Read This Before Making Your Next Online Payment

In an age when India’s digital payments ecosystem is expanding at breakneck speed, the Reserve Bank of India (RBI) has announced new regulations to enforce a more stringent authentication regime for such transactions. 

The move, intended to safeguard users and strengthen trust in the digital economy, mandates multi-factor (at least two factors) authentication for digital payments, with at least one factor being dynamic (i.e., unique to each transaction). 

This shift signals the end of overreliance on SMS-based OTPs and opens the door to newer, more secure mechanisms like biometrics, device tokens, and risk-based checks.

This article delves into the rationale behind the RBI’s announcement (drawing on the The Hindu article you shared), the key changes in the directive, potential impacts across stakeholders, implementation challenges, and the future trajectory of secure payments in India. We conclude with strategic recommendations and reflections on the broader consequences of this regulatory pivot.

Rationale for Tougher Authentication

The decision by RBI is not sudden; rather, it stems from mounting pressures and evolving risks in India’s digital payments landscape.

First, fraud and security incidents have become more sophisticated. OTP interception, SIM swap attacks, spoofing, phishing, and large-scale credential leaks have demonstrated the vulnerabilities inherent in static, SMS-based one-time passwords. Authorities and industry stakeholders have long flagged that OTPs alone, especially over SMS, are no longer adequate.

Second, India is a global leader in transaction volume, with the Unified Payments Interface (UPI) ecosystem playing a prominent role. According to estimates, UPI now handles tens of billions of transactions monthly, marking India as a global instant payments leader. With such scale, even low-percentage fraud loss can translate into significant absolute value.

Third, in comparison with global norms, many advanced digital economies have already adopted stronger authentication models (e.g., device-based tokens, biometrics, behavioural analytics), pushing Indian regulators to catch up. 

As one analysis notes, the RBI’s new framework aligns with global best practices by emphasizing “strong MFA” and moving away from the vulnerable “OTP monoculture.”

Finally, customer trust and reputation risk factor heavily. If users lose confidence in the safety of digital payments, adoption, usage, and innovation could suffer. The RBI’s move can be seen as a preemptive strengthening of the regulatory guardrails to preserve the integrity of India’s payments ecosystem.

Thus, the impetus is both reactive (responding to rising fraud) and proactive (future-proofing the system as volumes grow).

Key Changes in RBI’s New Direction (2025)

Here we catalogue the major shifts the RBI is mandating under the Authentication Mechanisms for Digital Payment Transactions Directions, 2025 and related drafts and commentaries.

1. Mandatory Two-Factor Authentication (2FA) for All Digital Payments

Beginning 1 April 2026, all domestic digital transactions must be validated via at least two factors of authentication, unless specifically exempted. One of the factors must be dynamic: that is, it should be unique for each transaction or regenerated per use.

Importantly, RBI has clarified that SMS-based OTPs will not be banned outright; they may continue to form one factor, provided the other factor is distinct.

2. Flexibility in Authentication Methods

RBI is not prescribing a fixed technology. Instead, banks and payment providers may choose from a palette of alternatives, including:

• Biometrics (fingerprint, facial recognition, iris, etc.)
   
• Device-based tokens or native device authentication (e.g., secure enclave, passkeys)
   
• Passphrases, passwords, or PINs (as the “something you know” element)
   
• Behavioural or contextual risk-based checks (e.g., geolocation, device fingerprinting, transaction history)
   

This flexibility is meant to encourage innovation, interoperability, and adoption of newer, stronger methods without locking the industry into one approach.

3. Risk-Based Authentication Beyond 2FA

The new framework allows additional risk-based checks beyond the mandatory two factors. If a transaction is deemed high-risk (based on contextual signals like unusual device, location, timing, or user behavior), issuers may trigger supplementary verification steps.

For instance, a high-value transaction from a new device could require biometric revalidation or an extra confirmation prompt.

4. Cross-Border, Card-Not-Present (CNP), and Non-Recurring Transactions

One of the more significant tighter controls is over cross-border, non-recurring card-not-present (CNP) transactions. Starting 1 October 2026, card issuers will have to validate an Additional Factor Authentication (AFA) for such transactions when requested by foreign merchants or acquirers.

Additionally, for first-time online card usage internationally, extra authentication may be mandated.

5. Liability and Compensation

Notably, issuers (banks or payment providers) will carry the liability for failures in authentication systems. If authentication lapses or non-compliance leads to user loss, issuers must fully compensate affected customers.

6. Implementation Timeline & Transitional Provisions
 

• 1 April 2026: The core norms for domestic transactions (2FA + dynamic factor) come into force.
   
• 1 October 2026: Stricter controls for cross-border, non-recurring CNP transactions become effective.
   
• Some provisions may have phased compliance deadlines, and industry feedback was solicited on drafts before final issuance.
   

Key Features and Compliance Timeline

Below is a table summarizing the main features of the new RBI authentication directives and their compliance deadlines. This helps clarify how different elements map to different time frames.
 

The table highlights that while the structural shift to 2FA applies broadly from April 2026, added controls—especially around cross-border transactions and issuer liability—are phased to allow industry readiness.

After reviewing the table, we can see that the RBI is rolling out a layered and phased approach: the first wave imposes foundational security norms domestically, while the second wave targets more vulnerable cross-border and card-not-present contexts.

Impacts on Stakeholders

The new directives will reverberate across multiple stakeholder groups. Below is an assessment of how each might be affected:

a) Consumers / End Users
 

• Stronger security & reduced fraud: Users stand to benefit from more robust protection, reducing risks of unauthorized transactions.
   
• Slight friction / inconvenience: Some may perceive additional steps or biometric prompts as friction, especially in low-value or routine payments.
   
• Better recourse: With issuer liability, users have stronger protection and chances for loss recovery.
   

b) Banks and Payment Issuers
 

• Operational and implementation cost: Banks will need to upgrade authentication infrastructure, integrate biometric systems, deploy secure tokens, and build risk engines.
   
• Liability burden: The requirement to compensate for lapses raises financial and reputational stakes.
   
• Innovation opportunity: The flexibility in authentication allows banks to differentiate via smoother, more user-friendly security flows.
   

c) Fintechs, Wallets, Payment Aggregators
 

• Technology integration challenge: Many fintechs rely on off-the-shelf OTP systems; they will need to adapt to varied authentication modalities.
   
• Partnership opportunities: Firms specializing in authentication, biometrics, device security, risk scoring or passkey systems may see new demand.
   
• Interoperability requirement: Since the RBI encourages open access to authentication services across apps, fintechs must ensure compatibility.
   

d) Merchants & E-commerce Platforms
 

• Conversion risk: Additional authentication steps can increase drop-offs at checkout, especially for cross-border buyers.
   
• Need to adapt to AFA protocols: Merchants may need to integrate stronger authentication request mechanisms or support standards set by card issuers.
   

e) Regulators & Oversight Bodies
 

• Compliance oversight: RBI will need to monitor issuer compliance, audit security practices, and adjudicate compensation claims.
   
• Standard-setting role: Regulators may need to issue guidelines on acceptable biometric or token standards, data privacy and interoperability.

Challenges & Risks in Implementation

While the mandate is ambitious and well-intentioned, real-world rollout will not be frictionless. Key challenges include:
 

1. Technology maturity & compatibility
   Not all transactions or user devices may support biometrics, hardware tokens, or passkey systems. Ensuring backward compatibility and fallback options will be critical.
    
2. User experience trade-offs
   Additional security steps risk hurting convenience. Striking a balance between usability and security will be essential, especially for smaller-value payments.
    
3. Fraudsters adapting & escalation
   Cybercriminals often evolve. New attack vectors (e.g., deepfakes, sensor spoofing, side-channel attacks) may emerge, demanding continuous strengthening.
    
4. Cost burden on smaller banks / fintechs
    

Global Comparisons and Lessons

It’s instructive to compare India’s move with global precedents:

• In the European Union, PSD2 / Strong Customer Authentication (SCA) mandates that e-commerce payments use two-factor authentication, combining elements from “knowledge, possession, and inherence.”
   
• The United States and parts of Asia are seeing increased adoption of tokenization, biometric authentication, passkeys, and behavioural analytics rather than traditional OTPs.
   
• Some countries have piloted silent network authentication (SNA), where transaction verification happens without user intervention in the background. Analysts have pointed out that India's transition reflects a similar shift away from purely SMS-based systems.
   

The global trajectory is toward frictionless but resilient authentication, invisible to users most of the time, but strong under the hood. India’s regulation is aligning with this direction.

Recommendations & Strategic Considerations

To ensure smooth adoption and maximize benefits, the following strategies should be considered:

1. Phased user education and awareness
   Roll out awareness campaigns, guidelines, and demo flows so users understand why and how the changes impact them.
    
2. Graceful fallback and hybrid systems
   For legacy devices or low-risk transactions, fallback to existing OTP or app-based credentials while pushing adoption of newer methods.
    
3. Strong interoperability & open APIs
   Encourage open authentication services that work across banks, wallets, fintechs, so that innovations scale rather than fragment.
    
4. Third-party partnerships
   Banks and fintechs can partner with biometric vendors, risk-engine providers, and security firms to accelerate adoption. 

Conclusion

India’s shift to tougher authentication for digital payments, mandating at least two factors, with one being dynamic, is a landmark regulatory move. As underscored by the The Hindu article you shared and reinforced by subsequent analyses, the intention is clear: to bolster trust, protect users, and future-proof the payments ecosystem in the face of evolving threats.

The approach is not merely punitive enforcement but a forward-looking framework, one that emphasizes flexibility, risk sensitivity, and technological neutrality. While the implementation will present challenges, the benefits, reduced fraud, stronger user confidence, and an infrastructure ready for next-generation payments, are profoundly important.

Over time, we can expect India’s digital payments to grow not just in scale, but in robustness. The regulated environment will encourage innovation in authentication: biometrics, passkeys, device tokens, and behavioural risk models will likely become mainstream. However, success will depend on synergies: between regulators, banks, fintechs, security vendors, and consumers.

In closing, this is a watershed moment in India’s financial technology journey. The RBI’s mandate is a bold step, one that, if executed well, could cement India’s position not only as a volume leader but also as a global standard-bearer in secure digital payments.