India has been at the forefront of all the developments in the world from the recent uproar in startups to spreading awareness about the environment. India has well-adjusted itself to the new mode of contactless living which also spreads to contactless transactions.
In just a few years, the historically accepted method of transaction, which is cash, has been replaced by the digital transactions. This shift has been supported and regulated by various stakeholders by providing more options for payment, improving the older ones, and also regulating them all.
This article discusses about the digital payments and the role of NPCI in supporting and promoting them and attempts to throw some light on the related regulatory framework.
A Digital Payment transaction is a transaction that is executed through electronic means for the direct transfer of funds. It is a convenient method with low-risk and easy traceability of the transaction.
Digital payments have increased many folds in the last two decades. In year 2021, the nation witnessed almost 44 billion payments made digitally. Most of this growth can be attributed to the efforts of the Reserve Bank of India (“RBI”) and the National Payments Corporation of India.
NATIONAL PAYMENTS CORPORATION OF INDIA
National Payments Corporation of India (“NPCI”) is an organization formed by RBI and the Indian Banks Association and was incorporated in 2008 as a “Not for Profit” Company to provide the Banking system of India with infrastructure supporting various settlement systems such as physical and electronic.
Over the years, the organization has come up with various modes of digital payments to contribute to the sector. The major methods of digital payments introduced by NPCI are mentioned below.
RuPay is a payment system that supports digital payment. The platform allows the issue of cards like debit cards, credit cards, etc. for contactless payment.
A recent update in the field is the RuPay Tokenization, which is the tokenization of information from which consumers can make payments while keeping their sensitive information private. It is supported by Bharat E-commerce Payment Gateway. RuPay card is also associated with the Government in providing various schemes such as Pradhan Mantri Jan Dhan Yojna.
2. Cheque Truncation System
Cheque Truncation System (“CTS”) enables increased cut-off time to accept customer cheques by banks. It reduces time duration and eliminates the cost of paper. It uses digital signature/encryption methods also to avoid tampering with data/images.
3. National Automated Clearing House
National Automated Clearing House (“NACH”) is a system to execute multiple transactions collectively. It is a system developed to facilitate unified standards for transfer across the nation.
NACH works by conducting transactions from many accounts to one account like a collection of various payments related to gas, electricity, telephone and water charges, etc. It also helps in the periodic collection of installments related to premiums, loans, etc.
4. Aadhar enabled Payment System
Aadhar enabled Payment System (“AePS”) allows the execution of transactions through the Aadhar number. The bank account is linked to Aadhar and a bank customer can access the account and execute transactions through the Aadhar itself.
5. National Financial Switch
National Financial Switch (“NFS”) is a network of ATMs launched on December 14, 2009, which supports the sub-membership model allowing even the smaller, regional banks to become a part of the ATM Network.
The network also has a Dispute Management System (“DMS”) to comply with relevant regulations. In addition to basic services like cash withdrawal, the mechanism also provides Value Added Services such as Card to Card fund transfers.
6. Immediate Payment Service
Immediate Payment Service (“IMPS”) was launched on 22nd November 2010 and helps in real-time fund transfer. This transfer can be made by Mobile, Internet, ATM, or even SMS. IMPS is also provided through NFS. This supports a network aimed at transferring banking services to the mobile phone.
7. Unified Payments Interface
Unified Payments Interface (“UPI”), launched on 11th April 2016, allows money transfer through mobile at all times even though different bank accounts. Under this system, a Virtual Payment Address is created and it requires a request to be accepted for completion of the transaction.
Bharat Interface for Money (“BHIM”) is the application supporting UPI. Following this, Bharat QR was also launched which is a code in digital form, giving the details of the product and an option to make the payment without even a Point-of-Sale machine. The guidelines related to BHIM UPI are issued by NPCI itself.
*99# allows the users to undertake any transaction without even downloading the app. It is backed by USSD and its main aim is to create maximum reach even to the underserved part of the society. It can be used by dialing *99# and interacting with the voice menu which opens thereof. The service can only be used in the bank account which is linked to the phone number.
9. Bharat Bill Payment System
Bharat Bill Payment System (“BBPS”) is a system by RBI and NPCI. It can be considered as a single method for all bill payments. It is easily available, reliable, safe, and also the proof of payment is sent via SMS or receipt.
10. National Electronic Toll Collection
National Electronic Toll Collection (“NETC”) is a nationwide applicable system used for toll tax in India. It enables the usage of FASTag for electronic payment of toll tax. It helps in transaction processing, clearing and settlement, and dispute management.
E-RUPI is a digital payment medium, where benefits will be delivered directly to the mobile phones of the recipients in form of a QR code or an SMS. It can be understood as a prepaid gift voucher that can be used at specific centers without employing any other medium of payment. It’s built on the UPI platform and has partnered with banks that will be issuing the vouchers.
Apart from the initiatives, NPCI is also actively promoting digital payments and also monitoring its growth. NPCI along with People Research on India’s Consumer Economy & Citizen Environment (“PRICE”), which is an NGO, came out with a report on Digital Payment in India. It was found that one-third of the Indian households were using digital payments. Even the low-income group was found to be actively involved in digital payments. Further, NPCI through a press release dated 25.03.2020 in light of COVID-19 also asked the country to switch to the digital mode of payments.
The Regulatory Framework regarding digital payment revolves around major legislation in the domain i.e., the Payment and Settlement Systems Act, 2007 (“PSS Act”), and the guidelines released by the regulator i.e., Reserve Bank of India (“RBI”).
All payment systems are required to adhere to the PSS Act. The PSS Act defines a payment system as “a system enabling payment to be effected between a payer and a beneficiary, involving clearing, payment, or settlement service or all of them”. It controls the digital payments system in India giving power to RBI to regulate the matters.
In terms of Section 4 of the PSS Act, “no person other than RBI can commence or operate any payment system in India unless authorized by it”. RBI has since then, authorized the payment system operators of card schemes, prepaid payments instruments, money transfers, and ATM networks.
1. Guidelines for Prepaid Payment Instruments
In October 2017, RBI issued the Master Directions on Issuance and Operation of Prepaid Payment Instruments (“PPI Directions”). The PPI directions are mainly aimed at operators like Paytm who enable transactions against the value stored in them.
After this, on 27.08.2021, RBI also released new “Master Directions on Prepaid Payment Instruments” replacing the older ones. The new directions rejigged the classification to make things simpler and extended the registration to perpetuity while also providing new rules for cross-border transactions and maintenance of accounts.
2. Guidelines for Payment Aggregators and Gateways
RBI also issued detailed guidelines titled “Guidelines on Regulation of Payment Aggregators and Payment Gateways” applicable w.e.f. 01.04.2020. The guidelines focus on Payment Aggregators and Payment Gateways while also defining them.
Authorization from RBI and minimum capital requirements are mandatory under the guidelines along with other compliances like KYC, Security of Data and governance, etc.
3. Guidelines for Digital Payment Security
RBI has issued Master Direction on Digital Payment Security Controls, 2021 on 18.02.2021. The directions apply to all scheduled commercial banks, small finance banks, payments banks.
The credit card issuing non-banking financial companies (NBFCs) ask the lenders to create a broad approved policy and also conduct regular audits and vulnerability testing of their systems. They would have to adopt the highest standards of security available to avoid data breaches and especially for card payments, adopt better standards.
RBI has asked the lenders to change the destination of OTP so that it won’t be received on the same device. RBI also expects a reconciliation process within 24 hours of the transaction by communicating the transaction details. Strong CAPTCHA Codes with server authentication while using web pages are also required. Lodging of complaints must also be made easier. RBI asked the lenders to not store customer-sensitive information on their servers.
Turning towards cashless transactions has been a major step that the nation is taking. However, this step must be supported by the Government as well by helping the consumers adapt and also enhancing their security.
Multiple organizations are contributing their best to the cause and even RBI is trying to impose security-related regulations, while also encouraging digital payments. But amid layered guidelines and no concrete legislation, the present scenario for fintech companies have become blurry.
To provide clarity in the domain and a standard set of rules, the legislature must come up with a new law capable of addressing the latest demands while also leaving some scope for RBI to impose it to ensure maximum compliance and efficiency.
-Team AMLEGALS assisted by Ms. Sakshi Garg (Intern)
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