Payment Regulation in India

Payment Ecosystem in India:

• A “payment system” means a system that enables payment to be effected between a payer and a beneficiary, involving clearing, payment or settlement service or all of them.
• Settlement’ means the settlement of payment instructions received and these include settlement of securities, foreign exchange or derivatives or other transactions. 

Based on the mode of settlement, Payment systems can be classified into two categories:

1. RTGS (Real Time Gross Settlement): A gross-settlement based payment system, which works on a real-time basis.
2. Payment systems which are operated on a “delayed net settlement” basis

In India, the major payment systems include – RTGS, NEFT, Immediate Payment Service (IMPS), Unified Payment Interface (UPI), National Electronic Clearing Service (NECS) and various card schemes (such as Visa, MasterCard and RuPay).

Payment Service Providers (PSPs) in India

• Both bank and non-bank players are PSPs in India. Only bank-led PSPs have direct access to payment systems. Non-bank PSPs can access payment systems only through a member bank
• As of 2016, there are 44 authorised PrePaid Payment Instruments (PPIs) (including mobile wallets, prepaid cards, etc.) and 8 authorised Payments Banks.
• Apart from this, the RBI has also authorised 8 Cross-Border Money Transfer operators, and 8 White-label ATM Operators

Legal and Regulatory framework:

Payment and Settlement Systems Act, 2007: Under the Payment Systems & Settlements (PSS) Act of 2007, two regulations have been made by the Reserve Bank of India:

1.The Board for Regulation and Supervision of Payment and Settlement Systems Regulation (BPSS), 2008:

• The BPSS is a sub-committee of the Central Board of the RBI is in charge of discharging the regulatory functions vested in the RBI under PSS Act 2007.
• It is empowered for authorising, prescribing policies and setting standards for regulating and supervising all the payment and settlement systems in India

2.The Payment and Settlement Systems Regulations, 2008: It covers matters like form of application for authorization for commencing/ carrying on a payment system and grant of authorization, payment instructions and determination of standards of payment systems

• The above two regulations together provide the necessary statutory backing to the RBI for overviewing the payment and settlement systems in the country.
• Further, National Payment Corporation of India (NPCI) acts as an umbrella organisation for all retail payment systems in India. It was set up with the support & guidance from Reserve Bank of India (RBI) & Indian Banks Association (IBA). The NPCI provides the following products and services:
• UPI
• IMPS
• RuPay
• *99#:
• National Automated Clearing House
• Aadhaar Enabled Payment System
• e-KYC
• National Financial Switch

Issues:

1. Ownership neutrality: Ownership neutrality implies that governance standards for regulated entities should not depend on the form of organisation of the financial firm or its ownership structure. However, Fintech companies, which require connecting to banking systems to serve their customers tend to face restrictive practices.
2. Technology neutrality: Technology neutrality requires regulation to be outcome based, without mandating the adoption of any particular type of technology. However, in India, laws and regulations tend to assume, or in certain cases mandate the use of a particular technology for the attainment of a regulatory outcome. This hinder innovation and efficiency, by preventing the adoption of newer and possibly more efficient technologies.
3. Barriers to entry: The present legal framework relating to authorisation of payment systems and PSPs, enables a continuous licensing framework. However, administrative actions such as suspension of licensing, or placing discretionary limits upon number of licenses, create disruptions in the market and raise entry barriers for new entrants. The provisions of the Payment and Settlement Systems Act, 2007 and the RBI’s Guidelines relating to major payment systems, do not allow open access to all system participants which is a major entry barrier.
4. Issues with BPSS: The BPSS do not have adequate resources to be able to encourage innovation in payment systems.
5. Changing trends: Traditionally payment systems have been bank-driven. In recent times, technology has led to payments being dominated by Fintech companies. However, the regulatory regime in in India has been unfavourable for enabling competition, leverage innovation and boost consumer protection.

The issue of independent Payments Regulatory Board (PRB)

A Committee on Digital Payments was constituted under the Chairmanship of Ratan P. Watal. The committee made the following recommendations for strengthening the digital payment ecosystems and enable the markets to be competitive and innovative; safe and resilient; accessible and inclusive:

• Establishment of the PRB within the overall structure of RBI with majority of non-RBI members nominated by the Central Government
• Update the current Payments and Settlement Systems Act, 2007

Following the recommendations of the Watal Committee, in the Finance Act of 2017, the government amended the PSSA, 2007 to provide for a PRB.

The Draft Payment and Settlement System Bill, 2018:

It seeks to foster competition, consumer protection, systemic stability and resilience in payment sector and establish an independent Payments Regulatory Board (PRB) to regulate the same. The Bill provides for:

• The PRB to be an independent payments regulator.
• Changes to the composition of the PRB beyond the composition provided in the Finance Act, 2017
• The RBI to have significant representation on the PRB.
• It envisages a formal mechanism for co-ordination so that the regulation of payments, in so far as it may be relevant in the context of financial stability, monetary policy and credit policy is achieved harmoniously.

Views of RBI:

The RBI issued a dissent note on the draft Payment and Settlement System Bill 2018 and advocated the regulation of payments system should remain with the central bank. It put forward the following arguments against creation of an independent PRB:

• There has been no evidence of any inefficiency in payment systems of India and the digital payments have made good and steady progress. Provided this, there should not be any change in a well-functioning system.
• The RBI argues that the payment and settlement system being a sub-set of the currency management system, keeping the PRB independent of RBI would not be appropriate. The Monetary Policy has a huge impact on the payment systems and therefore, the power to regulate the payment systems should be with the monetary authority.
• Since, banks are the most important parties of the payment systems, RBI being the banking regulator makes it logical to keep integrate PRB within the operations of the RBI. Further, there are certain payment systems like cards which are issued by banks globally. Dual regulation over such instruments will not be desirable.
• Settlement systems are finally posted in the books of account of banks with the RBI to attain settlement finality. Regulating these entities goes hand in hand with the settlement function.

Conclusion:

There should a proper consultation with all stakeholders before creating an independent PRB. Changes should not result in existing foundations being shaken and the potential creation of disturbances in an otherwise well-functioning and internationally acclaimed payment regulation system in India