FinTechStreamlining Net Banking: RBI’s Move Towards Interoperable Merchant Payments

INTRODUCTION

India’s payments ecosystem is rapidly developing, owing to the increased adoption of technology and innovation. The country is now a global leader in digital payments and offers a range of safe, secure, innovative, and efficient systems.  As per the vision document published by Reserve Bank of India (hereinafter referred to as “RBI”) titled “Payments Vision 2025” dated 17th June 2022, India’s payment systems conduct over 26 crore digital payment transactions every day, with the Unified Payments Interface (hereinafter referred to as “UPI”) system accounting for more than two-thirds of these transactions.

As reported by a Press Release published by the Press Information Bureau titled “India’s UPI: A global front-runner in digital payment systems” dated October 30^th, 2023, India accounted for roughly 46% of global digital transactions in the year 2022. The unprecedented growth in digital payments is also reflected in the RBI’s Digital Payment Index, which has increased fourfold in the last five years. Payment systems promote economic growth, financial stability, and financial inclusion. One of the primary strategic aims and objectives of the RBI has been to provide safe, secure, dependable, economical, and effective payment systems. The RBI’s function has evolved from regulator, operator, and facilitator to developer of an environment for the organized growth of India’s payments ecosystem.

WHAT IS MEANT BY AN ‘INTEROPERABLE PAYMENT SYSTEM’?

 Interoperability is the core ability of various digital systems, applications, and databases to connect and interact with one another. Payment platforms use financial technology to connect and exchange data with ecosystem participants such as banks, payment gateways, processors, merchants, and customers. This integration facilitates seamless transactions between payment service providers, third-party processors, and other networks.

Interoperability is crucial for instant payments as it enables different payment systems to communicate and share information in real-time. This implies that customers may make payments using any device or platform, and merchants can accept payments from any customer, regardless of their payment provider.

Without interoperability, customers and businesses are forced to use a single payment method, which can be difficult and costly. Interoperability fosters innovation in the payments business. When diverse payment systems can effortlessly integrate, it promotes a fair playing field for new market entrants. This stimulates competition and pushes innovation, resulting in improved goods and services for customers.

NEED FOR INTEROPERABILITY OF NET BANKING

Presently, Internet banking transactions handled through Payment Aggregators (hereinafter referred to as “PA”) are not interoperable, which means that a bank must establish a separate agreement with each PA of various online retailers. As a result, if a customer wishes to transfer funds from his bank account to a certain merchant, the Merchant’s PA and the Customer’s bank must establish a separate bilateral arrangement. The current situation exposes a significant bottleneck in the efficiency of Internet banking transactions, particularly those processed by PAs.

Each bank must negotiate the challenging task of independently integrating with several PAs connected to distinct online retailers due to the absence of interoperability. Given the large number of payment aggregators, it is challenging for each bank to integrate with each PA.

Considering the fact that there are presently 18 online payment aggregators authorized by RBI, including Razorpay Software Pvt. Ltd, Amazon Pay (India) Pvt. Ltd, Google India Digital Services Pvt. Ltd, Tata Payments Ltd, Zomato Payments Pvt. Ltd, etc., not only does this process take time and money, but it also presents a major obstacle for smaller banks that may find it difficult to integrate with every PA. Furthermore, due to the absence of a payment system and a set of regulations for these transactions, there are delays in the actual receipt of funds by merchants and settlement concerns.

In a bold drive to transform its digital payments ecosystem, the RBI has set its vision on developing an interoperable payment system for Internet banking by this year. This strategic project, backed by the RBI Governor, has the potential to not only streamline financial transactions but also strengthen the country’s efforts toward financial inclusion.

APPROVAL TO NPCI BHARAT BILLPAY (NBBL) AND THE WAY AHEAD

As discussed in the ‘Digital Payments Awareness Week’ celebration on March, 2023, in Mumbai, the RBI Governor stated that the central bank has approved NPCI Bharat BillPay Ltd (herein referred to as “NBBL”), a wholly-owned subsidiary of National Payments Corporation, to build such an interoperable system.

The interoperable system by NBBL will be implemented during the current calendar year, providing a more efficient and smooth payment experience. The major purpose of the new interoperable system is to help merchants settle their payments faster and more smoothly. By developing an interoperable framework, there will no longer be a need to make specific payment arrangements between the Merchant’s PA and the Customer’s bank.

The RBI has come up with the following measures with the aim of Financial Inclusion, Integrity, Innovation, and Institutionalism,:

1. RBI has come up with a Master Direction RBI/DPSS/2023-24/111CO.DPSS.POLC.No.S1114/02-27-020/2023-2024 titled “Reserve Bank of India (Bharat Bill Payment System) Directions, 2024” dated February 29^th, 2024 providing a revised regulatory framework applicable to NBBL and all Bharat Bill Payment Operating Units (hereinafter referred to as “BBPOUs”), thereby aiming to streamline the process of bill payments, increasing greater participation, and improving customer protection among other changes.
2. Further, in a vision document published by RBI titled “Payments Vision 2025” dated 17^th June 2022, the RBI intends to centralize all payment rails. The regulator intends to swiftly bring Internet banking under its purview and bring it up to speed with other operations like the Immediate Payment Service (managed by the NPCI), Real Time Gross Settlement, and National Electronic Fund Transfer systems (administered by the RBI). Centralization will enable merchants to standardize their payment processes, get visibility into their data, and establish effective consumer grievance channels.

IMPLICATIONS FOR STAKEHOLDERS

I. Benefits for merchants:

• Faster and more dependable fund settlement.
• Settlement risks have been reduced, as have payment delays.

II. Benefits for Banks

• A more standardized and interoperable system that simplifies the integration procedure.
• Enhanced efficiency in processing Internet banking transactions.

III. Benefits for Customers

• A smooth payment experience that eliminates the need for numerous arrangements.
• Faster transaction processing for a variety of businesses, including insurance, mutual funds, and e-commerce.

IV. Benefits for Payment Aggregators

Providing a level playing field for small payment aggregators who are unable to establish a tie-up with big leading banks.

AMLEGALS REMARKS

The RBI’s mandate to build an interoperable Internet banking system via NPCI Bharat BillPay Ltd. is an important step towards facilitating digital payments in India. The RBI’s interoperable system aims to create a unified framework, reduce complexity, and provide a more user-friendly experience for both consumers and financial institutions.

By confronting existing difficulties encountered by stakeholders, the RBI not only aims to streamline Internet banking transactions but also paves the road for a more inclusive and dynamic economy. It is thereby consistent with India’s overarching goal of widespread financial inclusion.

This approach is aimed at filling a crucial gap in the current regulatory framework i.e., the lack of a standardized payment mechanism and standards for Internet banking transactions. As the nation anxiously anticipates this momentous leap, it is clear that this effort has the ability to revolutionize India’s digital banking landscape.

– Team AMLEGALS assisted by Ms. Deepanshi Kapoor (Intern)