Reserve Bank of India’s rules for payment security

Digital payment usage in India has seen a rise over the past few years, offering convenience to users and unprecedented opportunities to banks and fintech. However, this growth has also cybercriminals who exploit gaps in basic authentication systems particularly those relying on SMS One-Time Passwords (OTPs) or incomplete biometric checks.

In response, the Reserve Bank of India (RBI) has taken decisive action to enhance the safety of digital transactions. Its guidelines emphasize additional factors of authentication, real-time alerts, and a risk-based approach to securing online payments. By tightening compliance requirements for banks and fintech, the RBI aims to bring uniformity in security protocols and give consumers the confidence to engage in digital transactions without fear of fraud.

In this blog post, we are going to answer the following questions:

1. What are the key RBI guidelines, and how can financial institutions comply with them effectively?
2. What are the limitations of current authentication methods, and how can multi-factor authentication improve security?
3. How can financial institutions implement risk-based controls and real-time fraud detection to enhance compliance and reduce fraud risks?

Rather than simply issuing stricter rules, the RBI is striving to create a more transparent, consumer-centric framework. The mandates focus on:

• Reducing Unauthorized Activities: Strengthening authentication mechanisms to deter , SIM swapping and other common exploits.

• Streamlining Compliance: Encouraging financial institutions to adopt uniform security standards for a more consistent experience across the sector.

• Building Trust: Ensuring customers feel protected as they perform a growing volume of online transactions, thereby fueling India’s digital economy.

Historically, many financial institutions in India have relied on SMS OTPs due to their ease of deployment and compatibility across different device types and regions. This method rose to prominence because most mobile users can instantly receive text messages, making OTP-based authentication appear convenient.

However, the same simplicity that made SMS OTPs attractive has now become the problem. Numerous fraud cases have revealed how cybercriminals exploit vulnerabilities such as SIM swapping, phishing links and malware-based interception of SMS messages. These incidents underscore the urgency to move beyond SMS OTPs and explore more advanced approaches to safeguarding digital payments.

The Aadhaar-enabled Payment System (AePS), while revolutionary in extending banking services to a wider population, lacks two-factor authentication (2FA). Its reliance on basic biometric checks has proven insufficient against increasingly inventive fraud tactics. Fraudsters have used cloned or “dummy” fingerprints to circumvent AePS authentication, enabling unauthorized withdrawals and transfers. This lapse, combined with the system’s rapid adoption, has led to a significant rise in AePS-related scams in recent years.

uthentication factors into three broad domains knowledge, possession, and inherence. Financial institutions are encouraged to mix and match these, ensuring robust verification without compromising user convenience.

• Knowledge-Based Factors: Typically revolve around passwords or PINs.

• Possession-Based Factors: Include physical or software-based tokens that generate dynamic codes.

• Inherence-Based Factors: Rely on unique biological traits to validate user identity.

The RBI’s guidelines prescribe that institutions use two-factor authentication for most digital transactions, which often means layering a user’s password (knowledge-based) with either a token or a biometric check (possession-based or inherence-based). This move aims to deter fraudsters who might gain access to one factor but not the other.

By insisting on dynamic authentication where authorization codes are generated instantly for each transaction the RBI minimizes the possibility of hackers recycling older codes. It also adds a time-sensitive layer, forcing malicious actors to act within a narrow window if they somehow intercept the code.

Institutions aren’t expected to apply the same rigidity to every transaction. Instead, the RBI supports a risk-based model in which financial organizations can heighten authentication measures for large, suspicious, or otherwise high-risk payments. Conversely, lower-risk transactions such as certain contactless card payments may have fewer checks.

While the RBI’s directives cover most digital transactions, it does permit certain exemptions. Small-value contactless card payments up to INR 5,000, for instance, are spared from stringent 2FA to maintain quick tap-and-go convenience. E-mandates for recurring payments also get a partial pass, streamlining subscription services for both providers and customers.

Another crucial element is the requirement for financial institutions to send real-time alerts or notifications. By informing customers of successful (and sometimes even declined) transactions, the RBI ensures that unusual activity is caught by the user, limiting the window for fraudulent transactions.

Recurring transactions above INR 15,000 now necessitate additional authentication steps. Moreover, banks must send a reminder notification at least 24 hours prior to the charge, offering the customer an opportunity to cancel if the payment is no longer authorized. These mandates protect users against stealthy recurring charges and allow them better control over their finances.

Adding phishing-resistant passkeys can bring a great level of security to your digital payment environment. Passkeys rely on publickey cryptography and eliminate the need for users to manually enter codes or passwords, reducing the risk of interception or misuse. Unlike traditional MFA methods that often depend on SMS OTPs, passkeys are resistant to phishing attacks because the private key never leaves the user’s device, and each authentication request is tied to a specific domain. This approach is not only safer but also more convenient for customers, helping institutions strike the right balance between security and user experience.

Not all transactions carry the same level of risk. By employing analytics and adaptive authentication, banks can impose additional checks when they detect unusual spending patterns or heightened risk, such as large sum transfers or transactions from unfamiliar locations.

Fraudulent actors frequently target the onboarding phase to open accounts using forged documents or stolen identities. Implementing advanced identity verification tools during account creation prevents such loopholes from the start.

Simple notifications stating that a transaction has occurred might not be enough. Providing details such as merchant name, transaction amount, and location can help customers quickly spot anomalies. Coupling these alerts with easy-to-access dispute resolution channels further secures the ecosystem.

Continuous software patching and employee training are vital. Cyberthreats evolve quickly, and a well-informed workforce can often be the difference between successfully thwarting an attack and unwittingly aiding one.

Beyond strategic planning, implementing the right technologies can dramatically simplify RBI guideline adherence:

• Passkey Infrastructure and Phishing-Resistant Authentication: By implementing passkeys, banks and fintech firms offer customers a credential bound to their device and secured through robust public key cryptography. This method minimizes human error and protects against phishing attacks, as users never have to manually input or share secret tokens.

• Push-Based Approvals: In-app push notifications allow customers to confirm or deny transactions instantly, mitigating the risk of SMS OTP theft or interception.

• Tokenization and Dynamic Linking: Transforming sensitive financial details into tokens that are unique per transaction reduces exposure if systems are breached.

Financial institutions that align with these technologies effectively strike a balance between stringent security protocols and user-friendly processes.

While the RBI’s new mandates introduce stricter controls, they ultimately pave add to a more secure, transparent, and consumer-friendly digital payment environment. By integrating multi-factor authentication, issuing real-time alerts, and employing risk-based strategies, banks and fintech firms can dramatically reduce fraudulent activities. The key to success lies in adopting solutions that are not just compliant but also scalable and intuitive.

Institutions that move quickly to implement these guidelines can position themselves as leaders in secure digital transactions, earning customer loyalty and demonstrating a serious commitment to safeguarding financial assets. As India’s digital economy continues to expand, those who proactively strengthen their security posture will likely emerge as the most trusted and resilient players in the market.