The RBI’s stringent rules on recurring payments are driving away India’s software companies

A number of Indian SaaS companies are registered in the US.
A number of Indian SaaS companies are registered in the US.
Image: Reuters/Robert Galbraith
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Google Capital recently made its first investment in an Indian company—but Freshdesk, a help-desk startup, happens to be registered in the US. If it had been registered in India, it might still be struggling with the strict rules on recurring payments from India’s central bank, which has been making things difficult for Indian software-as-a-service (SaaS) companies.

Many of India’s best SaaS companies are registered either in the US or Singapore. One of the reasons is that it is easier for companies to reach out to an international customer base. But the relative ease of conducting business also plays a big role.

An Indian startup called Practo, which provides a service that allows customers to book doctor’s appointments online, is registered in Singapore but still has to deal with a lot of the hassles of doing business in India. “We have to (manually) collect recurring payments and have to maintain a large team on the ground to do so,” says founder Abhinav Lal. “We also try and keep longer subscription periods and someone always has to remind the doctors for payments.” The whole process ends up adding to the company’s costs and delaying payments.

The Reserve Bank of India’s regulation at the root of these problems came into force in August 2009, and made it mandatory for customers to enter a two-step authentication password for every online credit card transaction. This was done to reduce fraud and cyber crime—especially merchants that kept charging customers even after they wanted to discontinue payments, according to Vishwas Patel, founder and CEO of Avenues India, the company behind payment gateway CCAvenue. “This became a problem as banks had to then recover payments from the merchants and there was large amount of fraud happening in the space,” he said.

While the RBI does allow a system to collect recurring payments through a direct debit from the customer’s account, this hasn’t solved the problem for SaaS startups. “The problem is that the customers don’t want to do a direct debit from their accounts to try a new software service. The adoption and customer acquisition for them becomes a challenge therefore,” says Krish Subramanian, founder of Chargebee, a company that provides customer support for the recurring billing needs of SaaS companies. “Also if the payment varies based on usage of the software then the payment has to be made either manually by the customer every time or someone from the company has to go and collect the payment.”

In 2011, the RBI made an exception for some companies like hotels to be able to charge credit cards without the need for two-step authentication. But this is not allowed for other companies such as software firms. There are also companies that are able to charge recurring payments by saving credit card details, but these are firms have established track records and have obtained the necessary clearances. Subramanian of Chargebee says this happens only for those who are “well-connected”. Obtaining, for example, a PCI-DSS certification or a data security standards certification, requires several levels of certifications, fee and renewals and is recommended only if a company is already a large volume player. Flipkart got this certification in 2012.

A company based in India can also collect recurring payments on software services using an international payment gateway like 2Checkout. But these pose a number of challenges. You can only use the payment gateway to collect payments in foreign currency, in which case a customer in India has to pay a charge on currency conversion. The percentage per transaction cost is also higher than what Indian payment gateways charge.

Gartner estimates that the spending on software as a service will total $220 million in 2014, growing 33.2 percent from last year. Until the recurring payment problem is solved, Indian startups will continue to lose out on a portion of that pie.