The Reserve Bank of India (RBI) has allowed payment companies to maintain more than one escrow account with a scheduled commercial bank. At present, pre-paid instrument (PPI) issuers and payment aggregators (PA) are required to maintain one escrow account with a commercial bank. “With a view to diversify risk and address business continuity concerns, it has been decided to allow one additional escrow account in a different scheduled commercial bank,” the central bank said in a circular issued on November 17.

An escrow account, used primarily in commercial transactions, acts like a holding account for funds while two parties complete a transaction. In the payments industry, an escrow account owned by a PPI or PA protects and the buyer from losing money in case the seller delivers unsatisfactory goods and services or if the seller is a fraudster. It also provides a safeguard in case of disputes or chargebacks between the parties.

Let’s say a person buys ₹100 worth of goods online, the money is transferred from the buyer’s bank account via the PPI or PA to the escrow account and is held there for a temporary period, usually T+2 or 3 days. Once the seller delivers the goods and if no dispute is raised by the buyer, the PPI or PA can then transfer the ₹100 from the escrow account to the sellers’ bank account.

According to the RBI’s circular:

  • An additional escrow account may be maintained with a different scheduled commercial bank at the discretion of the PPI or PA company.
  • While the central bank has permitted PPIs and PAs to credit and debit funds from one escrow account to the other, such inter-escrow transfers should be avoided.
  • An auditor will need to clearly mention such transactions in their certifications of company accounts.
  • When two escrow accounts are maintained by a PPI or PA company, both accounts require auditor certifications and the same auditor must be employed to audit both escrow accounts.
  • The core portion for each of the escrow accounts, held by PPI or PA companies, must be calculated separately and will remain linked to the respective escrow account.
  • The auditor must clearly disclose the balance and core portion maintained in each account in their certifications.
  • PPIs will need to submit the quarterly audit certificate within a fortnight from the end of a financial quarter in addition to annual certificates to the RBI.
  • In the case of PPIs, if there is a need to shift the escrow account from one bank to another, the company must complete this migration in the minimum possible time with prior intimation to the RBI.
  • Whereas for PAs, if there is a need to shift the escrow account from one bank to another, the company must complete the migration in a time-bound manner without impacting the payment cycle to merchants. But such migration does not need to be intimated to the RBI beforehand.