Framework for authorisation of pan-India Umbrella Entity for Retail Payments

-Kanakprabha Jethani (kanak@vinodkothari.com)

The Rise of Stablecoins amidst Instability

-Megha Mittal

(mittal@vinodkothari.com

The past few years have witnessed an array of technological developments and innovations, especially in Fintech; and while the world focused on Bitcoins and other cryptos, a new entrant ‘Stablecoin’ slowly crept its way into the limelight. With the primary motive of shielding its users from the high volatility associated with cryptos, and promises of boosting cross-border payments and remittance, ‘Stablecoins’ emerged in 2018, and now have become the focal point of discussion of several international bodies including the Financial Standards Board (FSB), G20, Financial Action Task Force (FATF) and International Organization of Securities Commission (IOSCO).

Additionally, the widespread notion that the desperate need of cross-border payments and remittances during the ongoing COVID-crisis may prove to be a defining moment for stablecoins, has drawn all the more attention towards the need of establishing regulations and legal framework pertaining to Stablecoins.

In this article, we shall have an insight as to what Stablecoins, (Global Stable Coinss) are, its modality, its current status of acceptance by the international bodies, and how the ongoing COVID crisis, may act as a catalyst for its rise.

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RBI to regulate operation of payment intermediaries

Guidelines on regulation of Payment Aggregators and Payment Gateways issued

-Mridula Tripathi (finserv@vinodkothari.com)

Background

In this era of digitalisation, the role of intermediaries who facilitate the payments in an online transaction has become pivotal. These intermediaries are a connector between the merchants and customers, ensuring the collection and settlement of payment. In the absence of any direct guidelines and adequate governance practices regulating the operations of these intermediaries, there was a need to review the existing instructions issued in this regard by the RBI. Thus, the need of regulating these intermediaries has been considered cardinal by the regulator.

RBI had on September 17, 2019 issued a Discussion Paper on Guidelines for Payment Gateways and Payment Aggregators[1] covering the various facets of activities undertaken by Payment Gateways (PGs) and Payment Aggregators (PAs) (‘Discussion Paper’). The Discussion Paper further explored the avenues of regulating these intermediaries by proposing three options, that is, regulation with the extant instructions, limited regulation or full and direct regulation to supervise the intermediaries.

In this regard, the final guidelines have been issued by the RBI on March 17, 2020 which shall be effective from April 1, 2020[2], for regulating the activities of PAs and providing technology-related recommendations to PGs (‘Guidelines’).

In this article we shall discuss the concept of Payment Aggregator and Payment Gateway. Further, we intend to cover the applicability, eligibility norms, governance practices and reporting requirements provided in the aforesaid guidelines.

Concept of Payment Aggregators and Payment Gateways

In common parlance Payment Gateway can be understood as a software which enables online transactions. Whenever the e-interface is used to make online payments, the role of this software infrastructure comes into picture. Thinking of it as a gateway or channel that opens whenever an online transaction takes place, to traverse money from the payer’s credit cards/debit cards/ e-wallets etc to the intended receiver.

Further, the role of a Payment Aggregator can be understood as a service provider which includes all these Payment Gateways. The significance of the Payment Aggregators lies in the fact that Payment Gateway is a mere technological base which requires a back-end operator and this role is fulfilled by the Payment Aggregator.

A merchant (Seller) providing goods/services to its target customer would require a Merchant Account opened with the bank to accept e-payment. Payment Aggregator can provide the same services to several merchants through one escrow account without the need of opening multiple Merchant Accounts in the bank for each Merchant.

The concept of PA and PG as defined by the RBI is reproduced herein below:

PAYMENT AGGREGATORS (PAs) means the entities which enable e-commerce sites and merchants to meet their payment obligation by facilitating various payment options without creation of a separate payment integration system of their own. These PAs aggregate the funds received as payment from the customers and pass them to the merchants after a certain time period.

PAYMENT GATEWAYS (PGs) are entities that channelize and process an online payment transaction by providing the necessary infrastructure without actual handling of funds.

The Guidelines have also clearly distinguished Payment Gateways as providers of technological infrastructure and Payment Aggregators as the entities facilitating the payment. At present, the existing PAs and PGs have a variety of technological set-up and their infrastructure also keeps changing with time given the business objective for ensuring efficient processing and seamless customer experience. Some of the e-commerce market places have leveraged their market presence and started offering payment aggregation services as well. Though the primary business of an e-commerce marketplace does not come within the regulatory purview of RBI, however, with the introduction of regulatory provisions for PAs, the entities will end up being subjected to dual regulation. Hence, it is required to separate these two activities to enable regulatory supervision over the payment aggregation business.

The extant regulations[3] on opening and operation of accounts and settlement of payments for electronic payment transactions involving intermediarieswe were applicable to intermediaries who collect monies from customers for payment to merchants using any electronic / online payment mode. The Discussion Paper proposed a review of the said regulations and based on the feedback received from market participants, the Guidelines have been issued by RBI.

Coverage of Guidelines

RBI has made its intention clear to directly regulate PAs (Bank & Non-Bank) and it has only provided an indicative baseline technology related recommendation. The Guidelines explicitly exclude Cash on Delivery (CoD) e-commerce model from its purview. Surprisingly, the Discussion Paper issued by RBI in this context intended on regulating both the PAs & PGs, however, since PGs are merely technology providers or outsourcing partners they have been kept out of the regulatory requirements.

The Guidelines come into effect from April 1, 2020, except for requirements for which a specific deadline has been prescribed, such as registration and capital requirements.

Registration requirement

Payment Aggregators are required to fulfil the requirements as provided under the Guidelines within the prescribed timelines. The Guidelines require non-bank entities providing PA services to be incorporated as a company under the Companies Act, 1956/2013 being able of carrying out the activity of operating as a PA, as per its charter documents such as the MoA. Such entities are mandatorily required to register themselves with RBI under the Payment and Settlement Systems Act, 2007 (‘PSSA, 2007’) in Form-A. However, a deadline of June 30, 2021 has been provided for existing non-bank PAs.

Capital requirement

RBI has further benchmarked the capital requirements to be adhered by existing and new PAs. According to which the new PAs at the time of making the application and existing PAs by March 31, 2021 must have a net worth of Rs 15 crore and Rs 25 crore by the end of third financial year i.e. March 31, 2023 and thereafter. Any non-compliance with the capital requirements shall lead to winding up of the business of PA.

As a matter of fact, the Discussion Paper issued by RBI, proposed a capital requirement of Rs 100 crore which seems to have been reduced considering the suggestion received from the market participants.

To supervise the implementation of these Guidelines, there is a certification to be obtained from the statutory auditor, to the effect certifying the compliance of the prescribed capital requirements.

Fit and proper criteria

The promoters of PAs are expected to fulfil fit and proper criteria prescribed by RBI and a declaration is also required to be submitted by the directors of the PAs. However, RBI shall also assess the ‘fit and proper’ status of the applicant entity and the management by obtaining inputs from various regulators.

Policy formulation

The Guidelines further require formulation and adoption of a board approved policy for the following:

  1. merchant on-boarding
  2. disposal of complaints, dispute resolution mechanism, timelines for processing refunds, etc., considering the RBI instructions on Turn Around Time (TAT)
  3. information security policy for the safety and security of the payment systems operated to implement security measures in accordance with this policy to mitigate identified risks
  4. IT policy(as per the Baseline Technology-related Recommendations)

Grievance redressal

The Guidelines have put in place mandatory appointment of a Nodal Officer to handle customer and regulator grievance whose details shall be prominently displayed on the website thus implying good governance in its very spirit. This is similar to the requirement for NBFCs who are required to appoint a Nodal Officer. Also, it is required that the dispute resolution mechanism must contain details on types of disputes, process of dealing with them, Turn Around Time (TAT) for each stage etc.

However, in this context, the Discussion Paper provided for a time period of 7 working days to promptly handle / dispose of complaints received by the customer and the merchant.

Merchant on boarding and KYC compliance

To avoid malicious intent of the merchants, PAs should undertake background and antecedent check of the merchants and are responsible to check Payment Card Industry-Data Security Standard (PCI-DSS) and Payment Application-Data Security Standard (PA-DSS) compliance of the infrastructure of the merchants on-boarded and carry a KYC of the merchants on boarded. It also provides for some mandatory clauses to be incorporated in the agreements to be executed with the merchants.

Risk Management

For the purposes of risk management, apart from adoption of an IS policy, the PAs shall also have a mechanism to monitor, handle and report cyber security incidents and breaches. They are also prohibited to allow online transactions with ATM pin and store customer card credentials on the servers accessed by the merchants and are required to comply with data storage requirements as applicable to Payment System Operators (PSOs).

Reporting Requirements

The Guidelines provide for monthly, quarterly and annual reporting requirement. The annual requirement comprises of certification from a CA and IS audit report and Cyber Security Audit report. The quarterly reporting again provides for certification requirement and the monthly requirement demand a transaction statistic. Also, there shall be reporting requirement in case of any change in management requiring intimation to RBI within 15 days along with ‘Declaration & Undertaking’ by the new directors. Apart from these mainstream reporting requirements there are non-periodic requirements as well.

Additionally, PAs are required to submit the System Audit Report, including cyber security audit conducted by CERTIn empanelled auditors, within two months of the close of their financial year to the respective Regional Office of DPSS, RBI

Escrow Account Mechanism

The Guidelines clearly state that the funds collected from the customers shall be kept in an escrow account opened with any Schedule Commercial Bank by the PAs. And to protect the funds collected from customers the Guidelines state that PA shall be deemed as a ‘Designated Payment System’[4] under section 23A of PSSA, 2007.

Shift from Nodal to Escrow

The Discussion Paper proposed registration, capital requirement, governance, risk management and such other regulations along with the maintenance of a nodal account to manage the funds of the merchants. Further, it acknowledged that in case of nodal accounts, there is no beneficial interest created on the part of the PAs; the fact that they do not form part of the PA’s balance sheet and no interest can be earned on the amount held in these account. The Guidelines are more specific about escrow accounts and do not provide for maintenance of nodal accounts, which seems to indicate a shift from nodal to escrow accounts with the same benefits as nodal accounts and additionally having an interest bearing ‘core portion’. These escrow account arrangements can be with or without a tripartite agreement, giving an option to the merchant to monitor the transactions occurring through the escrow. However, in practice it may not be possible to make each merchant a party to the escrow agreement.

Timelines for settlement to avoid unnecessary delay in payments to Merchants, various timelines have been provided as below:

  1. Amounts deducted from the customer’s account shall be remitted to the escrow account maintaining bank on Tp+0 / Tp+1 basis. (Tp is the date of debit to the customer’s account against good/services purchased)
  2. Final settlement with the merchant
  3. In cases where PA is responsible for delivery of goods / services, the payment to the merchant shall be made on Ts + 1 basis. (Ts is the date of intimation by merchant about shipment of goods)
  4. In cases where merchant is responsible for delivery, the payment to the merchant shall be on Td + 1 basis. (Td is the date of confirmation by the merchant about delivery of goods)
  5. In cases where the agreement with the merchant provides for keeping the amount by the PA till expiry of refund period, the payment to the merchant shall be on Tr + 1 basis. (Tr is the date of expiry of refund period)

Also, refund and reversed transactions must be routed back through the escrow account unless as per contract the refund is directly managed by the merchant and the customer has been made aware of the same. A minimum balance requirement equivalent to the amount already collected from customer as per ‘Tp’ or the amount due to the merchant at the end of the day is required to be maintained in the escrow account at any time of the day.

Permissible debits and credits

Similar to the extant regulations, the Guidelines provide a specific list of debits and credits permissible from the escrow account:

  • Credits that are permitted
  1. Payment from various customers towards purchase of goods / services.
  2. Pre-funding by merchants / PAs.
  3. Transfer representing refunds for failed / disputed / returned / cancelled transactions.
  4. Payment received for onward transfer to merchants under promotional activities, incentives, cashbacks etc.
  • Debits that are permitted
  1. Payment to various merchants / service providers.
  2. Payment to any other account on specific directions from the merchant.
  3. Transfer representing refunds for failed / disputed transactions.
  4. Payment of commission to the intermediaries. This amount shall be at pre-determined rates / frequency.
  5. Payment of amount received under promotional activities, incentives, cash-backs, etc.

The aforesaid list of permitted deposits and withdrawals into an account operated by an intermediary is wider than those allowed under the extant regulations. The facility to pay the amount held in escrow to any other account on the direction of the merchant would now enable cashflow trapping by third party lenders or financier. The merchant will have an option to provide instructions to the PA to directly transfer the funds to its creditors.

The Guidelines expressly state that the settlement of funds with merchants will in no case be co-mingled with other business of the PA, if any and no loans shall be available against such amounts.

No interest shall be payable by the bank on balances maintained in the escrow account, except in cases when the PA enters into an agreement with the bank with whom the escrow account is maintained, to transfer “core portion”[5] of the amount, in the escrow account, to a separate account on which interest is payable. Another certification requirement to be obtained from auditor(s) is for certifying that the PA has been maintaining balance in the escrow account.

Technology-related Recommendations

Several technology related recommendations have been separately provided in the Guidelines and are mandatory for PAs but recommendatory for PGs. These instructions provide for adherence to data security standards and timely reporting of security incidents in the course of operation of a PA. It proposes involvement of Board in formulating policy and a competent pool of staff for better operation along with other governance and security parameters.

Conclusion

With these Guidelines being enforced the online payment facilitated by intermediaries will be regulated and monitored by the RBI henceforth. The prescribed timeline of April 2020 may cause practical difficulties and act as a hurdle for the operations of existing PAs. However, the timelines provided for registration and capital requirements are considerably convenient for achieving the prescribed benchmarks. Since PAs are handling the funds, these Guidelines, which necessitate good governance, security and risk management norms on PAs, are expected to be favourable for the merchants and its customers.

 

[1] https://www.rbi.org.in/scripts/PublicationReportDetails.aspx?ID=943

[2] https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=11822&Mode=0

[3] https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=5379&Mode=0

[4] The Reserve Bank may designate a payment system if it considers that designating the system is in the public interest. The designation is to be by notice in writing published in the Gazette, as per Payment System Regulation Act, 1998

[5] This facility shall be permissible to entities who have been in business for 26 fortnights and whose accounts have been duly audited for the full accounting year. For this purpose, the period of 26 fortnights shall be calculated from the actual business operation in the account. ‘Core Portion’ shall be average of the lowest daily outstanding balance (LB) in the escrow account on a fortnightly (FN) basis, for fortnights from the preceding month 26.

 

 

Our other write ups on NBFCs to be referred here http://vinodkothari.com/nbfcs/

Our other similar articles:

http://vinodkothari.com/2017/04/overview-of-regulatory-framework-of-payment-and-settlement-systems-in-india-by-anita-baid/

Cryptotrading’s tryst with destiny- Supreme Court revives cryptotrading, RBI’s circular struck down

-Megha Mittal

(mittal@vinodkothari.com

April 2018, the Reserve Bank of India (RBI) issued a “Statement on Developmental and Regulatory Policies” (‘Circular’) dated 06.04.2018, thereby prohibiting RBI regulated entities from dealing in/ providing any services w.r.t. virtual currencies, with a 3-month ultimatum to those already engaged in such services. Cut to 4th March, 2020- The Supreme Court of India strikes down RBI’s circular and upheld crypto-trading as valid under the Constitution of India.

Amidst apprehensions of crypto-trading being a highly-volatile and risk-concentric venture, the Apex Court, in its order dated 04.03.2020 observed that RBI, an otherwise staunch critic of cryptocurrencies, failed to present any empirical evidence substantiating cryptocurrency’s negative impact on the banking and credit sector in India; and on the basis of this singular fact, the Hon’ble SC stated RBI’s circular to have failed the test of proportionality.

In this article, the author has made a humble attempt to discuss this landmark judgment and its (dis)advantages to the Indian economy.

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RBI introduces another minimum details PPI

BACKGROUND

The Reserve Bank of India (RBI) has vide its notification[1] dated December 24, 2019, introduced a new kind of semi-closed Prepaid Instrument (PPI) which can only be loaded from a bank account and used for purchase of goods and services and not for funds transfer. This PPI has been introduced in furtherance of Statement on Developmental and Regulatory Policies[2] issued by the RBI. The following write-up intends to provide a brief understanding of the features of this instrument and carry out a comparative analysis of features of existing kinds of PPIs and the newly introduced PPI.

BASIC FEATURES

The features of the newly introduced PPIs has to be clearly communicated to the PPI holder by SMS / e-mail / post or by any other means at the time of issuance of the PPI / before the first loading of funds. Following shall be the features of the newly introduced PPI:

  • Issuer can be banks or non-banks.
  • The PPI shall be issued on obtaining minimum details, which shall include a mobile number verified with One Time Pin (OTP) and a self-declaration of name and unique identity / identification number of any ‘mandatory document’ or ‘officially valid document’ (OVD) listed in the KYC Direction.
  • The new PPI shall not require the issuer to carry out the Customer Due Diligence (CDD) process, as provided in the Master Direction – Know Your Customer (KYC) Direction (‘KYC Directions)[3].
  • The amount loaded in such PPIs during any month shall not exceed ₹ 10,000 and the total amount loaded during the financial year shall not exceed ₹ 1,20,000.
  • The amount outstanding at any point of time in such PPIs shall not exceed ₹ 10,000.
  • Issued as a card or in electronic form.
  • The PPIs shall be reloadable in nature. Reloading shall be from a bank account only.
  • Shall be used only for purchase of goods and services and not for funds transfer.
  • Holder shall have an option to close the PPI at any time and the outstanding balance on the date of closure shall be allowed to be transferred ‘back to source.’

COMPARATIVE ANALYSIS

The Master Direction on Issuance and Operation of Prepaid Payment Instruments[4] contain provisions for two other kinds of semi-closed PPIs having transaction limit of ₹10,000. The features of these PPIs seem largely similar. However, there are certain differences as shown in the following table:

 

Basis PPIs upto ₹ 10,000/- by accepting minimum details of the PPI holder

(Type 1)

PPIs upto ₹ 1,00,000/- after completing KYC of the PPI holder 

(Type 2)

PPIs upto ₹ 10,000/- with loading only from bank account

(Type 3)

Issuer Banks and non-banks Banks and non-banks Banks and non-banks
PPI holder identification procedure Based on minimum details (mobile number verified with One Time Pin (OTP) and self-declaration of name and unique identification number of any of the officially valid document (OVD) as per PML Rules 2005[5]) KYC procedure as provided in KYC Directions Based on minimum details (mobile number verified with One Time Pin (OTP) and a self-declaration of name and unique identity / identification number of any ‘mandatory document’[6] or OVD as per KYC Directions[7]
Reloading Allowed Allowed Allowed (only from a bank account)
Form Electronic Electronic Card or electronic
Limit on outstanding balance ₹ 10,000 ₹ 1,00,000 ₹ 10,000
Limit on reloading ₹ 10,000 per month and ₹ 1,00,000 in the entire financial year Within the overall PPI limit ₹ 10,000 per month and ₹ 1,20,000 during a financial year
Transaction limits ₹ 10,000 per month ₹ 1,00,000 per month in case of pre-registered beneficiaries and  ₹ 10,000 per month in all other cases ₹ 10,000 per month
Utilisation of amount Purchase of goods and services Purchase of goods and services and transfer to his bank account or ‘back to source’ Purchase of goods and services
Conversion Compulsorily be converted into Type 2 PPIs (KYC compliant) within 24 months from the date of issue No provisions for conversion Type 1 PPIs maybe converted to Type 3, if desired by the holder
Restriction on issuance to single person Cannot be issued to same person using the same mobile number and same minimum details more than once No such provision No such provision
Closure of PPI Holder to have option to close and transfer the outstanding balance to his bank account or ‘back to source’ Holder to have option to close and transfer the outstanding balance to his bank account or ‘back to source’ or to other PPIs of the holder Holder to have option to close and transfer the outstanding balance ‘back to source’ (i.e. the bank account of the holder only)
Pre-registered Beneficiary Facility not available Facility available Facility not available

THE UPPER HAND

Based on the aforesaid comparative analysis, it is clear that for issuance of the newly introduced PPI or the Type 3 PPI, the issuer is not required to undertake the CDD process as provided in the KYC Directions. Only authentication through mobile number and OTP supplemented with a self-declaration regarding of details provided in the OVD shall suffice. This implies that the issuer shall not be required to “Originally See and Verify” the KYC documents submitted by the customer. This would result into digitisation of the entire transaction process and cost efficiency for the issuer.

Compared to the other 2 kinds of PPIs, one which requires carrying out of the KYC process prescribed in the KYC Directions and the other, which can be issued without carrying out the prescribed KYC process but has to be converted into Type 2 PPI within 24 months, this new PPI can be a good shot aiming at ease of business and digital payments upto a certain transaction limit.

CONCLUSION

The newly issued PPI will ensure seamless flow of the transaction. As compared to other PPIs, it will be easier to obtain such PPIs. Further, the limitations such as reloading only from the bank account, restriction of transfer of money from PPI etc. are some factors that shall regulate the usage of such PPIs. These may, however, pull back their acceptance in the digital payments space.

 

 

[1] https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=11766&Mode=0

[2] https://www.rbi.org.in/Scripts/BS_PressReleaseDisplay.aspx?prid=48803

[3] https://www.rbi.org.in/Scripts/BS_ViewMasDirections.aspx?id=11566

[4] https://www.rbi.org.in/Scripts/BS_ViewMasDirections.aspx?id=11142

[5] “officially valid document” means the passport, the driving licence, the Permanent Account Number (PAN) Card, the Voter’s Identity Card issued by the Election Commission of India or any other document as may be required by the banking company, or financial institution or intermediary

[6] Permanent Account Number (PAN)

[7] “Officially Valid Document” (OVD) means the passport, the driving licence, proof of possession of Aadhaar number, the Voter’s Identity Card issued by the Election Commission of India, job card issued by NREGA duly signed by an officer of the State Government and letter issued by the National Population Register containing details of name and address.

 

Our other write-ups relating to PPIs can be viewed here:

 

Our other resources can be referred to here:

 

 

 

BLOCKCHAIN-BASED LENDING – A PEER-TO-PEER APPROACH

Ombudsman Scheme for PPI issuers

By Simran Jalan (simran@vinodkothari.com)

Introduction

The payment technology has evolved and the number of digital transactions is increasing enormously. With this rapid adoption of digital mode of transactions, there was an emerging need for an expeditious grievance redressal mechanism for strengthening the consumer confidence in this channel. Consequently, the Reserve Bank of India (RBI) has issued an Ombudsman Scheme for Digital Transactions, 2019[1] (Ombudsman Scheme) to provide a mechanism for redressal of complaints against deficiency in services related to digital transactions.

In this article we shall discuss the important provisions of the scheme and their impact on Prepaid Payment Instrument (PPI) issuers.

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The arrival of digital empowerment

By Rajeev Jhawar (finserv@vinodkothari.com)

During the past five years, the Government of India has been working stalwartly towards achieving the vision of Digital India, that aims to transform India through the power of technology and bridge the digital divide. Other programs like Start-up India, Stand-up India and Skill India were designed to become a significant adjunct to this larger narrative.

The Reserve Bank of India (RBI) has been playing a catalytic role in permeation of FinTech into the economy, propelled by its Payment and Settlement System Vision – 2018. FinTech or digital innovations have emerged as a potentially transformative force in the financial markets. With the rapid adoption of digital payments across the country, aided by the introduction of innovative products in the payment space, RBI is focused on strengthening infrastructure and ensuring safety and security of digital transactions.

Further to accentuate digitization of payments and enhance financial inclusion through digitization,RBI has decided to constitute a high level committee, appointing Infosys co-founder and former Chairman of Unique Identification Authority of India(UIDAI), Nandan Nilekani as the Chairman of five-member committee, which inter alia shall:

  • review the existing status of digitization of payments in the country, identify the current gaps in the ecosystem and suggest ways to bridge them;
  • assess the current levels of digital payments in financial inclusion;
  • undertake cross country analyses with a view to identify best practices that can be adopted in our country to accelerate digitization of the economy and financial inclusion through greater use of digital payments;
  • Suggest measures to strengthen the safety and security of digital payments;
  • provide a road map for increasing customer confidence and trust while accessing financial services through digital modes;
  • suggest a medium-term strategy for deepening of digital payments;

Lastly, the committee shall submit its report within a period of 90 days from its first meeting.

The road to digitization of payments

As per RBI’s annual report 2017-2018, the payment and settlement systems recorded robust growth in 2017-18, with volume and value growing at 44.6 per cent and 11.9 per cent, respectively, on top of an increase of 56.0 per cent and 24.8 per cent, respectively, in 2016-17. The share of electronic transactions in the total volume of retail payments increased to 92.6 per cent in 2017-18, up from 88.9 per cent in the previous year with a corresponding reduction in the share of paper based clearing instruments from 11.1 per cent in 2016-17 to 7.4 per cent in 2017-18[1].

Multiple factors and official & behavioral trends are fueling this shift towards economy. Improved internet connectivity and high rate of permeation of smartphones in the Indian market has altogether shaped India’s payments landscape in favor of digital payment.

Furthermore, flagship government initiatives such as ‘Digital India’ would act as key catalysts for this change.


[1] https://rbi.org.in/Scripts/AnnualReportPublications.aspx?year=2018

 

RBI’s Interoperability guidelines for PPIs- A move to promote Digitalization

By Simran Jalan (simran@vinodkothari.com)

Introduction

Interoperability is the ability of customers to use a set of payment instruments seamlessly with other users within the segment. It enables a payment system to be used in conjunction with other payment systems. It allows Prepaid Payment Instruments (PPI) issuers and other service providers to undertake, clear and settle payment transactions across systems, without participating in multiple systems. All the service providers adopt common standards so as to make the PPIs interoperable. This interoperability shall facilitate payments among different wallets inter se and with banks. Paytm, Freecharge, Oxygen wallet, Airtel money, etc. are some of the digital wallets operating in India currently.

Last year, RBI issued Master Directions on Issuance and Operation of Prepaid Payment Instruments[1] (“Master Directions”) to regulate the prepaid payment instruments and to monitor the working of the PPI issuers. This was the much required legislative framework to supervise the prepaid payment industry. The Master Directions also provided for interoperability of the PPIs. It stated that the interoperability shall be enabled in the following phases for the PPIs:

The Master Directions mandated the first phase for all KYC compliant PPIs (bank and non-bank) issued in the form of wallets to have interoperability amongst themselves through UPI within 6 months from the issue of the Master Directions. This ensured fair competition between the different PPI providers as some providers used to spend exorbitantly to get merchants on-board and this would in turn eliminate competition.

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RBI’s dissent on the PSS Bill, 2018

By Simran Jalan (simran@vinodkothari.com)

Introduction

An Inter-Ministerial Committee was formed to finalise Payment and Settlement System Bill, 2018 to amend the Payment and Settlement System Act, 2007 (“PSS Act”). The Bill seeks to foster competition, consumer protection, systemic stability and resilience in payment sector and establish an independent Payments Regulator Board (“PRB”) to regulate the same. The proposals of the Government to amend the PSS Act at length is covered in our previous Article- Major recommendations of the Committee on Payment Systems.
Reserve Bank of India (“RBI”) had raised various objections in the Bill and has, further, issued dissent note[1] to bring out into public domain the fact that RBI is not happy with the government’s attempt to take control of payment and settlement systems.

Dissent of RBI

The RBI has given the dissent on the following recommendations of the committee:

• On composition of PRB

RBI has contended that there has been a major departure with respect to composition of the PRB from what was proposed under the Finance Bill, 2017. Initially, the Finance Bill proposed that the PRB shall be constituted with the Governor of RBI as the Chairman, however, the PSS Bill states that the Chairman of the PRB shall be appointed by the Government in consultation with the RBI.

Further, the Finance Bill, 2017 suggested that the PRB must be built into the overall framework and the RBI, however, the PSS Bill states that the PRB shall be an independent body. 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.

The Bill also provides for a formal mechanism for co-ordination between PRB and RBI. The RBI is of a view that the operations of PRB should be integrated and not co-ordinated with RBI.

Further, 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.

It will additionally provide holistic benefits since a single regulator will decrease the compliance costs as compared to the costs incurred if there are multiple regulators and will be more effective.

Further, the Bill stated that it was necessary to distinguish the role of the Central Bank as an infrastructure institution providing settlement function from its role as a regulator of the payment sector. In respect to this statement, RBI commented that the payment systems are nothing but digital substitutes of currency. RBI creates currency and distributes them through banks. Major concern of RBI was that the non-banks were ascribed the job of creating money via payment systems.

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