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From 5th May 2020, in the news, there have been talks that RBI may open doors for private players to set up a new umbrella entity for Retail Payments System Infrastructure. RBI has also given approval to private players for setting up retail payment systems under the Payment and Settlement Act, 2007, which is the statute that governs the payment and settlement systems in India. Payment and settlement systems play an inevitable role in improving the economic efficiency and independence of our country.
These systems comprise of all types of methods that are used to systematically transfer money-currency, paper instruments such as cheques, and various electronic channels. The Central Bank of India/RBI is the driving force in the development of national payment systems. The Board for Regulation and Supervision of Payment and Settlement Systems (BPSS), a subsidiary committee of the RBI is the highest policy-making commission of payment systems in India. Its sole prerogative is to supervise the regulation and supervision of payment systems in India, which has been discussed in the PSS Act. This Act, consisting of 8 chapters with 38 provisions, has received the “green-light” by the President on 20thDecember 2007.
Salient features of the Act
- Ambiguity regarding issuance of credit cards
As of 2017, under the PSS Act, 2007, American Express Banking Corp, USA, Diners Club International Ltd, USA, Mastercard Asia, Singapore, and Visa Worldwide Pte Ltd, Singapore, have been authorized to issue credit cards in India. Because credit card operations are not included within the ambit of “prepaid instruments”, in the absence of any specific regulatory framework under the PSS Act, 2007, it still remains a grey area for fintech entities. Thus, it can be inferred from this that the issuance of credit cards is restricted for banks and permitted NBFCs only.
- Entities created by RBI under PSS Act, 2007
According to the provisions of Section 4 of the PSS Act, no person other than the RBI unless approved beforehand can operate a payment system in India. All entities who wish to set up or use these payment systems are required to apply for authorization under the PSS Act, 2007. Any unapproved operation of a payment system would be considered as an offense under the PSS Act and susceptive for penal liability. After registration, the payment system provider is required to operate the payment system in accordance with the provisions of the PSS Act, 2007, and the regulations, terms, and conditions of authorization and RBI directions on a regular basis. Section 20, 21, and 22 of the PSS Act, 2007 mandated the system provider to provide for disclosure of the terms and conditions including the charges, limitations of liability, etc. to the customers. The system provider is required to keep the documents and its contents as confidential, except according to the procedure established by law.
- Prepaid payment instruments
In conformity with the PSS Act, the RBI has allowed for the issuance of such instruments which are used to access the prepaid amount to finalize transactions and have also laid down the means to settle transactions. These guidelines state the definition of ‘prepaid payment instruments’ as payment instruments that help in the facilitation of the purchase of goods and services, along with funds transfer compared to the value stored on such instruments. They encompass many forms; as smart cards, magnetic stripe cards, internet accounts, internet wallets, mobile accounts, mobile wallets, paper vouchers, etc. which can be used to get the amount in advance. The pre-paid payment instruments that can be issued in India are classified under three categories: closed, semi-closed, and open system payment instruments.
- Electronic wallets
The banks are the only ones allowed to give out open-system payment instruments that can be used for the purchase of goods and services, and also tolerate cash withdrawals from ATMs. These are payment instruments that can be used at any card-accepting merchant locations and also permit cash withdrawal from ATMs. Eg. credit cards, debit cards, etc. Closed system payment instruments run on the principle of when the goods or services are acquired directly from the entity which provides for this financial instrument. They do not allow for cash withdrawal or redemption. Eg. The amount so credited can be utilized only for either travelling or recharging of mobile respectively in “Ola Money/Freecharge” cashless wallet.
- Settlement of payments for electronic payment instruments
The RBI has considered it necessary to frame specific guidelines and directions for the safe and orderly conduct of e-commerce transactions. Intermediaries (eg. aggregators and payment gateways) that facilitate payment services, though not authorized by RBI under the PSS Act, 2007 are however required to route their transactions only through a nodal account opened with a bank under the guidelines. There is a stipulation by the RBI that all accounts opened and maintained by banks for facilitating collection of payments by middlemen from customers of merchants are to be treated as internal accounts of the banks.
Objectives and purposes
RBI’s statement of purpose for payment and settlement system states that the initiative would be to assure the quality of all payment and settlement systems operating in the country with 5 words-safe, secure, sound, efficient, accessible, and authorized. Adhering to the PSS Act, 2 Regulations have been made by the RBI:
1. The Board for Regulation and Supervision of Payment and Settlement Systems Regulations, 2008 and
2. The Payment and Settlement Systems Regulations, 2008.
The BPSS gives assent to the powers on behalf of the RBI, for regulation and supervision of the payment and settlement systems under the PSS Act, 2007. The Payment and Settlement Systems Regulations, 2008 oversees matters, for example, application form that has to be authorized in order to maintain the functioning of a payment system, instructions on how to pay, and determination of standards of payment systems, publishing of returns/documents/other information, requisition of accounting information and balance sheets by the provider of the system, etc.
- Section 2(1) (i) of the PSS Act 2007 defines that a payment system is a catalyst for the payment to be executed between a payer and a beneficiary, which is a process including clearing of payment and/or settlement services, excluding a stock exchange. It is also expressly written that a ‘payment system’ involves the systems sanctioning credit card, debit card, smart card, money transfer operations, etc.
- As described under the chapter-1 of The Payment and Settlement Systems Act, 2007; that it extends to the whole of India, under Section 1 clause (3). Important definitions in the definition clause:
- ‘derivative’ which is an instrument used in payment systems whose value is derived from the change in interest rate, foreign exchange rate, credit index, etc.
- ‘Netting’ refers to the determination by the system provider of the amount of money or securities.
- ‘Payment system’ is also defined under this Act which is responsible for enabling payment system and operations.
- ‘Settlement’ which refers to the settlement of payment instructions which involve in certain obligations occurring during the time of payment.
- ‘systemic risk’ which describes the occurrence of risk through any disruption in the system or any other problem occurs during the time of payment or maybe of any inability of service by system participant.
- Under Section 3 of Chapter 2 of The Payment and Settlement Systems Act, 2007 where the role of Reserve Bank has been described in clear, which follows with the committee of some members which is known as the Board for Regulation and Supervision of Payment and Settlement Systems.
Misconduct and punishments
Chapter 7 of this Act deals with offenses and penalties.
- If an authorized person contravenes the provisions, then he shall be punishable with fine and imprisonment for a term not less than one month which may exceed up to 10 years and fine extending up to Rs. 10 lakhs.
- If any authorized person is providing false documents or information, then the offender is punishable with imprisonment which may extend up to 3 years and with liable fine which extends from 10 lakh to 50 lakhs.
- If a person is unable to present any information, then he must be punishable with a fine of Rs. 25 000 per day or of Rs. 10 lakhs.
- It has been discussed that Reserve Bank has certain powers to impose fines on any contravention if noticed. While in the matter of any offense which is cognizable, no court deals with the proceedings of that case until a proper application has been received by a court which is to be written by the officer of Reserve Bank.
- A few marketing processesshould be accomplished which create an awareness of a payment instrument among people which would depend on the marketing campaigns of the service providers. The marketing campaigns would advertise to the customers on the pros, security, and safety of the payment instrument. The level of transparency of the campaigns and the confidence gained by the customers during the campaign would facilitate large scale migration to these payment modes.
- It should deal with the level of technology because the level of technological adoption in the banks would also decide the level of promotion of new payment products by banks. Banks that have implemented Core Banking Solutions are observed to have provided the customers with multiple delivery channels like ATMs, internet banking, and mobile banking systems for initiation and receipt of payments.
- The knowledge & proficiency of staffshould be checked whether they are aware of all the necessary concepts or not. While marketing can encourage customers to attempt new payment instruments, it is necessary that all the branches of the bank brought on to the electronic payment platforms are adequately manned by trained employees. It would be the responsibility of these employees to ensure that the payments are processed seamlessly. An unmotivated or unskilled employee with no incentive can lack the confidence to operate the new systems and therefore may not encourage the use of new payment instruments in their interactions with bank customers.
- Customer serviceis a prominent stepping-stone of any service industry. The payment systems are no exception to this. Customer services include service level at the point of service, information dissemination, and other services. To confidence of a customer, it is necessary that the service providers redress these specific grievances in a timely manner.
- An awareness campaignshould be started for the benefits of the public at large because of the lack of adequate awareness of the payment products was one of the factors inhibiting the growth of electronic payment in the country. It was suggested that the Reserve Bank conducts awareness campaigns through various media for promoting public/corporate use of electronic payment products. Banks on their own may also carry out campaigns to promote electronic payment products. They can educate customers who approach them for the issue of drafts and payment orders.
- There should be an inauguration of regulatory changes. However, Credit cards and Debit cards are the only electronic payment instruments currently available for use at merchant locations. While the use of these instruments has been increasing, the use of these instruments for micropayments is not cost-effective. It was suggested that RBI introduce the promotion of payments through mobile phones and pre-paid smart cards. It would require that RBI carry-out regulatory changes to enable improvement in the maintenance of customer accounts at the mobile companies and merged accounts at banks.
On 10th Jan 2020, via a circular, a systematic framework was declared with the purpose of imposing a penalty related to money on lawful payment system operators/banks under the Payment and Settlement Systems Act, 2007. Payment and settlement systems are a vastly growing area, which involves advanced market policies with newer innovations in technology. One demerit of the PSS Act is that definition of ‘bank’ is not specified. Reserve Bank has to put efforts to ensure among the public that all payment and settlement systems in the country are safe, efficient, interoperable, authorized, and accessible, as it may also be furthering financial inclusion and compliance with some international standards.
The main focus is to shift the cash payment system to electronic/cashless payment systems. RBI is required to make regulations for the payment instructions and other matters which cause disputes between both parties. Also, a suggestion is that it should be followed with stronger legal provisions which include the Information Technology Act, 2000 as well. My final suggestion is that there should be an amendment in 2020 or 2021 to be up-to-date with the digital advancement in India in the past decade.
Author: Anjali Baskar from CHRIST (Deemed to be University).
Editor: Arya Mittal from Hidayatullah National Law University, Raipur.