The Reserve Bank of India (“RBI”) on August 25, 2020, had published its annual report for the year 2019-20, section IX of the report is titled Payment and Settlement Systems and Information Technology (“Annual Report”), of the central board on the working of the RBI for the year ending June 30, 2020. The Annual Report suggests that RBI is putting its effort towards efficient and secure payments and settlement systems with the focus on making user-friendly platforms available at reasonable costs. The vision set out by the Department of Payment and Settlement Systems (“DPSS”) for the year 2019-2021 lays down the path for an advanced framework. Moreover, the Department of Information Technology (“DIT”) has been on its quest to set up a robust digital platform to ensure smooth and effective payments and settlement systems in India.
Since the announcement of the DPSS vision which promised a secure, convenient, quick, and affordable e-payment medium, 4 Cs have been adopted by the RBI that promote:
1. Competition – healthy competition among players;
2. Convenience- enhance customer convenience;
3. Cost- affordable for public use; and
4. Confidence- Instills assurance in the payments systems.
The DPSS along with inputs from DIT have been trying to penetrate the digital payments across the country with a foolproof system that intensifies the security of payment systems.
Embracing the DPSS 2019-2021 vision
The 4C’s that were set as the elements of the vision were discussed by the RBI in terms of their implementation status in the Annual Report. The discussion was as follows:
1. Competition and Innovation
Since the inception of the Unified Payments Interface (“UPI”), other payment modes have seen an eclipse owing to its multiple unique features which include two-factor authentication, ability to link multiple bank accounts in a single application, open and interoperable platform, e-mandate, and compatibility with bank accounts and wallets. These features have all the factors that give UPI a cross-border appeal.
The Annual Report hints at India’s local card network- RuPay, which until now had only domestic operation could soon expand globally. In adherence to its vision, RBI is aiming at global outreach of its payment systems. The outreach is not limited to payment systems but is an opportunity for remittances services. RBI claims to have been working incessantly with National Payments Corporation of India (“NPCI”) to widen their reach of UPI and RuPay globally to UAE and South Korea which until now had been working just in Bhutan, Singapore, and Bahrain.
Participation of new players to promote the pan-India payments platforms has been focused on in the Annual Report. This would encourage innovation and competition in the sector and eliminate the risk of concentration of only a few players in the retail payments system. RBI had introduced a policy paper on authorisation of new retail payment systems which subsequently took the shape of a draft framework for new umbrella entity for retail payments on February 10, 2020.
RBI has been eyeing to inculcate innovation and for those purposes it also conducted an innovation contest to provide a platform to encourage, recognise and promote innovation and ideas in the payments and settlement systems area to foster new development by entrepreneurs and start-ups in the payments space.
2. Cost Affordability
As envisaged in RBI’s vision, a payment infrastructure development fund was created by virtue of the Developmental and Regulatory Policies for increasing the acceptance infrastructure relating to both physical and digital point of sale in the country. The fund would enable subsidising certain charges paid by the acquirers for deploying the infrastructure. This would help acquirers reduce cost, effectively and rather let them invest in innovation and strategy and enhance digital footprint. It was clarified in the policy that the fund would be a corpus wherein contribution would be made by the RBI, card-issuing banks and card networks operating and overall administered by the RBI itself.
Pursuant to the abovementioned development policy, a committee was set up to provide a stimulus to the ATM deployment in the country and review the entire gamut of the ATM charges and fees. Such a revised framework of ATM charges and fees from the committee was withheld for examination by the RBI.
Removal or waiver of charges previously collected by the RBI from member banks towards centralised payment system i.e. the processing charges in NEFT and RTGS which was further extended to the customers with effect from January 1, 2020, on savings bank account holders was a relief and major incentive for voluminous usage of digital payment platforms.
A pertinent guideline issued by the RBI on March 17, 2020, on the regulation of payment aggregators and payment gateways now puts these intermediaries’ activities within the ambit of the RBI which earlier was not the case. These intermediaries acted as merchant aggregators during an online payment transaction while facilitating them. The RBI assuming authority to regulate such intermediaries would further minimalise certain transactional charges which earlier were charged by these intermediaries but were not regulated.
3. Customer’s Convenience
The RBI with effect from October 15, 2019, has also ensured customer convenience in the form of compensation also referred to as the turnaround time (TAT) framework that shall bring uniformity and discipline in reversing failed transactions and provide suo-moto compensation to customers for delay in executing the reversal of such transactions. Unlike the initial NEFT transactions, the payment method from December 16, 2019, was made accessible 24x7x365 starting at 00:30 hours and the last batch ending at 00:00 hours.
Effected in August 2019, a customer could now avail e-mandate or standing instructions for recurring payments to be deducted from the cards and was also extended to cover UPI based transactions. Additionally, the large value funds transfer system RTGS saw an increase in its operating hours and currently operational between 07:00 hours and 18:00 hours as against 08:00 hours and 16:30 hours earlier.
The digital payments were given a boost by including utility bills within the ambit of the Bharat Bill Payment System (BBPS) to enable the availability of the standard platform and greater digitisation of cash-based repetitive payments. It serves as a standardised bill payment experience and grievance redressal mechanism. RBI is also experimenting with newer instruments like the Prepaid Purchase Instrument (PPI) which gives an option to the customer for issuance based on essential minimum details. Such instruments can be used to purchase goods and services but not for funds transfer by loading the card from a bank account.
The extent of interoperability was widened even more by the RBI with the introduction of the National Electronic Toll Collection System (NETC) by linking payments systems with FASTags for identifying vehicles to make payments for toll tax and at a later stage for even parking fees and fuel payments. Keeping in mind the ease of cash availability, the RBI also eased the one-time approval process and allowed small value cash withdrawal at the merchant location or the point of sale terminal extending it to the UPI platform.
Lastly, since the penetration of awareness regarding digital payments has a crucial role to play, RBI organised multilingual public awareness campaigns where digital literacy workshops were conducted.
4. Enhancing Customer Confidence
Certain changes were made to the scope of the system audit report (SAR) and now covered relevant areas of the information system process. In order to avoid conflict of interest of the auditor, it was mandated that the audit firm or any of its sister must not be engaged in providing other services to the audited entity in the last two financial years. Along with all the mechanisms to eliminate fraudulent activities, RBI developed a fraud information registry which would facilitate reporting by system participants of all payment-related fraud.
The penalty provisions under sections 30 and 31 of the Payment and Settlement System Act, 2007 (“PS Act”) were reviewed and it was decided in the revised framework to continue levying monetary penalty to ensure payments systems operators conform to the legislation for objectivity and transparency. With the constant rise in the use of card transactions, RBI felt the need to add safety measures which now include (1) facility round the clock to switch on & off transaction rights and for setting limits; and (2) sending alerts to the cardholder regarding a change in the status of the card. The issuers have been given a deadline until September 30, 2020, to implement these measures. Grievances could be redressed now by the internal ombudsman put in place under section 18 of the PS Act working at arm’s length with the payments system operator.
Findings and Figures
Payment and settlement system saw strong growth in 2019-20, rising by 44.1% (forty-four point one percent) in terms of volume as well as by 55.8% (fifty-five point eight percent) in the previous year. The share of digital transactions in the overall amount of non-cash retail payments increased to 97.0% (ninety-seven percent) in the 2019-2020 period, up from 95.4% (ninety-five point four percent) in the previous year. However, the prolonged lockdown duration arising from the COVID-19 pandemic resulted in decreased economic activity and lower discretionary payments, leading to a decrease in digital transactions.
Road Ahead
To adhere to the 4C’s of the visions, RBI has established certain agenda for itself keeping mind the pandemic situation, and those are as follows:
1. Offline Payment Systems: An interesting fintech development could be seen with this proposal whereby, RBI plans to set up an offline payment through mobile devices. The mechanism would enable stored value components on a card to provide impetus to the sector. The pilot run for this scheme is yet to be tested.
2. Online Dispute Resolution- The most important addition to the agenda for the vision is the introduction of Online Dispute resolution (ODR). This mechanism eliminates the physical necessity to visit the grievance cell of the payments platforms and would be initiated with the dispute resolution for a failed transaction without requiring to file complaints to nodal officers and furthering the matter in courts.
3. Self-Regulated Organisation- RBI also announced a framework for the creation of a self-regulatory organisation for engaging with the regulator to enforce rules for the payments system operator. The creation of such an organisation was also envisaged in the Reserve Bank’s Statement on Developmental and Regulatory Policies issued as part of monetary policy statement dated February 6, 2020.
4. Survey for Digital Payment Awareness- To determine if the digital footprint has reached out to the remotest areas, the RBI would conduct even more surveys and achieve to contributing to the one district in a state to be fully digital-enabled.
5. Pan India Truncation System- The All Express Cheque Clearing System is proposed to be merged with the Cheque Truncation System grids to enable cheque collection services by banks.
6. Digital Payments Index- There is also a proposal to construct and periodically publish a composite digital payments index.
RBI’s goal is to develop reliable, affordable, and safe payments and settlement structures, with a focus on providing access to every Indian. A bouquet of e-payment options has yielded results in the year 2019-2020. It continued to ensure safe, stable, fast, and affordable e-payment options, with greater competition and consumer trust in the country's payment ecosystem. Implementing the NEFT clock round was a major step on this journey. The RBI will further aim to reach out to the previously excluded parts of society with state-of-the-art technology and payment systems focused on an effective regulatory environment and strong consumer security.
The article is authored by Ayush Chowdhury, Co-Head, BlockSuits
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