Why Is PayPal Screwing Indians? An ex-RBI Employee Tells Me The Facts

So as you already know by now, PayPal is busy screwing small Indian SMBs and independent freelancers who rely on the service to send and receive payments. This is definitely not the first time this has happened, and will definitely not be the last one.

In a recent email and blog post, PayPal said that they will be restraining Indian users from using the money in their PayPal account to purchase anything along with putting a stipulation that they have to withdraw the money within 7 days. In addition to that, they have also said that Indian users cannot accept payments more than $500.

Many users have been blaming the Reserve Bank of India (RBI) for this, but most of them haven’t done any fact-checking as such and are just blaming it because they feel that PayPal has no faults whatsoever. So I sat down with one of my roommates who has been an ex-RBI employee who has worked with them for 7 years to understand why this is happening.

Let me take you through this. First of we take a look at why PayPal cannot keep your money with them for more than 7 days and then delve into the $500 restriction they will be putting into place. Here is the actual conversation edited in some form by me without changing the details.

Me: So PayPal says that they cannot keep the money in their account for more than 7 days? Why is this happening.

RBI-expert: Because if PayPal keeps the money with them, they have to be regulated as a bank (and any institution that does it have to do the same) and PayPal does not want that to happen. Any entity which provides on-demand payments have to be regulated as a bank as per RBI rules, this is mandated because if they hold money for more than 7 days they have to provide users with interest. With this new change PayPal is basically circumnavigating this regulation so that they don’t have to answer questions to any government about how they conduct business and why they charge an exorbitant amount to customers to accept payments whilst continuing to not giving users interest like every other bank in India does.

Me: So you are saying that PayPal is practically f*cking all Indians.

RBI-expert: No I wouldn’t say that, but I would say that their business heads know how to circumnavigate against a country’s policies and that they are adamant about accepting regulations because that would mean that they have to cut down on their charges and also ensure that they do follow all guidelines laid down for a bank.

Me: Ok, so I see that they are screwing their customers with a hefty fee and now this. I do understand that they want to make money, but what is about $500 transaction limit.

RBI-expert: Well, once again this is a government and RBI mandated thing. All entities who bring cash-flow into India have to basically report transactions above $500 to the RBI and government. PayPal is basically just circumnavigating around this mandate by restricting the payments to $500. Once they do this, they have no obligation to report it to the RBI or the Indian government.

Me: So you are basically saying that these new changes by PayPal is just about screwing the RBI, Indian Government and people who use their service.

RBI-expert: Well, these are the rules. I will simply say this. If PayPal accepts the RBI regulations they have to be treated a bank and I can see that they are hell bent on not doing it. They are basically finding ways to get over it because once they become a bank they come under a different set of rules. Right now PayPal is a monetary service but they are not like say SBI, ICICI, HSBC or Citibank and do not have to adhere to the rules. Once you become a bank, you have stringent rules which I don’t think PayPal wants to follow.

So as you can see, from the above conversation which came through from a horse’s mouth, I feel that PayPal is basically cheating the RBI, Indian government and Indian users because they don’t want to be regulated. All I can say is that we need to boycott these services, check out some PayPal alternatives.

Though these things may make my statement that RBI is in no fault at this sound untrue, but you have to understand that these rules have been in place in 2004 and some of them since 1999. So saying that RBI is screwing PayPal is basically wrong. PayPal has been floundering these rules since they came into India and the RBI is just reining them in. They might have given them an option to change to being a bank or stop flouting the rules laid down by the Government of India. I believe you will understand what PayPal chose to do.

PayPal has also been blocked or regulated in countries such as Japan, Brazil, USA among others. Some of these countries have put in similar restrictions on in place which were also done last year in India. So it does not really make sense to say that RBI is the only one who is regulating PayPal.

This post has been updated with additional inputs and facts.

Published by

Keith Dsouza

I am the editor-in-chief and owner of Techie Buzz. I love coding and have contributed to several open source projects in the past. You can know more about me and my projects by visiting my Personal Website.I am also a social networking enthusiast and can be found active on twitter, you can follow Keith on twitter @keithdsouza. You can click on my name to visit my Google+ profile.

  • RBI-Expert?
    Well, I still think RBI should make rules for services like PayPal. Just take this simple logic:
    Bank = Pays Interest And Keeps Money
    PayPal = Keeps Money, No Interest. It’s Like A Wallet, idots!
    So, how in the world is PayPal a “bank”? RBI needs to open eyes to online world and think of PayPal as a service, not bank. Wake up guys!

    • Ashis

      Thank you Ishan, i personally think Paypal is a online Wallet and it’s RBI who wants to bind itself with paypal and regulate its body. So, RBI is forcing paypal to regulate some rules to sustain in India. It’s not happening anywhere in world. I think RBi is fked up.

      • @Ashis – Who said India is the only country doing this? PayPal is facing the same regulations in Japan, Brazil and Taiwan. In US too the government has moved to regulate PayPal, but out there they won’t circumnavigate against the system because they will basically lose all of their business. In the US, PayPal has readily accepted and will pertain to IRS standards, if they don’t the IRS will practically tell them to f*ck off. Isn’t that a two-faced business?

        Before you blame the monetary regulatory in your country, or the government itself, please take a look at how PayPal is conducting it’s business in US and elsewhere.

        • Arun

          I second Keith. Dwelling deep into the business models paypal has adapted in different countries shows their stubborn attitude, to circumvent every relugations set by the country of operation. Only exception to this is U.S, Isn’t that a double standard? I use Paypal, day in and out but right now I just wann say F*$$ off to paypal.

        • I am a freelance web developer works with shopping website for last 4 years. Most of the shopping cart system was done for my projects are with Paypal. But now my clients in india needs to change the payment system because of RBI regulations. I am not sure what should I do. I am trying to find a good alternative method.

          I also have account with Elance (a website for freelancers).
          There they have an escrow system just like a bank where they keeps the money for a long period. From this escrow we can transfer the money to our Elance account(same as bank account they say). From this account we can transfer money to our bank account. Usually I use my SBI account for this.

          But there is also an option to purchase services with the money we have in the Elance account. Suppose I received 5000 USD from a client for a job. The amount I can spend for getting other services from another person on elance. In this case, how RBI regulates this? We are not mentioning even PAN number there. As you know, there are more than 1 Lakhs of Indian freelancers are working with Elance. Any way I am happy with this. Hope RBI will not do anything on Elance/oDesk.

    • Amused

      When your wallet gets stolen, you pretty much say bye-bye to that money.

      When a bank branch is robbed or a bank is going bankrupt, insurance and regulations in place make sure you can get your money.

      That’s the difference. Now do you prefer to keep your money in a wallet or a bank?

      • Amaron

        I prefer the wallet. Just use 15 character alpha-numberic password on Paypal like I do.

        • right

          Are you stupid? Its not security breach he is talking about.He is talking about bankruptcy or similar things.If not regulated the company can just pack up with all the money.Regulated banks need to keep money with RBI to cover it in case it happens.

      • I do not care about what the RBI person thinks.

        Where the hell was RBI when paypal started the business in India? These laws which stated above were created in 1999 why were they not enforced once paypal came to India?

        Paypal is not a bank and neither we use it as a wallet, we need it for a transfer of money.

        RBI has already asked for PAN numbers to be added to the paypal account, they always know how much we are earning.

        The problem is RBI has woken up from sleep, and is now trying to pin their mistake on paypal.

        and Keith, next time you give alternative payment transfer sites, please try them yourself first and compare with paypal – except western union rest are crap.

        Even for western union I will have to go out and get the payment physically, while paypal handles the transaction free of cost and transfer directly to our bank.

        Using any wire transfer method will cost you way more than what paypal charges as its own cut right now.

        The message is straight –

        RBI wants us to go back in Stone age.

        • Arun

          It’s really disgusting to see how you end up supporting an external business, who cares Sh** about the governing laws in your nation! I’ve been using paypal (personal and business account) since it’s inception and to be frank, it has been a great mode of payment. But when it comes to holding on to respecting my nation, I stand by the rules set by RBI. Paypal is an alien, If they can’t follow the rules here, let them F$** off!

  • but they are ok to keep money in swiss bank

    • Love PayPal Paid Shills

      Nice PayPal commercial spot on that site.

      Love how these paid PayPal shills harp on the same topics, the Swiss, outdated regulations, government interference, RBI stupid. Anything to deflect blame from PayPal’s rule breaking activities.

      Farhad Irani (Head PayPal business in Asia Pacific [email protected]): “working closely and tirelessly with the Reserve Bank of India to get a fast resolution to this issue”, February 2010

      PayPal says one year fast. Think what PayPal means when they say you’ll get your money fast.

  • Kalpesh

    Thnk you so much for this post.
    I am sharing this post to every one who is RBI for this. even I have sent this link to labanol.com also.

  • Kumar

    Cannot agree more , PayPal has the brains who can bypass any law, they are rich to hire the best lawyers and CA’s , but what about freelancers ..
    and btw , there are many politicians who have swiss acc

  • karan

    Well paypal and other online payment services can’t act as bank can they ?
    Everybody is blaming RBI because Foreign Exchange Management Act guidelines laid down by Govt are outdated and need to be updated. Guidelines were placed before e-commerce revolution and this ain’t 1999.
    Guys at RBI must be having some brain to regulate online payments than to just ask services like Paypal to become an bank.

    • @karan – Foreign Exchange Management Act is not outdated, if that were the case you would have all the banks that operate in India lobby against it. In the past several years, no banks have gone against it because it is basically a fulfilling law. You don’t create financial and regulatory laws every year based on the whims and fancies of the consumer.

      RBI has been very diligent in what they do, this is one of the reasons why India never had to see or face much of the recession that happened across the world. This is because they know what they do and do it very well.

      Just because PayPal cannot adhere to the rules you can’t call the government or RBI to change rules, this is the most absurd thing I have heard.

      • karan

        Hii Keith,
        I don’t have any problem with not allowing use of Paypal funds which is acceptable and right thing to do so that RBI can regulate payments but $500 limit is absurd which basically strangle every foreign payment processor.
        What i understand $500 cap is general guideline under FEMA and not specific to paypal so it will apply to every foreign payment processor including paypal, 2checkout, moneybookers etc.
        So if you look at user point of view Indian IT companies and professionals do not have any other option but to use Indian payment gateways or accept payments via wire.
        By Amendment of Act i am only for raising this cap as $500 do not hold same value as it was 10 -15 years back. It should be around 2500 USD above which foreign payment processors have to report the RBI or operate under that limit.

      • @Keith – Several freelancers are losing their bread and butter because of this, are those people stupid ? Where were your comments when paypal commenced its business in India ? ITS NOT A BANK. Do you understand it. Its just a mediator for easy transfer of monetary funds over border that is source of income for several freelancers. Are you a freelancer who make money online ?

  • It’s clear that Indians have to find best alternative for this as this is not going to be solved in coming couple of years.

    We know Indian government, they will not take action against black money in Swiss banks but will take action action on small businesses like us.

    • How is this related to that? Do you know that Swiss have secrecy laws which are in place? Do you think the Indian government didn’t go asking the Swiss Banks about Indian accounts and were declined? Just so that you know the Swiss have done the same to several other nations.

      Coming back to PayPal, do you expect our country to have financial regulations which basically allow anyone to operate as and how they want? I know that PayPal is one of the most used services out there, but do you want the Indian government and RBI to create separate rules for just PayPal so that they can do as they want?

      The RBI did give PayPal a choice and that is to accept payments and then tell them if they are receiving anything about $500. FYI, this is done by each and every financial institution in India. So why should PayPal be exempt from it? And did you really try to question PayPal as to why they don’t want to report income above $500 to the RBI?

      • jugnu

        Absolutely agree with Keith. Always paypal used a loophole to escape from the law.

      • Ankur

        Keith – As also noted by one of the commentators above, check this notification from RBI http://www.rbi.org.in/scripts/BS_CircularIndexDisplay.aspx?Id=6107. This notification is generic in nature and applicable for all payment gateways. One of the points clearly states that

        “(ii) This facility shall only be available for export of goods and services of value not exceeding USD 500 (US Dollar five hundred).”

        Unless RBI has come up with another directive in this regard, It appears to be pretty clear that $500 is a cap for all payment gateways and there is NO mention of “notify us if you receive more than $500″.

        You may want to double check with the person you interviewed.

  • Job

    well i saw many saying guideline done way back n need to be followed. but think these guidelins are outdate well before internet revolution. now things changed, the are many players in money business not just banks. And paypal yeah they charge high to us but i am happy to pay busy i don’t have any other alternative to get my money from my US client. you said paypal screwing us, if no paypal there won’t be many freelancer may be you can add 5 lakh plus unemployed including me. We all use paypal not becoz RBI allows it becoz paypal is not US clients use for paying outsource work. Understand its not other way around. If not a Indian, philiphines are ready to do our freelance job. Now competition is tuff, our government should support us, not bring in more problems.

    RBI should sit with paypal and solve issue in which is not affecting the daily wage freelancers. paypal is not the way used for black money transfer and it can’t be used at all. But the issue the government should change the rule that reflect current reality.

    In these article end, you mentioned paypal alternative, believe me i tried all the payment, for your kind information no US n Europe client use any payment service other than paypal.

    last year i hate paypal, when this kind of problem happen and blashed the paypal in blog and tried xoom n other service and come to conclusion paypal is best.

    I tell you paypal they charge more. But it better to have some money than nothing else. so freelancer in that stage $500 is ok but if i charge $550 for a freelancer work. i should ask client to send it 2 transaction $500 n $50 seperately. IF its a new client or busy client, we have trouble or we have to beg them to do a favour for us.

    Again if the $500 is per day maximum limit from single client than oh my God i can’t imagine what to do. We can’t ask client to one transaction today and 2nd transaction tomorrow.

    Its a great news for other south Asian countries and Philippines. They get some extra job thanks to RBI n Paypal

  • Ram Kumar

    What this means is:

    Big Indian IT company share prices are going to drop, sell… sell… sell…

  • i am totally agree with Keith. PayPal need to follow rules and regulations of any countries including India.

  • Its only that the RBI is trying to regulate a foreign business entity and trying to force them to act as bank..lame

    I personally don’t think RBI or anyone in the Indian bureaucracy is concerned about the fact that paypal is not paying interest on kept money .. we all know how much our govt and regulators think about common people …

    Govt and RBI only want to control things which they cannot understand ( which is in this case is the IT)

  • Santosh

    Keith Dsouza, You’ve got your facts right! I completely agree with you, and I feel a tinge of sympathy towards the ignorance of the others!

  • PayPal is just an Payment processor.

    • Nitin Goyal

      No its not…..

      Payment Processor is a Payment gateway from which you pay n seller revive money in his BANK ACCOUNT

      like ccavenue , Ebay’s PaisaPay etc etc ….

  • vihu

    It’s time for RBI to grow up to the New Age Of Technology. We dont want to go on living in pre-independence era forever.

    People from all over the world are conducting business using paypal, it’s time for India to open up and embrace technology to move forward with the rest of the world and not be caught up in hundreds of regulations which were made decades back.

  • Pingback: PayPal Team Shocked Indian Freelancer with New Rules()

  • Ankur Trivedi

    Dear Sir,

    I fully Disagree with the Explanation given..

    PayPal is doing a business, Just think..Do you..as a businessman afford to loose money..? not a single penny…right..?

    It may be Not even RBI, but Its the Congress Govt. Who clearly seems to behind this, to screws down the small business entrepreneurs.

    Its very very frustrating, It is simply Point Blank Encounter of Small Businesses and Individual Doing Online Business.

    After Onion & Petrol this PayPal restrictions
    seems Direct Killing of small Indians entrepreneurs
    by the ruling Govt. India.

    • Nitin Goyal

      dude its not killing …..

      its protection system ….

      its paypal who is not ready to follow RBI’s Guidelines in India

      PP is already act as Bank in Europe then whats the problem in India ???

      simple funda of RBI …
      if you want to keep money of people then you have to be a Bank
      else you have no right to keep money with you

      if PP will fraud you with $$$$s then you have no one to be blamed

      • Gaurav

        RBI is not just saying that Paypal should act as a bank but to pay interest as well. It`s very easy to say that Paypal should act as a bank but we have to think that to become a bank Paypal has to change its entire rules & policies.
        As I already mentioned that Indian policies are totally different from European and China. Our politicians are corrupt.
        Think as a businessman Paypal is here to make money not to loose money.
        Congress murdabad…..murdabad

  • Pingback: Paypal India Payments Restricted Again!()

  • Great article. Nice to know both sides of the story.

  • reality

    Are you a masochist? You like regulations so much, you suggest Indians go back to the days of licence-quota-permit-3%-rate-of-growth-days?
    Try opening your illiterate eyes to what Paypal support means for Indian entrepreneurs and exporters. Your ‘great’ local banks offer nothing but piss and shit in the name of online products.

    Ask your RBI expert why the govt. wants to control in and out flows of funds? Billions stashed away in swiss ‘banks’ is on no concern to any of them? Or they think they got some gospel of banking smartness that US ans european countries missed?

    • nick

      Most entrepreneurs are not worried that they’ll have to pay their taxes.
      RBI regulations would help keep Indian consumers protected.

      Use escrow services and get your money wired to banks.

    • Nitin Goyal

      dude do you know working system of a BANK ????

      if tomorrow paypal will scam you for thousands of dollars then where will you report ???

      • If your wallet got stolen in a busy bus of Indian roads, do you whine on road ?

  • Basically RBI wants the tax on the ton of money that freelancers keep in paypal and buy stuff from there and never report it as income . . .its a good move from their end . .for those who honestly take out the money from paypal to their bank and report it as income will be fine . . .but others are screwed and done for.

    But personally. I think they should try to bring paypal under their net and allow payments thry paypal too . . .as its good for the economy. . .plus those who keep money in paypal know they are loosing on the interest from a traditional bank anyways . . .

  • Prashant

    As always, thank you Keith. The Paypal alternatives were helpful. The only people who are totally screwed are the ones who have had no other option but Paypal. For example, I use Paypal for Grooveshark since I dont like to have a credit card. But now I have to find out someone who has a credit card.

  • If I enter into an agreement with a company, knowing that they will make a profit from providing me a service, who is getting screwed? Did the company hold a gun to my head and force me to use their service?

    The problems begin when a third party (government) forces itself into the agreement between yourself and a company. In almost all cases, the only winner is government.

    • Agreements between you and a company or between two companies are never above the Law of the Land.

      What RBI is doing is to protect you, not just to earn from TAX.

      Moreover the rules had been there even before Paypal came to India, also these rules are applicable to all similar service providers, not just Paypal alone.

  • Krishnandu Sarkar

    Well, I still think it’s the fault of RBI, why should paypal change their rules only for Indians and bogus RBI rules??

    RBI wants them to operate as a bank and pay interest if they holds money, means RBI is forcing Paypal to do this, Paypal is here to make business, why should they turn themselves into a bank??

    RBI wants the report of payments if it’s >500, again they are interfering on Paypal’s internal works.

    We users are accepting and using Paypal after knowing all their charges and all that, so there is no question of RBI forcing paypal to do this.

    I think RBI should accept and operate Paypal freely. What’s is RBI’s problem when the user’s are accepting every rules??

    • Paypal since 2007 is operating as a bank in European Union after EU asked them to follow the rules or packup. Paypal in China is operating through one of their local national bank

      So why can’t they do some similar arrangement for India?

      Paypal has been flouting the Indian rules since they started operations here. Support your country and be tough, today Paypal is not in a position to ignore or leave our country, do check how much revenue they are generating from India, get united and force Paypal to follow our rules.

      • Karthi Keyan

        Paypal fuckers DESERVES to pay interest. Those asses charging goddamn transaction/conversion fees. Dont they lick our asses to get all revenue? Why dont they setup a bank and start paying goddamn interest?

        Paypal fuckers.. FUCK OFF. Do what RBI says.

        RBI rules are pure assholes., Sometimes they benefit for users.

      • Gaurav

        Paypal is operating as a bank in European Union and China but have you ever thought that Indian policies are totally different? Indian politicians are very corrupt as we already know. In China you will not find corruption. Paypal is entirely a monetary service. You cann`t force paypal to work as a bank.

    • Krishnan,

      These measures of tracking foreign flow of funds in to india is very important – because that is how all terrorist activities are financed.

      • Karthi Keyan

        Do you ever know or explain with an example?

        Dont simply say that fuck again (Terrorist fucks).

        RBI people are bullshits. They dont know how to control the internal economy. Now, They are putting rules for legit freelancers and web hosting guys.

  • Krishnandu Sarkar

    And as for boycotting Paypal, it’s never going to be possible, Alert Pay, Western Union, whatever service you use, 90% of websites accepts Paypal, and is the only way to buy for those who doesn’t have CC’s. So it’s never going to be happen.

    How much sites have provision for Alert Pay, Western Union?? It’s not all about money transfer, it’s about the acceptance on websites.

  • SK

    Please see this circular issued by RBI (link attached). Please verify facts before posting such crap. Your ex-RBI employee must be anti-MNC and must be thinking that everyone is a thief except the Indian Government.


  • Personally I think this is all to make Aam Adami suffer. When over 189 countries have no problems with PayPal why RBI is having such problems. If they want to know exactly how much money is coming in one person’s account then force PayPal to share account history or make them notify the RBI and Income tax department when someone crosses the amount on which there is no tax. Why are they imposing these rules.

    Truth is that RBI treats us like dogs, it is not tackling issues like Inflation which has made our life living hell. Only when one of the freelancer with get frustrated and burn himself alive outside the RBI headquarters then only these people will realize our pain.

    For 40 years Indian Government followed the policy which doesn’t allow people to create wealth and that’s exactly what RBI is doing once again.

    • hmmm

      Consider reading the article before commenting…

    • Mayank,
      you really got it all wrong.
      If you paid even little attention to the article you’ll clearly see that RBI has these regulations of reporting for the longest time.
      Paypal is deliberately NOT want to to take up that headache of reporting and is therefore keeping the limits to 7 days / $500 etc.

      Also, there are a lot of other countries where Paypal is not willing to work with the regulatory authorities such as Brazil, Japan etc. and is therefore not allowed to work there.

      • Jessie

        Are you sure paypal isn’t working in Japan? I think that’s a wrong info. Until November 2010 I had a paypal a/c in Japan and there were absolutely no restrictions on the payment amount and or any transactions.

    • Nitin Goyal

      Paypal is already act as Bank in many European countries ….

      then whats the problem at India

    • Gaurav

      It is purely a fault of Indian Government and RBI because Paypal is used all over the World by the people. If other countries` government have no issues then why India is creating problems for Paypal.