Introduction:
The coronavirus pandemic has had numerous and vast effect in the daily livelihoods of people across the world. One of the more significant impacts of the pandemic is the increase in cashless transactions. Much like 2016, when demonetisation saw many adapting to cashless transactions, India, due to the various restrictions brought on by the pandemic, is increasing its usage of e-payment methods. The surge in the usage of electronic means of handling money over the past four years has seen a growth in the need for effective regulation and airtight security of such methods. This article shall expand upon and analyse the various legislation, regulations, guidelines etc. that governs the usage and security of such methods.
Payment and Settlement Systems Act
The Payment and Settlement Systems (PSS) Act of 2007 was the early attempt of the Indian government to place checks on the new and unchecked idea of digital transactions. The Act governs all modes of payment systems and gives the Reserve Bank of India to authority to oversee them[1]. The RBI is allowed the authority to pass legislation to that end, and also to form a “Board for Regulation and Supervision of Payment and Settlement Systems”, for the same[2], and also imbues it with various powers such as prescribing standards, call for information, audit and inspection etc.
As such, the Mission Statement of the Department of Payment and Settlement Systems in the RBI states that it shall work “to ensure that all payment and settlement systems operating in the country are safe, secure, sound, efficient, accessible and authorised”[3] and that it aims to do the above by “(i) monitoring existing and planned systems; (ii) assessment and (iii) inducing change”[4].
Per the Act, a payment system is a “system that enables payment to be effected between a payer and a beneficiary, involving clearing, payment or settlement service or all of them, but does not include a stock exchange”[5], and settlement is “the settlement of payment instructions received and these include settlement of securities, foreign exchange or derivatives or other transactions. Settlement can take place either on a net basis or on a gross basis”[6]. The above definitions can be seen to include within its purview many cashless transaction methods, such as NEFT, RTGS, e-wallets such as Paytm, PhonePe, Aadhaar Enabled Payment Systems (AEPS), UPI etc.
Section 4 of the PSS Act prohibits the operation of any payment system in India without the permission of the RBI, and that its operation must be according to the directions of the Act and the RBI[7].
Regulations of RBI
The RBI, utilising the power granted to it by the Payment and Settlement Systems Act, has passed two regulations in 2008 to supplement the statute: The Board for Regulation and Supervision of Payment and Settlement Systems (BPSS) Regulations and the Payment and Settlement Systems (PSS) Regulations.
The BPSS Regulations is the policy upon which the Board for Regulation and Supervision of Payment and Settlement Systems is enacted, as is the discretion of the RBI under the PSS Act. The BPSS acts as the primary instrument of the RBI in overseeing all payment and settlement systems and is assisted by the Department of Payment and Settlement Systems of the RBI in a “secretarial” capacity. It sets the standards, does the decision making and sets policies, creates sub-committees, exercises the functions that the RBI is authorised to under the PSS Act, etc.
The PSS Regulations oversee the procedural aspect of the day-to-day functions of the RBI with regard to the payment and settlement systems. It lays down the processes to be fulfilled in the filing for application for authorisation, requisitioning of necessary information such as documents, books of account and balance sheets and other various policies and standards.
Prepaid Payment Instrument
The provisions for prepaid payment instruments in the PSS Act are of particular importance in analysing a cashless economy. The Policy Guidelines on Issuance and Operation of Pre-paid Payment Instruments in India, issued by the RBI under Section 18 of the PSS Act, define prepaid payment instruments as “payment instruments that facilitate the purchase of goods and services, including funds transfer, against the value stored on such instruments. The value stored on such instruments represents the value paid for by the holders by cash, by debit to a bank account, or by credit card”[8]. They can be anything from smart cards to mobile wallets, as long as the instrument is used to access a prepaid amount.
These instruments can be classified into three:
- Closed system payment instruments: These can be sued to enable the purchase of goods and services from an entity, but cannot be used for cash withdrawal or redemption. For example, a voucher for a particular company’s products.
- Semi-closed system payment instruments: “These are payment instruments which can be used for the purchase of goods and services, including financial services at a group of clearly identified merchant locations/establishments which have a specific contract with the issuer to accept the payment instruments. These instruments do not permit cash withdrawal or redemption by the holder.”[9] Most e-wallets, such as Amazon Pay, Ola Money etc. fall under this category.
- Open system payment instruments: These can only be issued by banks and are can be used for the “purchase of goods and services, including financial services like funds transfer at any card accepting merchant locations”[10].
All the above instruments, as per the Guidelines, fall into the purview for governance of the RBI.
Settlement of Payments for E- Payment Instruments
The popularity of electronic payment methods has seen the rise of intermediaries in the process, such as payment aggregators such as PayU, RazorPay etc and payment gateways such as Paytm, Mobikwik etc. While they were not under the direct authority of the RBI for long, the RBI still made stipulations to be followed by such intermediaries in their operation[11]. However, by way of notification on March 17, 2020, the RBI brought the above into its ambit explicitly[12]. It stated that while payment aggregator and gateway services offered by banks do not require new licences, those operated by non-bank entities do, including e-commerce marketplaces. The guidelines expand upon capital requirements, safety and regulatory framework, grievance and dispute redressal mechanisms etc.
Conclusion
The Indian government has taken many efforts to efficiently regulate digital transactions, in order to transition over to a cashless economy. Since the passing of the PSS Act, the governing body RBI has put in place many regulations and issued many guidelines over the years to fulfil its objective of ensuring secure and effective cashless transactions. It has made every effort to evolve with the burgeoning technology and its resultant players in the field, as demonstrated by its assertion of authority over payment aggregators and gateways by the RBI. Given the dynamic nature of the field and the many changes in the 13 years since 2007, the RBI must continue to regulate and supervise cashless transactions in order to ensure smooth functioning for the public.
References:
[1] §3, The Payment and Settlement Systems Act, 2007, No. 51, Acts of Parliament, 2007 (India).
[2] Id.
[3] Reserve Bank of India – Oversight of Payment Systems Reserve Bank of India, https://www.rbi.org.in/scripts/PaymentSystems_Oversight.aspx (last visited Aug 3, 2020).
[4] Id.
[5] Supra note 1 at §2.
[6] Id.
[7] Supra note 1 at §4.
[8] Reserve Bank of India – Master Circular – Policy Guidelines on Issuance and Operation of Pre-paid Payment Instruments in India, https://www.rbi.org.in/Scripts/BS_ViewMasCirculardetails.aspx?id=10510 (last visited Aug 3, 2020).
[9] Id.
[10] Id.
[11] Reserve Bank of India – Directions for Opening and Operation of Accounts and Settlement of Payments for Electronic Payment Transactions Involving Intermediaries, https://www.rbi.org.in/scripts/NotificationUser.aspx?Mode=0&Id=5379 (last visited Aug 4, 2020).
[12] Reserve Bank of India – Guidelines on Regulation of Payment Aggregators and Payment Gateways, https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=11822&Mode=0 (last visited Aug 4, 2020).
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