Digital Payment systems - The Legal Perspective

Posted on 27 March, 2023 by Adv Amogh

The Reserve Bank of India, chiefly known as RBI, is India's central bank and regulatory body responsible for regulation of the Indian banking system. It is under the ownership of Ministry of Finance, Government of India. It is responsible for the control, issue and maintaining supply of the Indian rupee. 

ThePayment and Settlement Act System, 2007(PSS Act, 2007), which was approved by the President on December 20, 2007 came to effect on August 12, 2008. The Board for Regulation and Supervision of Payment and Settlement Systems is a central authority that has been established by RBI (the country's top institution) with the ability to regulate and supervise payment and settlement systems (BPSS). The RBI also created the Payment and Settlement Systems Regulations, 2008 The 12th of August 2008 saw the implementation of both regulations. 

Objectives

The objectives of the Payment and Settlement System Act, 2007 are to regulate and supervise payment methods through-out India. The Act vests RBI as the supreme authority and grant powers and to regulate payment gateways. It also provides legal framework for ‘netting’ and ‘settlement finality’. The RBI established a Board consisting of industry experts for Regulation and Supervision of Payment and Settlement Systems as a central body with the jurisdiction to control and oversee payment and settlement systems (BPSS). The Payment and Settlement Systems Regulations, 2008 were also produced by the RBI. The two regulations went into effect on August 12th, 2008.

The  Payment and Settlement Systems Regulations has the following goals:

- It covers topics pertaining to the format of an application to allow starting/operating a payment system as well as the granting of authorization.
- It establishes the standard for payment systems and specifies payment instructions.
- It includes topics pertaining to the delivery of returns, documents, or other information.
- It also covers how system providers produce accounting and balance sheets.

Authorization of payment system

Section 4 of the PSS Act grants powers only to RBI to operate or launch any payment system, and anyone else who wants to do so must apply to RBI for permission under Section 5 of the Act in order to do so. The authorisation request must be submitted using Form A in accordance with PSS Regulations, 2008, Regulation 3(2). The application must be completed and sent to the RBI together with the necessary paperwork and a cost of 10,000. The application fee can be paid in cash, cashier's checks, demand draughts, money orders, checks payable to RBI, or electronic fund transfers. It can also be submitted electronically. The RBI must grant permission for the system providers running the payment systems or wishing to establish such a payment system via this link. Under this Act, any unlawful use of a payment system would constitute a crime and be subject to punishment.

Control and jurisdiction over foreign entities

Between domestic and international entities, the Act makes no distinctions or distinctions. In accordance with Section 4 of the Act, it uses the phrase "No Person." Therefore, it is permitted for foreign organizations to run India's payment system. Regardless of whether an organization is native or foreign, a license or approval from the RBI is required before starting a payment system in India.

A foreign company may provide any service or payment option as the Act puts no bar. The PSS Act of 2007 does not impose any limitations on the type of payment system that a foreign company may provide as long as the method of payment or the service complies with the laws of the country. The RBI has granted permission to foreign card networks like MasterCard, Visa WorldWide Pvt. Ltd., and others, and they are now managing card programmes in India. Remittance services are also being offered by foreign entity service providers like Western Union Financial Services Inc., USA, MoneyGram Payment Systems Inc., etc. who have also been granted authorization.  

Control over financial market infrastructures (FMI)

One of the institutions taking part in a multilateral system is the system operator. This technique is used to clear, settle, or record payments, securities, or other financial transactions. FMI refers to Central Securities Depositories (CSDs), Securities Settlement Systems (SSSs), Central Counter Parties (CCPs), and Trade Repositories (TRs) as "payment systems" under the Act to facilitate the clearing, settlement, and recordkeeping of financial transactions. The Committee on Payment and Settlement Systems (CPSS) and International Organization of Securities Commissions (IOSC) publish the Principles for Financial Market Infrastructures (PFMIs). The PFMIs' policies and guidelines also apply to the FMIs. A foreign Financial Market Infrastructure can also operate in India. The PSS Act does not prohibit its operation.  On July 26, 2013, the RBI issued a press release titled "Policy Document for Regulation and Supervision of Financial Market Infrastructures."

Regulatory powers of RBI

The Reserve Bank has the following authority over requests to authorize payment systems:

In accordance with Section 7(3) of the Act, RBI may reject the application by sending the applicant a written notice that outlines the reasons why and gives them a fair amount of time to respond. Any authorization that the RBI has granted in accordance with Section 8 of the Act may be revoked. If the system provider disobeys RBI orders or directives, violates any Act or regulatory rule, or violates the terms and conditions on which it was granted authorization, the authorization may be cancelled.

RBI is allowed to collect permission fees under Section 7. According to Section 15(3), RBI is authorized to disclose any documents or information it obtains to any person or authority if it determines that doing so is necessary to protect the integrity, effectiveness, or security of the payment system, is in the best interest of banking or monetary policy, or serves the interests of the general public. The RBI is given the authority to guarantee that the Act's rules are followed by Section 14 of the Act. The Regulations established by the Act have the authority to appoint an officer to access any location where a payment system is in use, inspect any equipment, and call and request any document or information from any employee of the system provider or participant.

RBI also reserves the right to perform an inspection where it is required to scrutinize. According to Sections 17 and 18 of the Act, the RBI has the authority to direct a payment system or system participant to execute a specific act or refrain from performing a specific act in order to ensure the smooth operation of the payment system.

Retail Payments Mechanisms

01. National Financial Switch (NFS)
02. Immediate Payment Service (IMPS)
03. Affiliation of RuPay Cards (debit cards/ prepaid cards) issued by banks and co-branded credit cards issued by non-banking financial companies (NBFCs) or any other entity approved by the RBI.
04. National Automatic Clearing House (NACH)
05. Aadhar Enabled Payments System (AEPS)
06. Operation of Cheque Truncation System
07. Unified Payments Interface
08. National Electronic Toll Collection (NETC) Cards Payment Networks
09. Cross border Money Transfer – in-bound only
10. ATM Networks
11. Prepaid Payment Instruments
12. White Label ATM Operators

Dispute redressal mechanism

According to Section 24 of the Act, the system provider must set up a panel to resolve disagreements between system participants, and they must refer any such disagreements that include two or more participants to the panel. The Reserve Bank will be consulted if the system participants are not happy with the panel's judgement or if there is a disagreement between a system participant and the system provider. If the issue is addressed to the Reserve Bank, an officer of the Reserve Bank authorised in this regard will make the ultimate and binding decision. When a dispute arises between Reserve Bank acting as a system provider or system participant and any other system provider or system participant then the matter shall be referred to the Central Government which authorizes an officer of a rank not below the rank of Joint Secretary whose decision shall be final.

Reference : https://legislative.gov.in/sites/default/files/A2007-51_0.pdf