What is a Nodal Account? Meaning, Purpose & Use in Payment Aggregation

Today, digital transactions have a lot of moving parts such as multiple payment methods, aggregator platforms, and accounts, to name a few. Funds have to be isolated to be adequately managed.

The RBI offers nodal accounts for all businesses and financial intermediaries that control fund transfer. These accounts hold funds temporarily and release them as needed. With nodal accounts, keeping funds segregated, streamlining transactions, and building trust and transparency become much easier.

In this article, we’ll explore how nodal accounts make it happen and how any intermediary, from a web shop to a payment aggregator, can benefit from it.

Nodal bank accounts are designed for businesses, e-commerce platforms, and payment gateways that conduct online transactions. Nodal accounts hold funds in place and disburse them as required. The RBI (Reserve Bank of India) has made nodal accounts mandatory for all payment aggregators and gateways.

All online payments involve intermediary parties. These can be marketplaces, payment gateways, aggregators, or service providers. Intermediaries make sure that funds are transferred smoothly between the buyer and the seller. For managing this fund transfer, intermediaries use nodal accounts.

Nodal accounts collect funds from customers, consolidate them in a bank account, and then settle them as needed. They have been made mandatory to increase the transparency and fairness in digital payments.

Nodal accounts work by following three simple steps. The customer will make a purchase, the funds will be held in the nodal bank account for some time, and then settled. Refunds and disputes, if any, will be processed after these core stages.

Payment initiation

The buyer or customer will make a purchase, initiating the payment process. They can use any card or online payment method to do this.

Fund segregation

The funds will be held in the nodal account till certain conditions, like service completion or delivery of goods, are met. 

Settlement

Once those defined criteria are met, the funds from the nodal account are transferred to the seller’s account.

If there are disputes, the customer can be refunded from the nodal account, instead of directly from the seller’s account. This reinforces money segregation, as well as the transparency and compliance that nodal accounts support.

Nodal accounts support various methods of payments, quick reconciliations, offer API integrations, support auditing and compliance, and offer dedicated support to make it all simple. Let’s see how:

Payments and reconciliations

Nodal accounts can support multiple modes of payment like NEFT and IMPS, which help global businesses accept payments easily.

Along with quick payments, nodal accounts can simplify the reporting and tracking of transactions, improving the efficiency of reconciliations.

Integrations

Nodal accounts tend to come with secure APIs or Application Programming Interfaces. These are tech tools that can make payment initiation, beneficiary registration, API-based payouts, and payment status tracking much easier. 

With strong integrations, marketplaces and intermediaries don’t need to intervene for any of these steps manually.

Compliance

Nodal accounts need to adhere to RBI guidelines, as we will discover in the next section. Nodal account audits have to be submitted to the Department of Payment and Settlement Systems every quarter. Compliance with these guidelines can simplify compliance with other frameworks as well.

Support

The providers of nodal accounts will offer support and advisory services. Intermediaries can use these to resolve any operational issues quickly.

RBI’s leverage over digital transactions comes from the Payment and Settlement Systems Act, 2007. The RBI lays out guidelines for nodal accounts and how they are managed. These include defined settlement times, the way funds are to be segregated, rules on interest earnings, and the types of transactions that nodal accounts apply to.

Settlement timeline

When funds are collected in a nodal account, they have to be transferred to the seller within a fixed timeframe. This is usually within 2-3 days of the date of transaction completion – also referred to as T+2 / T+3 settlement. This guideline makes certain that the seller has sufficient liquidity to conduct their operations.

Segregation of funds

The primary aim of nodal accounts is to put a barrier between customer money and a company’s money. Nodal account balances, thus, have to be kept separate from an intermediary’s operating funds. 

Nodal accounts are internal bank accounts, so they cannot be operated by the intermediary directly. They are especially handy for payment aggregators, which process multiple payment methods in one go. The benefits are twofold: it increases transparency, and it prevents the misuse of customer money.

Interest

According to the RBI, nodal accounts cannot accrue interest. This prevents unnecessary fund-holding before settlement.

Special use cases

Nodal accounts have to be used for certain, designated transactions. For example, the funds in a nodal account can be used for refunds for failed transactions, or payments to various vendors, or other transactions with pre-determined terms and conditions. This gives the RBI oversight over all the ongoing transactions.

To find out more, consider the following guide on RBI’s rules for nodal accounts: Nodal Account RBI Guidelines PDF

Nodal accounts offer benefits to both merchants creating the account and customers doing business with them. Let’s see how:

For Businesses:

• Stronger security: Keeping customer payments separate from business funds can reduce the risk of fraud. It can also reduce the risk of customer money being misused for other purposes.

• Transparency: Nodal accounts promote transparency by design, since fund segregation and trust preservation go hand in hand. Nodal accounts make it easier to build trust.

• Compliance: Nodal accounts keep businesses in line with RBI rules. Compliance with RBI guidelines and other major payment frameworks, audit & regulatory reporting becomes simplified and streamlined.

For Customers:

• Peace of mind: Funds are held safely in a separate account until the transaction is complete, giving customers confidence when they make payments online.

• Lower fraud risk: Funds are only released once transactions are successfully completed, which reduces the likelihood of fraud.

• Transparency: When customers see that payments are being handled according to clear guidelines, they can trust online transactions and the digital payment ecosystem more.

Nodal accounts are used by intermediary parties in the digital payments space, like e-commerce platforms, finance and insurance providers, payment gateways, and payment aggregators. Here’s how they use nodal accounts for their needs:

Ecommerce

Today, e-commerce platforms (Amazon, Flipkart and others) handle payments for thousands, if not millions, of sellers. To collect payments securely, hold them, and settle in a timely manner, these platforms use nodal accounts.

Finance and insurance

Nodal accounts are often used by financial institutions when issuing loans and insurance policies. They’re useful in this case because all funds can be tracked easily, in isolation from the company’s money itself.  Aggregators get to instantly settle money with insurance providers.

Payment aggregators

Payment aggregators and gateways are a large user base for nodal accounts too. These platforms are managing large volumes of funds across several transactions through nodal accounts. It makes them more trustworthy, compliant, transparent, and lowers their risk for fraud.

Nodal, escrow, and current accounts are commonly found in business banking. Nodal accounts are RBI-mandated, transparency-promoting account types. Escrows are oriented towards contractual transactions, while current accounts are a standard business banking option. Let’s look at each nodal vs escrow vs current account here:

Any business or company that operates digitally and enables fund transfer is an intermediary. All intermediaries – like e-commerce platforms, payment gateways, financial service aggregators, travel platforms, or even ride-hailing services- can open a nodal account. Smaller sellers and businesses may not need nodal accounts at all.

Intermediaries often open a current and nodal bank account together for operational efficiency.

To open a nodal account, you need to research providers, select the one suited for your needs, provide the required documents in the application process, activate it, and integrate it into your existing digital payment ecosystem. Let’s look at the workflow in detail here:

1.Pick a provider

To begin the process, research and look for a nodal account provider that meets your business needs – strong compliance, flexibility, extensive support, etc.

2.Prepare documents for application

Once you have selected a provider, look through their application form. Prepare the required documents, including business registration data, proof of intermediary status, KYC details, and financial statements. Contact the provider if you have any uncertainties or lack of clarity.

3.Review agreement

Check the terms of the account once again. Nodal accounts will come with varying fees, transaction limits, settlement times, and dispute policies, especially for international transactions; make sure the agreement aligns with how your business operates.

4.Activate, integrate

Once your nodal account application has been approved, it can be activated and connected with your existing payment system, ERP tools, accounting software, etc. An integrated ecosystem is great for keeping all financial data consolidated and traceable.

5.Get support

Train your staff on what is nodal account, how it works, and what features it offers. If you need it, providers will offer support and advisory guidance on nodal accounts and related operations.

6.Auditing for nodal accounts

A last but essential step is to stay audit-ready. Auditing your nodal account is a compliance requirement under RBI guidelines. Keeping track of all transactions, reconciling on time, reporting periodically and conducting independent audits are the best nodal account practices to follow.

Tackling invoicing, reconciliations, and multiple payment streams across different currencies can become increasingly challenging.

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