Last month, I wrote for Pragati on issues with Paypal recently and why the real solution is to Open Up The Rupee:
PayPal, the company that pioneered payments and money transfers on the internet, recently announced a change in the payment system for Indian residents, by setting a limit of $500 per transaction. Furthermore, users cannot use money credited to them to directly buy goods or services—they will have to get the money paid into their bank account first. PayPal said this change was made in order to comply with Reserve Bank of India (RBI) regulations and, regrettably, did not give any further details.
Many Indians use PayPal—shoppers who buy books or software online, electronic retail entrepreneurs, and freelancers who are paid online for ad hoc or small projects. Typically, they would receive and store money at Paypal, and use it to pay for goods or services, or to make small donations. With these new changes, they must withdraw any received money immediately so the intermediation costs go up—users can still pay others through PayPal with a credit card, but that means paying fees at both ends of the transaction.
The limit of $500 per transaction hurts the bigger players who heavily relied on PayPal as it is trusted by their US customers. Now they have to tell customers to split transactions into chunks of $500—a process that is tedious and appears unprofessional.
The new regulation was announced in a circular by RBI, which stated that the Foreign Exchange Maintenance Act (FEMA) laws do not allow for storing of export proceeds abroad. PayPal is therefore required to put all such money into a pooled account at a “Category 1 I-Bank”, and then transfer it to the exporter’s bank within seven days. The seven-day limit is the RBI restriction, wherein interest needs to be paid above that time (in addition, you have to be a bank); PayPal is required to report in detail all transactions over the $500 limit.
Do let me know your thoughts!