Simplified: Nodal Accounts

Getting overwhelmed with the choice of accounts you can open for your online business? We try to simplify understanding one of them, a nodal account. Let's find out if you are an intermediary and need one.

What is a nodal account and who needs to open one?

Nodal Accounts are special purpose accounts which are created to ensure that interests of the customers and merchants are taken care of when ‘intermediaries’ are involved.

Intermediaries are defined by the Reserve Bank of India (RBI) as all entities that collect money from customers, for the goods and services availed by them, and subsequently transfer the money to merchants in order to fulfil the obligations of the paying customers.

So, you are an intermediary if

  • You collect money online from customers on behalf of your vendors.
  • You only source the products and do not actually manufacturing them.
  • You do not fully pay for the products or stock inventory of the products.

RBI has mandated that all the intermediaries, defined as such, would be required to open nodal accounts. The only exceptions to this requirement are all entities that facilitate immediate delivery of goods/services on completion of payment by the customer. Examples of this include entities that sell movie tickets, flight tickets etc.

How do you set up a nodal account?

Businesses can open a nodal account with any authorized bank. The criteria to open a nodal account varies across banks and depends on transaction volumes, category of business, reputation, capital investment etc.
The three main steps are:

  • Choose an authorized bank that provides nodal account services
  • Submit all the documents that suffice the know your customer (KYC) criteria
  • Sign the nodal account agreement after investigating segregation of
    responsibilities and detailed terms & conditions

Note:
Theoretically, a nodal account is an internal bank account and the funds do not belong to the intermediary that opened it. However, a nodal account is opened together with a current account to receive the commissions, fees etc. and hence KYC requirements need to be fulfilled.

How does a nodal account work?

Below are the transactions that can happen on nodal accounts:

Credits

  • Payments from customers towards purchase of goods/services
  • Transfers from other banks per agreement into the account, if this account is the nodal bank account for the intermediary
  • Transfers from merchants/service providers representing refunds for
    failed/disputed transactions

Debits

  • Payments to various merchants/service providers
  • Transfers to other banks as per pre-determined agreement into the account,
    if that account is the nodal bank account for the intermediary
  • Transfers to customers representing refunds for failed/disputed
    transactions.
  • Commissions to the intermediaries. These amounts shall be at predetermined
    rates/frequency
Transaction flow through nodal accounts

What is a settlement cycle?

The RBI guidelines make it necessary for the nodal accounts to transfer funds to the beneficiaries with minimum delays in order to increase the efficiency of transactions. The settlement cycle is as follows:

  • All payments to merchants which do not involve transfer of funds to nodal
    banks shall be effected within a maximum of T+2 settlement cycle (where T
    is defined as the day of intimation regarding the completion of
    transaction).
  • All payments to merchants involving nodal banks shall be effected within a
    maximum of T+3 settlement cycle.

What are the audit requirements for a nodal account?

Nodal accounts are required to be audited on a quarterly basis and the audit reports, confirming that RBI guidelines have been met, have to be submitted to the Department of Payment and Settlement System, RBI. These audits have to be conducted by a third-party auditor who is appointed by the intermediary. Such an auditor should not be involved in regular accounting for the intermediary. The audits have to address whether the payee wise transferred amount tallies with the closing balance. Exceptions can be made for frauds, refunds, chargebacks etc.

How does Recko help operate nodal accounts efficiently?

A significant effort is required for businesses to operate a nodal account in order to be compliant with RBI guidelines. It is recommended that businesses maintain the nodal account transactions in harmony with the internal order system to ensure proper control over money flows.

Recko helps you streamline the following processes to operate and maintain nodal accounts efficiently:

Reconciliation:
The collections received from multiple parties should be reconciled with the internal order system. This helps track every expectation from the actual money inflow. An automated tool is needed to perform this process efficiently

Commission Calculation:
To be compliant with RBI guidelines, the commission, fees, margin calculations etc. should be predetermined. The complexity of agreements between marketplaces and sellers is increasing & hence there is a need to automate this process

Payouts:
Marketplaces need to ensure a comprehensive payout calculation & scheduling that is compliant with RBI guidelines

Find out more at recko.io

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