Payment aggregator ecosystem: navigating the tightrope of regulations, profits and valuation

India’s payment aggregator landscape is experiencing a transformative phase, driven by evolving regulations and a dynamic market environment. With the introduction of the payment aggregator licence regulations and the upcoming changes in offline payments, key players face a blend of challenges and opportunities that could redefine the sector. 

This highly competitive market is characterised by tight margins, intense regulatory scrutiny, and the complex task of merchant know- your-customer (KYC) procedures. Even established players have retreated from this space, highlighting the formidable nature of the business. Yet, amid these challenges lies a golden opportunity to drive significant economic growth.

Regulatory challenges and physical KYC

The regulatory requirements for physical KYC and due diligence are stringent, akin to those imposed on universal banks by the Reserve Bank of India (RBI). Payment aggregators must also verify the bank accounts where merchants’ funds are settled. These processes, though cumbersome, are necessary to maintain the integrity and security of financial transactions. As the market matures, this period presents a unique opportunity for companies to assert dominance, especially as regulators encourage innovation.

Historical context and industry concerns

Historically, RBI’s actions have sparked considerable debate within the fintech and payment markets. The 2022 card tokenisation rules and the 2018 data localisation mandate faced significant implementation challenges. Recently, industry officials met to discuss the impact of new guidelines, expressing concerns that these could hinder the regulatory environment for potential players, especially street vendors and small businesses. 

However, while players faced initial hurdles, recent measures by the RBI have provided much-needed relief and support to the industry.

The Indian payment gateway market is estimated to be worth $1.21 billion in 2024 and is expected to reach $2.66 billion by 2029, growing at a CAGR of 17.16% during the forecast period, according to Mordor Intelligence. 

Integrating a payment gateway has become one of the most critical aspects of any business across industries. It enables the collection of money through the customer’s preferred bank without compromising sensitive data. Digital payment has been one of the highlights of the government’s ‘Digital India’ initiative, and online payment platforms and services have expanded rapidly across the country. Post-demonetisation, digital transactions witnessed a tremendous increase, leading to the emergence of numerous payment gateway vendors. 

An increase in digital payment trends in India further boosts the market. Government initiatives, such as the Digital India programme, aim to transform India into a digitally empowered society and promote a cashless economy. These initiatives have significantly enhanced the digital payment space and encouraged the growth of the payment gateway market.

Balancing innovation and compliance

The increased net worth requirements and stringent KYC measures aim to protect consumers and ensure fair market opportunities. However, the potential for these guidelines to discourage small sellers from adopting virtual payments must be carefully considered. For many small businesses, complying with new regulations could be prohibitively difficult, undermining their ability to operate effectively. Balancing regulatory compliance with innovative solutions is crucial. 

The ‘Make in India’ initiative, which emphasises local manufacturing and innovation, can play a significant role. By offering value-added services, payment aggregators can enhance their value proposition and gain a competitive edge in the market. Value-added services such as fraud detection, loyalty programmes, and financial analytics can help small businesses navigate regulatory challenges while driving economic growth.

The path forward: innovation and growth

This juncture is ripe for innovation and growth within the payment aggregator sector. To thrive, companies must look beyond the number of merchants onboarded and focus on the broader economic impact. Payment aggregators are crucial in driving financial inclusion and economic growth by enabling seamless transactions nationwide. The success measure will be how these companies contribute to the overall economic development rather than merely increasing their merchant base.

The future of payment aggregators lies in their ability to adapt to regulatory changes, leverage technological advancements, and offer value-added services that meet the evolving needs of merchants and consumers. As the market grows, those who can balance regulatory compliance with innovation and profitability will emerge as leaders. This period of transformation is not just a challenge but also an opportunity to redefine the role of payment aggregators in India’s digital economy.

In conclusion, the payment aggregator ecosystem in India is at a pivotal moment. The new regulatory landscape and the need for innovation and strategic growth present both challenges and opportunities. 

Companies that can master the art of staying aligned with regulatory requirements and compliance standards while fostering value stickiness within their target merchant ecosystem will find themselves at a significant advantage. These companies will navigate this complex environment more effectively, delivering value beyond mere transactions. 

By focusing on comprehensive solutions and fostering strong relationships, they can lead the market and drive significant contributions to the country's economic growth. This dual focus on compliance and value creation ensures they meet regulatory expectations and enhance their appeal and reliability to merchants. 

A balanced approach is key to sustainable success and long-term leadership in this rapidly evolving business environment.

The author is Founder, airpay Payment Services.