By Simran Jalan (firstname.lastname@example.org)
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 (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.
By Rajeev Jhawar (email@example.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.
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.
By Simran Jalan (firstname.lastname@example.org)
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 (“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.
By Simran Jalan (email@example.com)
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 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.
By Vishes Kothari & Simran Jalan (firstname.lastname@example.org)
Major reforms are being proposed to the Payments and Settlement Systems Act, 2007 so as to be able to catch up with the fast changing payments landscape in the country.
An Inter-Ministerial Committee was constituted in October, 2017 to finalise the draft bill called the Payment and Settlement System Bill, 2018 and was comprised of representatives from the RBI, UIDAI, Department of Financial Services (DFS), Department of Electronics and Information Technology (DEIT), Department of Economic Affairs (DEA) and the Department of Legal Affairs (DLA). The Committee has recently submitted its recommendations.
The committee has proposed sweeping changes in the payments sector. The formation of Payments Regulatory Board (“PRB”), an independent regulator of the payments system distinct from the central bank is perhaps the most significant. This separates the regulation of payments from the functions of the central bank, The PRB is formed with the broad objectives of consumer protection, systematic stability, and resilience. It further aims to bring about competition and innovation. Moreover the Bill proposes to put banks and non-banks at par by making authorization criteria to operate payment and settlement systems ownership neutral.
Further significant changes include the introduction of the concept of designated payment systems and infrastructure systems. Both are discussed in detail below.
The Bill has 100 sections as compared to 38 sections in the existing Payment and Settlement Systems Act, 2007 (“PSS Act”). Read more
By Anita Baid, (email@example.com)
With an enlarged view of the Government to make India go cashless and straddle towards the concept of digitalisation, many companies, specifically NBFCs are seeking approval from the Reserve Bank of India (RBI) to set up business in Prepaid Payment Instruments (PPI). Before getting into the present regulatory framework of such PPIs, one needs to understand the concept of such instruments. PPIs are a form of digital electronic instruments. PPI issuers open an account for its account holders known as PPI holders and with the help of such account, withdrawal/ deposit is made for some pre-ascertained payments or receipt. A certain amount is deposited into such PPI Account from the holder’s Bank A/c and using the balance deposited in the PPI Account, payments are made and/or even cash is received. The introduction of such mechanism enables a person to go cashless. Such PPI instruments can be of three types: Read more
By Ameet Roy,( firstname.lastname@example.org)
Payment systems in India are governed by the Payment and Settlement Systems Act, 2007 (PSS Act) and the RBI is the regulatory of all payment system India. All applications for granting of licence under the PSS Act has to be made to the RBI.
Under the guidelines for Issuance and Operation of Pre-paid Payment Instruments (PPIs) in India, an entity desirous of entering into business of issuance and operation of pre-paid payment instruments shall at all time maintain a minimum paid up capital of Rs. 5 Crore and positive net worth of Rs. 1 Crore.
An entity which fulfils the above mentioned capital requirements should file an application for grant of licence under the PSS Act on Form A (Application form for authorisation to set up payments systems) to the RBI with a nominal application fee of Rs. 10,000/-. On the form the entity should give all its details along with –
- Citing concrete benefits to the financial system/ country from the operationalisation of the payment to be set up.
- Experience of the applicants in the relevant field (the RBI seems very determined to allow operation of PPIs to serious and experienced persons in the field of payment systems).
- Method of settlement of payment claims (gross / net / hybrid).
- Details of bankers of the applicant entity.
- Banker’s report on the functioning of the applicant account and its financial health.
- Details of settlement agents for the proposed payment system.
- Whether the settlement agent will act as central counterparty to provide guarantee.
- Amount of finance required to execute the payment system project
- Sources of finance –
- Amount of own capital proposed to be deployed
- Amount of borrowings expected from banks
- Amount of borrowing expected from sources other than banks (sources to be properly disclosed)
- Rate of return on investment expected from the payment system sought to be set up
- How does the applicant propose to recover its investment and earn an income, that is, whether through cash flows or by levying joining fees, security fees, annual/ operating charges etc.( full details to be given)
and various other information which will help the RBI assess the potential of the proposed business and its future prospects. The will only grant licence after being totally confident of the viability and security of the payment systems.
For help and assistance on the application of licence for setting up payment systems mail us at – email@example.com
It has been a while that there has been a buzz around the emerging concept of financial technology (fintech), which seems to be evolving at an unimaginable speed. The technological development taking place globally, have compelled the traditionally cash-driven Indian economy to respond promptly to the fintech opportunities. The modern payment systems have overcome the shortcoming of the traditional mode of cash based payments where handing of cash was the most cumbersome part of all transaction. It is a known fact that the overall economic efficiency and stability of any country is dependent on the payment and settlement system in that country. As a result, the regulators in our country, including the central bank, have also been revisiting their operating model and policies regularly, to ensure and carry out the development of national payment systems. The regulators have to closely safeguard the sanctity of payment systems, primarily from the viewpoint of systemic risk, risk of fraud, etc. Specifically, it is the responsibility of the central bank of any country, that is to say the Reserve Bank of India (RBI) for our country, to ensure and carry out the development of national payment systems.
This article is intended to provide a panoramic view of the schematics of regulation over Indian payment and settlement systems.
India Inc is witnessing a major shift from cash driven economy to a cashless economy with a steep rise in the mobile transaction services through digital payment modes in the financial technology industry undoubtedly pushing huge pressure on cash. The payment industry is striving to become an integral part of the economy. With the evolution of online wallets, consumers are provided with simpler and more efficient method to complete online transactions Read more