What is a Nodal Account? RBI Rules for Payment Settlements

Highlights:

• Understand nodal accounts as RBI-regulated bank accounts used by payment intermediaries to hold customer funds before merchant settlements
• Learn the difference between nodal accounts (2009 framework) and escrow accounts (2020 Payment Aggregator Guidelines)
• Discover how T+2 and T+3 settlement cycles affect your business cash flow and working capital
• Clarify who needs nodal accounts—only RBI-authorised intermediaries, not regular merchants

Introduction

Running an online aggregator platform and unsure whether you need a nodal account? Here’s a simple explanation of its relevance for your business.

With the rapid growth of digital platforms and aggregator-based business models, the RBI has introduced nodal accounts for online intermediaries to ensure secure and timely handling of payments.

Your business may be considered an intermediary, and therefore may require a nodal account, if any of the following apply:

• You collect payments from customers on behalf of vendors
• You source products or services, but are not the manufacturer or creator
• You do not fully pay upfront for the products or services yourself

In such cases, a nodal account helps maintain transparency, safeguards stakeholder interests, and supports regulatory compliance for smoother payment operations.

What is a Nodal Account?

A nodal account is a type of current account used by intermediaries to hold funds on behalf of customers and vendors, ensuring that payouts are processed securely and promptly. It safeguards the interests of both parties by ensuring that the funds do not legally belong to the intermediary at any stage.

The RBI introduced nodal accounts as a regulatory requirement for intermediaries such as aggregators, e-commerce platforms, and payment gateways to promote transparency and secure payment handling.

How does a Nodal Account Work?

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.

What are RBI Guidelines For Nodal Accounts?

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.

Nodal vs Escrow vs Current Account: Understanding the Differences

Here is a clear comparison to understand how these accounts differ:

Key distinction: You receive settlements from the gateway's nodal/escrow account into your business current account. You never directly operate nodal or escrow accounts—only RBI-authorised intermediaries do.

How to Open a Nodal Account?

Now that you’re familiar with the concept and benefits, let’s walk through the steps of how to open a nodal account:

• Research Providers: Begin by researching reputable payment service providers that offer nodal account services. Look for providers with a track record of reliability, security, and regulatory compliance.
• Documentation: Prepare the necessary documentation as per the provider’s requirements. This may include business registration documents, KYC (Know Your Customer) details, and financial statements.
• Application Process: Initiate the application process with your chosen provider. This typically involves filling out an application form and submitting the required documentation for verification.
• Agreement Terms: Review and negotiate the terms of the nodal account agreement with the provider. Pay close attention to fees, transaction limits, dispute resolution mechanisms, and other relevant terms.
• Activation and Integration: Upon approval, your nodal account will be activated. Integrate it seamlessly into your existing payment infrastructure, ensuring compatibility with your business processes.
• Training and Support: Familiarise yourself and your team with the functionalities of the nodal account. Seek assistance from the provider for any technical queries or operational assistance.

The Bottom Line for Merchants

Nodal and escrow accounts form the regulatory backbone, ensuring your customer payments reach you safely. Whilst you don't directly manage these accounts, understanding settlement cycles helps you plan working capital and choose payment partners offering optimal timelines. Modern RBI-authorised payment aggregators use escrow accounts with stronger protections than the original nodal framework, a key consideration when evaluating payment solutions for your business.

FAQs

1. What is a nodal account in India?

A nodal account is an RBI-mandated bank account used by payment intermediaries to temporarily hold customer payments before settling with merchants. Banks control the account, not intermediaries, protecting merchant and customer funds through regulated T+2 or T+3 settlement cycles.

2. What is the difference between nodal and escrow accounts?

Nodal accounts (2009 framework) were bank-internal accounts for intermediaries. Escrow accounts (2020 Payment Aggregator Guidelines) are designated payment system accounts with stricter RBI authorisation, fund segregation, and merchant protection under the Payment and Settlement Systems Act, 2007.

3. Who needs a nodal account in India?

Only RBI-authorised intermediaries collecting payments for multiple merchants—marketplaces, payment aggregators, platforms—need nodal or escrow accounts. Regular merchants using payment gateways receive settlements from these accounts, but don't operate them.

4. What are the RBI guidelines for nodal accounts?

RBI's 2009 guidelines mandate nodal accounts for payment intermediaries with T+2 or T+3 settlement cycles. Banks control operations; intermediaries cannot access funds directly. In 2020, RBI shifted authorised payment aggregators to escrow accounts with stricter oversight.

5. How do payment gateways use nodal accounts for settlements?

Payment gateways collect customer payments into their RBI-regulated nodal or escrow account. After transaction confirmation, the gateway instructs the bank to settle merchant funds within T+2 or T+3 days, deducting fees, taxes, and refunds before crediting your bank account.