This is being done through disputes lodged with global card network Visa. The action is one of the first in the industry, marking a growing discomfort among banks over alleged merchant category misclassification by fintech companies, eroding their interchange income over the past one year.
“Issuing banks lost out on the interchange income because the merchant tags were misclassified into lower interchange categories. ICICI Bank raised a dispute Visa and they (Visa) have asked companies to revert ₹100 crore to the issuing bank,” a source said. The Reserve Bank of India (RBI) has been scrutinising payment fintechs over this matter since at least the year 2025. Business Standard first reported this last year.
Sources said the banking regulator had stepped up the supervision and scrutiny of fintech payment aggregators over such compliance-related matters during routine audits.
An email to ICICI Bank and Visa on the matter did not get a response till the time of going to press. Misclassification involves placing retail merchants in lower-interchange categories such as utilities, enabling fintech firms to offer merchants lower payment-processing rates while scooping out higher margins.
However, issuing banks lose out on their share of interchange income. A second source in the industry said the practice was not new but described it as “unethical”, stating that compliance lapses by a handful of new-age payment aggregators were damaging the credibility of the digital-payment sector and weighing on investor confidence.
Sources indicated other banks could soon follow suit, potentially widening the liability burden on fintech companies.
The regulator too has intensified its oversight of such classification practices.
These liabilities come at a time when fintech firms are under pressure to justify revenues and valuations even as the dominant payments rail, Unified Payments Interface (UPI), continues to operate without a merchant discount rate (MDR) or transaction fees.
For instance, a source cited the case of an early-stage Mumbai-based payment aggregator that is now facing liabilities of a similar scale as part of the ongoing dispute. It has revenues of ₹4 crore.
The scale of the practice, and the extent to which it may have contributed to revenue losses, appears to have come into sharper focus only recently.
“If I route a retail merchant category code (MCC) to discounted categories like education, my cost goes down by 1 per cent straightaway. But, for a card issuer, they could have seen margins contracting and could have flagged it to one of the card networks. Later, the schemes would have detected misuse, prompting action,” a third source said.
An MCC refers to a four-digit code that classifies merchants on the type of goods and services they offer and can be usually used for purposes such as tax reporting and interchange promotion.
A person engaged with a network said networks had limited visibility over misclassification by fintech companies and that it was a challenge waiting to be sorted out at the end of the payment aggregator and the acquiring bank.
“We cannot validate it. I’m sure our issuers also cannot do so. It is purely an acquiring problem,” the person said.
An acquiring bank enables merchants to accept and process payments, and licensed payment aggregators act as intermediaries that facilitate such transactions through partner banks.
“We (networks) are trying to come together and put something together to address this issue. It is not going to get resolved soon. It takes time, maybe three or four more years,” the person added.
Detecting such misclassification is not easy, sources added, explaining that networks only approach fintechs once the issue is flagged by a stakeholder within the ecosystem.
Following this, payment aggregators are given a chance to justify their move, especially in a market that has over 1,000 MCCs.
“We keep getting queries on MCC classification and we have to keep justifying. If a chargeback does come through, it then gets resolved,” a fourth source added.
