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.

  • I used paypal only and now i have to use cc to transfer money. Really bad for me :(

  • MQJ

    Its like end of PayPal in India. I am going to apply for a new bank a/c with Credit Card to continue my online biz. My 50% of transactions were completed through PayPal only…….

    • Steve

      I own a small business in the U.S. and have an ongoing business relationship with an Indian software company. I have sent over $200K USD in the past several years to freelancers around the world using PayPal.

      I have been affected by these recent changes from sending payments to India, and am here on this site researching alternatives to PayPal.

      From my experience, India is the only country that has implemented these new rules limiting PayPal. These recent PayPal changes in India have been well covered in the U.S. tech press and are not happening in other countries.

      Some of the comments in this article and blog make it sound like PayPal is the problem, because they are not paying interest, and they are harming their users in India. That is short sighted.

      I think you do not realize how important PayPal is to the many businesses like mine that are sending payments to India. Businesses trust PayPal and it is easy to process. They have had a very positive impact on small business operations in a global economy. If PayPal is hurt, the Indian freelancers will be hurt.

      Steve (New York City)

      • There is point I would like to draw out.
        As per RBI policy, PayPal can NOT keep money of Indians for more than 7 days.

        Then How can they limit account of Indians and keep their money for 180 days (that whooping 6 months)

        They limited two of my accounts and now I’m going to drag them to consumer court.

        they don’t want us to do business using paypal, that’s fine. but how can they deny us from taking out our own money ??

  • I thought that It was the fault of RBI.. You made the things clear.. I think this update is just temporary, may be Paypal will soon change and decide to comply with RBI’s guidelines…Paypal will loose a lot of business by this update, because a lot of Indians use Paypal and we have very high population

  • Nagaraj S V

    Many of us are stuck in 1970 if we believe our politicians stash money only in Swiss banks. You should look at the booming banking industry in Hong Kong and Singapore today.

    Banks are allowed to operate relatively freely as long as the money keeps pouring in to the country. Every large bank in the world has a base in Singapore and HK. Big name Swiss banks like UBS and Credit Suisse operate out of Singapore.

    Each of these banks has huge teams targeting HNW (high net worth) individuals, families or companies. I know bankers from some of these large banks who are assigned specific regions of India to target. One of my ex-classmates is now in ANZ, his target is the Gujarat region but he is based in Singapore.

    Of course they have regulations for PEP (politically exposed persons). For example, Sonia Gandhi cannot just come with 10,000 crores and try to open a Singapore account.

    Money from India is no longer just going to Swiss accounts. It is being distributed all over the world in the form of properties and overseas accounts in many countries and many currencies.

    By the way, do you know how many Indian politicians own properties in Thailand?

    • arun

      Out of the topic.

  • I don’t know why all the people like internet marketer uses paypal, why not use other payments prosessor, like Maroc Annonces, offres d’emploi or Maroc immobilier, there are many of them so you have only to make a research.

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  • Hi Keith, The rules might be true, but the trigger for the latest PayPal restrictions is something else. In November 2010, RBI issued a notification for online payment gateways. The restrictions announced by PayPal are mentioned in there. http://goo.gl/x4Xse

  • Complete BS. The real reason is that Paypal forgot to send their monthly “tea money” to RBI officials on time…

  • Simon

    It is very clear RBI is playing the dirty game. Govt. is always behind the common man. They cannot stop the black money of the corrupt politician. They cannot control the increase in price rise. They can squeeze only the Amm Admi. The RBI policy makers are always blind for ordinary people.

    Throughout the world, people are using PayPal. We Indians cannot. Hundreds of housewives, retired man and young entrepreneurs were using PayPal to earn their bread. Staying outside, Dsouza, you can never understand the pain of those Indians. Your relation with RBI is very clear in your post. Do not advocate for RBI.

    To keep the skill up to date we need latest software and technology. Through PayPal and Internet people were getting that easily. Now, we cannot purchase any low priced software, book etc from internet.

  • Is there any way to get rid off $500 limit other than splitting the transfer?

  • vish

    Hey Keith

    thanks for bringing in some meaningful insight to the problem, i think being an indian we should support what RBI is doing and make paypal obey the rules of India.

    -A proud Indian

  • Martin

    Found the following Article on the RBI website : http://rbi.org.in/scripts/NotificationUser.aspx?Id=6107&Mode=0

    This document does include $500.00 limit and the 7 day restrictions. Is this not the new law by RBI that PayPal is reacting to?

  • Christy

    >> PayPal is basically cheating the RBI, Indian government and Indian users <<

    This is NOT CORRECT. Paypal is one of the best payment processors available to accept payments online. What we have to change is outdated RBI Rules. The RBI is still living in pre-independence era. RBI and/or the government has to create new laws concerning 'Payment Processors' like Paypal instead of pushing them to start working like a bank. I think we have to send a mass petition to the authorities to do something before 1st March, 2011.

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  • Juventis

    “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.”
    Paypal is a low cost provider, if you want to enjoy the low rates which paypal charges on international transaction , it will have to function as a non banking institution. The cost of compliance in India is pretty high , which has screwed up the payment industry on one hand with high TDR rates but have reduced the risks of banks going under substantially.

    I totally disagree with the the “EX-RBI” guys assessment.

  • arun

    PP is not screwing anyone. they just have to follow the rules set by RBI. again dont complain RBI too.It”s how a law should be enforced to monitor all sorts of money transfers in our country.Please edit first few lines of your post.

  • Ravi

    so what you think ..they will also block skype because it allows free calls and our politicians will make a rule that they need to pay taxes ..India Really sucks!!! They don’t care about trillions of money that is transferred through hawala in foreign banks..RBI never looked that ..

  • I am a safe ePayments Motivator. And I strongly believe Safe ePayments have the potential to transform our country.

    I have spent considerable time, in going through the comments.
    This is what I understand

    01) Majority of the comments have been posted by freelancers
    02) They believe that because of Paypal, they are able to earn money.
    03) Because of RBI rules, the freelance work would move to other countries

    In my opinion, because of RBI
    a) their money is safe
    b) the income generation of freelancers is on the increase.

    Just remember the American Financial crisis did not affect India much. This is because of the RBI rules.

    What would you prefer?
    Steady safe income


    Unsteady single shot income.

  • Syam.S

    Kind attention: Paypal Lovers,
    RBI has raised this issue before one year. I agree that if RBI has some problem with PayPal it is must be concerned directly with our country’s economic policies. With PayPal many people evade taxes and that is which pinching Indian Govt. Many People who are earning more than 1000Dollars per month of which 20% must be paid as per latest IT Slabs.

    Last year even Japan had this Problems and they banned

    This is a major issue which India is facing . The Options left for Indian Govt are either we have to bow down before pay pal (like we did last year for Nuclear agreement) or we have to make them agree with RBI Policies.
    This is the fate of India we will always ” wipe the shoes of Americans(Govt & Companies)”.

    Who said India is not ruled by forigners.

    “Don’t Trust Anyone”.Get your sleeves up against them and find your own ways to get paid over any other medium that serves better, communicates better and keep them in plenty. If one fails other should work out.There are lot more payment options left, like 2checkout.com , Google checkout, alert pay etc…….

  • Mihir

    I don’t agree with paying interest and acting as bank stuff.

    1) Personal payments are already blocked for Indians. So all payments are commercial payments, which means business.
    2) No Indian bank pays interest in current account.

    So I totally disagree with this point.

  • John

    Let the RBI make any rule it wants.

    But why doesn’t RBI come up with an alternative for Paypal or a solution for all the freelancers who are in trouble?

    Babus love making rules but provide no easy alternatives for the common man.

  • John

    Nice conversation however I wonder why words like F*, S* were used in your conversation with an ex-RBI employee?

    What do you want to prove using stupid slang in your post? This is really not a smart and professional way to deal with topics like this.

  • you’re full of it

    I’m pretty sure you guys don’t have a clue what you’re talking about!

  • It is disgusting to see foreign companies manipulating the system to escape paying income tax and regulations ..