The digital payments ecosystem has made substantial progress over the last few years. The country has witnessed a shift from paper to electronic payment methods with the introduction of innovative payment products such as Unified Payments Interface (UPI). The Reserve Bank of India (RBI) has taken several policy and regulatory measures to move towards a “less-cash” society as part of the government’s Digital India campaign.
RBI’s recently published vision statement for 2019-2021 for payment systems in India (vision 2021) recognizes the exponential growth of digital payment systems in India and lays down a framework for the next steps in the era of digitization of payment methods to ensure increased efficiency, uninterrupted availability of safe, secure, accessible and affordable payment systems.
Vision 2021 keeps customer experience as the central theme, and has envisaged four goals: enhancement of competition in the payment landscape, achievement of optimal costs for customers, freer access of multiple payment systems, and the assurance of payment system safety to retain customer confidence. The RBI plans to implement this through 36 action points:
Self-Regulatory Organization (SRO): The RBI has recommended self-governance of payment system operators to foster best practices on aspects such as security, customer protection and pricing. The RBI also expects the SRO to serve as a two-way channel between the players and the regulator. This is a welcome move and one that has worked within the microfinance industry. Fintech players and customers would both benefit from self-regulation.
National settlement services: The RBI has proposed a common national settlement account across all card networks. Presently, banks have different settlement accounts for settling card transactions with different card networks. Industry participants will need to wait for directions from the RBI on how this will be implemented.
Interoperability: The RBI intends to pursue interoperability among various payment systems. This is not a new suggestion; it has been a persistent industry demand and has also previously been articulated by the RBI as a policy objective.
Regulatory sandbox: The RBI’s acceptance of the regulatory sandbox approach is an indicator that the regulator is keen on encouraging further innovation and experimentation within the payments industry. Vision 2021 also proposes to assist in globalizing certain payment systems and technologies developed in India such as the UPI and National Electronic Funds Transfer. The RBI also proposes to participate and engage in discussions with international standard-setting bodies. The RBI’s regulatory sandbox framework can go a long way towards the development of secure, innovative and robust payment systems.
System capacity and scalability: The RBI has proposed a framework for an ongoing assessment of the performance of retail payment systems together with clearly defined exit criteria. This measure will usher in accountability and it will be interesting to see how the RBI will implement this.
Regulation of service providers:With the fast-paced digitization of payment systems, the RBI has proposed guidelines for regulating payment gateway service providers. These entities are not entirely regulated and are not required to be licensed by the RBI. However, there continues to be uncertainty among market players regarding the extent of regulation that is likely to be proposed by the RBI.
E-mandates: The RBI has proposed implementation of e-mandates or standing instructions for retail payment systems. This is an important proposal and is linked to the security of transacting through payment systems. The RBI has also proposed the implementation of security standards for compliance by banks while providing banking services to customers.
Cross-border payments: This is a key suggestion made by the RBI and may also require a relook at how cross-border payments have traditionally been regulated. The RBI has proposed implementation of a legal entity identifier for payment system providers, their agents and distributors.
Vision 2021 also contemplates engagement of the RBI with other regulators such as the Securities Exchange Board of India, the Telecom Regulatory Authority of India and the Insurance Regulatory and Development Authority to improve regulation and customer experience, which is central to the growth of the Fintech sector.
Shilpa Mankar Ahluwalia is a partner at Shardul Amarchand Mangaldas & Co. and leads the firm’s Fintech practice at the firm.
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