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Payment Systems – The Digitalisation of Financial Services and its Future

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India has historically been an economy driven by cash. With unique population demographics and modest literacy levels, it is a difficult market to “digitalise”. However, over the past decade, urban India has seen a significant rise in the use of pre-paid cards, mobile banking, internet wallets and e-payment instruments, in their various guises. They have created a relevant market of their own.

However, in the past few months, and as a consequence of the recent demonetisation, India has been witnessing a new wave of financial technology, with the introduction of innovative products and a wider customer base. Increased penetration has also compelled both the regulators and government to renew their focus on this migration to a “cashless” society. Consequently, the regulatory framework governing e-commerce and financial technology has seen various amendments recently.

Payment Systems in India

In India, the payment and settlement systems are regulated by the Reserve Bank of India (RBI), which exercises oversight over this market. Payment systems are required to obtain authorisation from the RBI to enable payment between a payer and a beneficiary; and while effecting such payment, they should provide payment, clearing and/or settlement services. Set out below are the key payment systems covered under the regulatory framework.

Financial Market Infrastructures: The RBI currently regulates various financial market infrastructures that facilitate clearing, settling, or recording payments, securities, derivatives, or other financial transactions such as securities settlement systems, central counter parties, and trade repositories.

Card Payment Networks: Payment networks engaged in the actual payment/receipt, clearing and settlement of funds involved in card operations (such as Visa, MasterCard, American Express, Diners Club) are permitted to operate in India pursuant to the authorisation granted by the RBI. However, the RBI has not subjected other system participants such as payment processors/gateways, acquiring banks, merchants, to licensing requirements.

Pre-Paid Payment Systems: The RBI governs pre-paid instruments (PPIs) facilitating purchase of goods and services against the value stored on these instruments, which can be in the form of smart cards, magnetic stripe cards, internet accounts, internet wallets, mobile accounts, mobile wallets, etc. The guidelines issued by the RBI in 2009 for issuance and regulation of prepaid instruments are currently in the process of being revamped in view of the emerging digital environment and product innovation in the PPI space.

Cross-Border Remittance Schemes: There are two systems in India governed by the RBI, which enable cross-border inward remittance services – i.e., the Money Transfer Service Scheme and the Rupee Drawing Arrangement through tie-ups between offshore and Indian entities.

Bharat Bill Payment System (BBPS): BBPS is a pan-India interoperable bill payment system and has been set up to provide an accessible multi-tier infrastructure facilitating anytime, anywhere, any bill payment. The entities undertaking the business of billing as envisaged under the regulatory guidelines issued in 2014 are required to operate within the regulatory framework or exit the business of bill payments by May 31, 2017.

Trade Receivables Discounting System (TReDS): In 2014, the RBI allowed setting up of TReDSs to facilitate the financing of trade receivables of micro, small and medium enterprises from corporate buyers through multiple financiers for faster financing and liquidity.

Intermediaries in Electronic Payment Systems: The increasing growth of electronic payments, especially online payments, riding the growth of e-commerce and m-commerce transactions, has brought to the fore the increasing role and importance of entities that facilitate such online payments such as payment gateway providers and payment aggregators. The RBI has issued directions to ensure that payments made by customers/clients using intermediaries are duly accounted for by the intermediaries receiving such payments and are remitted to the accounts of the merchants/service providers who have supplied such goods/services without undue delay.

In addition to the above, the RBI also regulates automated teller machine (ATM) networks, white label ATMs, mobile banking, instant money transfers and domestic money transfers. Also, the registration and operation of service providers offering services by using telecom resources provided by authorised telecom service providers – like tele-banking, tele-medicine, tele-education, tele-trading, e-commerce, call centre, network operation centre and other IT enabled services – is governed in terms of the legal framework issued by the Department of Telecommunications in India.

Recent Developments – What More Can be Done?

The regulatory focus in this area has been to ensure the safety of transactions while at the same time facilitating the convenience of transacting. In the past quarter, pursuant to a comprehensive review of the framework for PPI issuance, the RBI released the revised draft guidelines for public comments. To ensure more holistic regulation, the Ministry of Electronics and Information Technology has issued draft rules towards enhancing the security and confidentiality of electronic payments made through PPIs.

The RBI has also issued guidelines to provide a framework for regulated entities such as banks and primary dealers to apply for membership of payment systems. Such access by these entities has been subject to certain minimum standards to ensure the safety, security and integrity of payment services.

That said, in a market that is constantly evolving, regulations and regulators will also have to keep re-defining their role, in order to keep pace. Given that these entities will play as important a role in our financial architecture as traditional channels such as banks and non banking financial companies, it is critical to identify and regulate based on systemic importance, so as to ensure graded compliance norms and standards. The RBI should also consider introducing consumer awareness and education programmes, specifically in relation to some of these payment systems, to ensure a smooth transition into a digital economy.

Way Forward

They say that the world is changing with every passing second. Nothing illustrates this better than the growth in the Indian e-payments space. Recent changes in the regulatory framework are driven by the need to facilitate payment systems that combine the much-valued attributes of safety, security and universal reach with technological solutions that enable faster processing and enhanced convenience and inter-operability, without compromising on robust regulation for systemically important players. It will be interesting to see the law evolve and keep pace in this space over the coming years, and match steps with technological innovation.

* The author was assisted by Anshu Choudhary, Senior Associate

Author: Shruti Rajan
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