchange Management Act, 1999, and specifically LRS.

The situation varies based on the type of cross-border payment. For example: for imports and exports, buyers can enjoy a seamless, integrated payment experience on merchant websites, via the services of Online Payment Gateway Service Providers (OPGSPs) under the RBI’s OPGSP scheme. For individuals (that is, not corporates) transferring funds abroad for other purposes, like investment in securities (capital account transactions) or say paying student fees abroad (current account transactions), the LRS applies.

Until now, LRS compliance has not been an end-to-end digital process, due to mandatory preliminary verifications, which authorised dealers (AD banks, or specific banks authorised by the RBI for capital and current account transactions) need to carry out under the LRS. These include:

A cap of USD $250,000 per individual per financial year

• Filing an A2 form with the designated AD bank branch for foreign exchange purchase
• Providing PAN (income tax identifier in India)
• For capital account transactions, the individual must hold the bank account with the AD banks for a minimum of one year
• Providing bank statement for one year or income tax returns for the previous year
• Listed as a permitted transaction under the LRS (for example,this may include acquiring and holding foreign shares, investing in mutual fund units, or venture capital funds)

Other verifications such as sanctions checks, verifying that the remittance isn’t being made to a country on the FATF list, are also done by the AD banks. All of these typically require physical visits, even though a few banks have introduced some digitisation here via net banking. The product tackles this as the first step to bringing ease and removing friction from the cross-border investment experience.

2. Integrated payments via net banking and UPI

Next, the product allows an individual to pay, via net banking and UPI, and directly through the website of the investment platform (or other entity), much like payments via a typical payment gateway. The LRS allows funds transfers through multiple channels, including cheque, demand draft, debit to account, and cards (debit/ credit/ prepaid). Most common, however, is the net banking route. This type of funds transfer requires the customer to execute the payment through their internet banking portals, in some cases their apps, or directly from the physical branches. The LRS product removes this friction, allowing direct payments from the same website of the investment platform, and adds UPI as a payments option here.

Adding UPI brings significant convenience to Indian investors given its immense popularity (UPI processes over 5 billion transactions per month). The advantage of UPI for capital account transactions is that, being in essence a bank funds transfer itself (UPI operates on IMPS, an instant funds transfer mechanism for banks in India), it allows verification of the bank account and the account holder, as well as of the source of funds. This is an essential part of the checks under LRS. In fact, this is the reason why card payments cannot be used for capital account transactions, since similar verifications of the underlying bank account cannot be carried out.

3. Bulk settlement for faster investment and lower costs

The new arrangement also allows the funds transfer to happen by the next day, a process that normally takes three to four days, allowing faster commencement of investing for the investors. Here, a tie-up with AD banks allows investment platforms, stockbrokers and other entities to deposit funds converted into dollars with these banks, enabling bulk remittances at the end of the day. This allows the purchase of stocks much faster than is possible through traditional investment routes.

Another advantage the bulk settlement as opposed to per transaction settlement brings is that the SWIFT charges are distributed across a set of transactions, reducing the costs per remitter.

The regulatory sandbox as an innovative tool

Sandboxes are a familiar enough policy instrument internationally, used globally to facilitate experimentation by providing regulatory relaxations in controlled, test environments. The RBI’s sandbox, introduced in 2019, is modelled along these same lines. It has so far announced four cohorts, with others being on retail payments, MSME lending and financial fraud, with applications invited on an ‘on-tap’ basis for all.

Cross-border payments present multiple challenges for fintech innovators to crack- from enabling real-time payments, FX issues, transaction costs, processing delays and multiplicity of compliance requirements are only some issues here. As the subject of the RBI’s second cohort, it allowed welcome relaxations and experimentation to bring convenience in this space.

This new innovation will thus allow multiple investment and consumer finance platforms to enable an integrated and digitised cross-border investment experience. Particularly with smaller value cross-border transactions, the lack of end-to-end digitisation, documentation requirements and high fees often act as a hindrance. With a solution addressing these, it will be interesting to see if it brings about changes to the investment preferences of Indians and an increase in global trading.

For a full discussion on the latest policy developments each month, do check out Cashfree Payments’ Policy Radar.