India’s Digital Payments Get Smarter: RBI Moves Beyond OTP for Safer Transactions in 2026

Instead of relying only on SMS-based one-time passwords (“OTP”) which is the current practice, new rules mandate two-factor authentication (2FA) by allowing technologies like biometrics and device-based verification (a combination of such technologies). Payment providers will also be required to assess each transaction’s risk by adding extra checks for suspicious activities. These changes aim to curb fraudulent activities, protect personal data, and align India’s payment security with global standards, making digital payments safer and more reliable for netizens.

This proposed shift indeed carries substantial implications for consumer privacy, risk management, and robust data protection, particularly as digital transactions become increasingly central to the nation’s financial ecosystem.

The RBI’s new framework mandates two-factor authentication (2FA) for all domestic digital payments but now allows banks, fintech, and payment system providers to choose from a wider array of alternatives for the authentication process. The alternatives are classified under three categories: something the user knows (password, PIN), something the user has (hardware/software tokens, cards), and something the user is (biometrics, including device-native or Aadhaar-based fingerprint and facial recognition).

Critically, at least one authentication factor must be dynamic and transaction specific in nature. This means that for every payment, the method of validation must be unique, which helps prevent replay attacks and increases transaction security. By leveraging alternative mechanisms, the RBI hopes to make the experience more secure and user-friendly and to promote technologies such as biometrics and device-based tokens for better fraud prevention.

A unique feature of the 2026 RBI rules is the adoption of risk-based authentication. Banks and payment providers must evaluate transaction risks using signals like device behavior, geolocation, and historical user patterns. Suspicious transactions, those initiated from new devices or at odd hours, may trigger extra layers of authentication. Routine transactions, by contrast, can proceed with minimal friction, achieving a balance between security and ease of use.

This intelligent, contextual approach means the payment landscape will shift away from ‘one-size-fits-all’ security methods, and toward dynamic protection specifically tailored to the transaction’s risk profile. Industry experts in India have welcomed this move as it aligns India’s payment security with global best practices.

With these changes, the spotlight on data protection grows even more intense. India’s Digital Personal Data Protection Act, 2023 (DPDPA), has made it mandatory for payment system providers to secure sensitive user data, including biometric information. The RBI framework obliges banks to comply with DPDPA’s robust consent, purpose limitation, and data minimization standards.

All transaction data including credentials, timestamps, amounts, and user details are required to be stored within India’s borders, aligning with existing RBI data localization norms. If processed overseas, a copy must be repatriated and stored locally within 24 hours. Such stringent measures prevent unauthorized cross-border access and reinforce India’s sovereignty over payments data.

Further, the RBI enforces mandatory encryption standards, regular security audits, and full forensic access to ensure the privacy and integrity of user data. Companies are compelled to compensate customers fully in case of losses resulting from non-compliance, which raises the stakes for ensuring robust data protection in everyday operations.

By enabling alternatives to SMS based OTP and introducing risk-based controls, the RBI is reshaping authentication to offer greater flexibility, security, and privacy. The move is especially critical as digital payments surge and cyber threats evolve, pushing financial institutions to adopt cutting-edge, privacy-compliant security tools.​​​​​

For consumers, the transition promises less friction and more confidence in the safety of their transactions. For banks and payment service providers, compliance with advanced RBI guidelines and India’s data protection law is no longer optional, but the central pillar of digital trust. As April 2026 approaches, the payments ecosystem must innovate not just to secure transactions, but to safeguard the underlying personal data that powers India’s digital economy.