RBI To Introduce New Payment Authentication Rules Beyond OTP

India’s digital payments ecosystem is undergoing a major transformation. From April 1, 2026, the Reserve Bank of India (RBI) will mandate stricter authentication protocols for every digital transaction, moving beyond the ubiquitous SMS OTP model. The shift is designed to bolster security, reduce fraud, and usher in more robust, flexible methods of user verification. 

In this article, we examine the origins of this change, key elements of the new framework, stakeholder implications, challenges ahead, and the likely impact on users, banks, and fintechs.

Why the Change? The Case Against SMS OTP

Over the years, SMS-based one-time passwords (OTPs) have become the default second factor of authentication in India’s payments ecosystem. They are simple, widely adopted, and easy to implement. However, several vulnerabilities and constraints have made reliance on them increasingly unsustainable:
 

1. Security vulnerabilities
   SMS as a channel is susceptible to SS7 protocol attacks, SIM swap scams, and malware that can intercept or read incoming messages. Attackers have exploited such loopholes to hijack or divert OTPs.
    
2. Reliability issues
   Users may not receive OTPs in remote locations, in cases of network congestion, or while traveling. This hampers smooth execution of transactions.
    
3. Scalability and cost
   Sending OTPs incurs recurring costs for banks and payment providers, especially as transaction volumes soar. Over time, this becomes a nontrivial operational expense.
    
4. Regulatory and international trends
   Globally, regulatory bodies are pushing for multi-factor, dynamic authentication methods rather than static or easily intercepted approaches. The RBI’s move aligns India with global best practices in payment security.
    

Because of these concerns, the RBI has decided to evolve the digital payments authentication regime, making it future-proof, risk-sensitive, and adaptable.

Key Features of the New Authentication Framework

The RBI has unveiled a comprehensive set of directions titled Authentication Mechanisms for Digital Payment Transactions, 2025, which will take effect from April 1, 2026. The major pillars of this framework include:

Two-Factor Authentication (2FA) as Norm

Every domestic digital payment must now be authenticated using at least two distinct factors, except in specified exempted cases. At least one of these factors must be dynamic—i.e., generated uniquely for each transaction.

The factors may be drawn from:
 

• Something you know (e.g., password, PIN, passphrase)
   
• Something you have (e.g., device token, software token, card token)
   
• Something you are (e.g., fingerprint, facial recognition, biometric identity)
   

The directions clarify that using two factors from the same category (for example, two passwords) will not be permitted. And the compromise of one factor should not jeopardize the integrity of the other.

Risk-Based or Enhanced Checks

While two-factor authentication is the baseline, issuers may apply risk-based checks—that is, additional authentication or validation depending on transaction context (amount, location, behavioral profile). These “step-up” checks can be triggered for high-risk transactions beyond the basic two factors.

International and Cross-Border Transactions

For non-recurring, cross-border, card-not-present (CNP) transactions, card issuers must validate an Additional Factor of Authentication (AFA) if requested by the foreign merchant or acquirer. This ensures that overseas merchants seeking stronger validation can require it.
Moreover, issuers should register their bank identification numbers (BINs) for AFA validation and maintain a risk-based mechanism to handle such transactions.

Exemptions & Carve-Outs

Certain low-risk or small-value transactions are exempt from the strict two-factor requirement. These include:
 

• Contactless “card present” transactions up to a small threshold (e.g. ₹5,000)
   
• Recurring e-mandates
   
• Certain prepaid instruments
   
• Low-value offline digital payments
   

These carve-outs are meant to maintain convenience in micro-payments and everyday use cases.

Liability, Compliance & Access

Issuers and payment system providers will be held fully liable for losses arising from failure in authentication safeguards. They must also ensure that all permitted authentication methods (e.g. biometric, passcode, token) are accessible on equal terms to all regulated entities.

Furthermore, the direction mandates interoperability of authentication and tokenization services across platforms, ensuring that no single provider has monopolistic control over the newer authentication technology.

Comparison of Current vs. New Authentication Regime

Before diving into implications, here’s a side-by-side comparison of the existing and forthcoming authentication frameworks.

Below is a table summarizing key differences:
 

Summary: This table clearly shows how the new regime increases security, flexibility, and accountability. The shift moves from a simplistic, SMS-centric model to a sophisticated, multi-modal system with risk considerations.

Implications & Challenges for Stakeholders

For Banks & Card Issuers

Banks and card issuers will need to overhaul their authentication infrastructure. They must support multiple verification modalities (biometric, device tokens, software tokens) and integrate risk models to dynamically evaluate transactions. The requirement to assume liability for any breach raises the stakes for rigorous cybersecurity, audit, and compliance capabilities.

This change also necessitates investment in technology, partnerships with device manufacturers, and staff training. For smaller banks or those operating in rural areas, the burden could be more pronounced.

For Fintechs, Payment Aggregators, and Merchants

Fintech players and aggregators will need to ensure their platforms support the new authentication methods and maintain seamless user experiences. Merchants dealing with cross-border transactions may also need to coordinate with acquirers and issuers to facilitate AFA when requested.

Merchants must also comply with tokenization standards (where actual card data is replaced by device-specific “tokens”) and back-end interoperability to support the multi-modal authentication ecosystem.

For Consumers & End Users

Users may need to adapt to new modes of authentication—such as face or fingerprint scans, device-based tokens, or passphrases—depending on the app or bank. While this may initially introduce friction, the added security and reduction in fraud attempts should benefit them in the long run. Users will also enjoy greater flexibility, as they won’t be forced to rely solely on receiving an SMS OTP.

Broader Ecosystem & Innovation

This regulatory push acts as a catalyst for innovation in payment security technologies in India. Solutions based on biometrics, cryptographic tokens, behavioral analytics, and device attestation will gain traction. The ecosystem must evolve in lockstep to maintain ease, speed, and trust.

There will also be greater demand for partnerships between banks, fintechs, device OEMs, and identity service providers to deliver seamless, secure authentication experiences.

Risks, Roadblocks & Mitigation Strategies

While the new regime is forward-looking, several challenges will need careful navigation:
 

1. User experience friction
   Introducing new factors may slow down transactions or confuse less tech-savvy users. Banks will need to design seamless fallback flows and clear user education.
    
2. Device and coverage constraints
   Many users still rely on basic phones or lack compatible biometric hardware. Ensuring backward compatibility or alternate authentication paths will be essential.
    
3. Privacy and data protection risks
   Biometric or device-based systems collect sensitive data. Strict privacy safeguards, encryption, and alignment with India’s data protection regulations will be necessary.
    
4. Implementation lag & legacy systems

To mitigate these, phased rollout, strong audit and oversight, comprehensive testing, fallback mechanisms, and user education campaigns will be key.

Projected Impact & Strategic Significance

The new authentication regime is expected to bring significant benefits:
 

• Substantial reduction in digital fraud
  With more robust authentication, interception or misuse of insecure OTPs will decline.
   
• Greater trust & confidence
  Users, domestic and international merchants, and banks will have greater assurance in transaction security—potentially boosting digital payments adoption further.
   
• Acceleration of digital innovation
  Biometric authentication systems, cryptographic token services, and context-aware risk models will see deeper adoption across the ecosystem.
   
• Global alignment
  India’s shift places it closer to best practices globally and may encourage cross-border acceptance and interoperability.

However, the true impact will depend on careful execution, industry coordination, and user adaptability.

Conclusion

The RBI’s decision to phase out reliance on SMS OTPs as the primary validation mechanism and shift to a robust, multi-factor, risk-sensitive authentication regime marks a pivotal moment in India’s digital payments journey. 

While the transition presents operational, technical, and user experience challenges, the move is timely and essential in an era of rising cyber-risk and evolving fraud techniques. If implemented thoughtfully and inclusively, the new regime promises to strengthen trust, enhance security, and catalyze deeper innovation across India’s payments ecosystem.