Mumbai: Reserve Bank of India (RBI) governor Raghuram Rajan on Monday warned companies against breaking the central bank’s rule on two-step authentication for credit-card transactions.

“It has come to our notice that some firms are bypassing this and clearing transactions abroad. We said don’t break the rules and sent out the circular with this effect and the immediate pushback was that the RBI is against innovation...is slowing the process. Whatever the innovation, breaking the rule is not done. You have to follow the rules," Rajan said.

Rajan was referring to an RBI notification last month in which it insisted on a second authentication for all card transactions done on the Internet. The RBI notification came after some overseas service companies used offshore payment gateways for transactions done in India to sidestep the RBI’s authentication rules.

A two-factor authentication can be either a personal identification number or a one-time password for transactions done over the Internet.

Rajan said RBI rules were there because they enhanced the security of transactions. “If there is a rule on the book, we don’t allow it to be violated simply because the innovation is cool. We are not against innovation. We very much want the kind of innovation that we are talking about. We just have to make sure that we work our way through it," he said.

Rajan said RBI is looking at whether the two-factor authentication can be done away with for small payments. “May be we can think about reducing the need for second authentication for low-value payments provided the card provider has systems to protect against misuse and can bear their cost beyond a certain point if the card is misused," Rajan said.

Last month, RBI also reduced the amount of free automated teller machine (ATM) withdrawals from non-home bank ATMs to three from five effective from November in the six metro cities of Mumbai, Delhi, Kolkata, Chennai, Bangalore and Hyderabad. Banks were also allowed to charge their own customers for more than five transactions at their ATMs.

“There is no such thing as a free lunch," Rajan said. “The ATM transaction is free to you but not free to the bank. It costs the bank 75 to 100 for those five transactions. The bank has to collect that amount from somewhere and it has to be from customers. But there are two distortions that it creates. First, not everybody is doing the same amount of transactions and (also) are we subsidizing using of cash by freeing up ATMs?" Rajan said.

Rajan clarified that RBI has allowed banks to charge customers but that does not mean that banks have to do so. “If you (banks) like your customers to use free ATMs you can subsidize the transactions. What we have done essentially is (to) let large banks make better business decisions and reduce the hidden cross-subsidy and make it more transparent," Rajan said.

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