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2014-08-26

RBI blow to Uber payment model in India

The RBI said that it had received complaints on breaches of the law as mentioned and advised the entities concerned to stop such arrangements.

The RBI has come down on entities abroad, such as Uber, the US-based taxi-hailing app, which allegedly flout the rules governing credit card transactions and the Foreign Exchange Management Act (Fema).

 

Without naming a specific entity, the central bank said that it had received complaints on breaches of the law as mentioned and advised the entities concerned to stop such arrangements. It has given them time till October 31 to wind up such arrangements.

 

The move comes as a relief for the local radio taxi sector, which felt threatened by the disruptive giant. The Association of Radio Taxis (ART) had on July 28 written to the central bank that Uber was storing the credit card details of customers in its server and deducting fares without a second-stage authentication, as mandated. ART had also alleged that the Uber payment mechanism of routing money through a Netherlands-based entity would amount to a capital account transaction and breached the Fema rules.

 

The RBI said, “It has come to our notice that there are instances of card not-present transactions being effected without the mandated additional authentication/validation, even where the underlying transactions are essentially taking place between two residents in India (card issued in India being used for purchase of goods and service offered by a merchant/service provider in India). It is also observed that these entities are evading the mandate of additional authentication/validation by following business/payment models which are resulting in foreign exchange outflow.”

 

Such transactions, with an outflow of foreign exchange in the settlement of these transactions, breaches the directives issued under the Payment and Settlement Systems Act, 2007 beside, Fema, 1999.

 

Uber, a San Francisco-based information technology company, backed by Google Ventures is valued at $17 billion and has operations in 150 cities across 42 countries. In India, it is present in six cities, including Delhi and Mumbai.

 

Uber makes it clear on its website that it only acts as an intermediary between the customer and the service provider but it controls the crucial part of the relationship, the payment. It deducts the fare from the customer’s credit card and pays the driver after deducting its commission. While the customer payment goes to a Netherlands-based entity, payment to the driver comes from a US-based firm.

 

RBI further advised that where cards issued by banks in India are used for making card not-present payments towards purchase of goods and services provided within the country, the acquisition of such transactions has to be through a bank in India and the transaction should necessarily settle only in Indian currency , in adherence to instructions on security of card payments.

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