Payment and Settlement Systems

Introduction

The need for payments and settlements is as old as the need for goods and services. The earliest known Payment and Settlement System (PSS) was the barter system facilitating exchange through goods and / or services. With the concept of money, people progressed to settling their economic transactions using currency notes and coins. The evolution of the banking system and advent of bank accounts led to an easy and safe method for making payments by transfer of money through bank accounts. This transaction required a payment instrument, and cheque emerged as the primary instrument for payment transactions. Thus, started the tale of payment systems.

An efficient payment system promotes market efficiency and reduces the cost of exchanging goods and services. By the same token, its failure can result in loss of confidence in the financial system and in the very use of money.

In India, the oversight of the payment systems is entrusted to the Reserve Bank of India (RBI) where the Board for Regulation and Supervision of Payment and Settlement Systems (BPSS), chaired by the Governor, RBI, spearheads this responsibility. The creation of a new department viz., Department of Payment and Settlement Systems (DPSS) by RBI in the year 2005 to focus exclusively on payment and settlement systems, and subsequent legislation of the Payment and Settlement Systems Act, 2007 (PSS Act) set the stage for a new era in the history of payment systems in the country.

Payment and Settlement Systems Act, 2007

A sound and appropriate legal framework is a necessary requirement for efficient payment systems. The legal environment should include (i) laws and regulations of broad applicability that address issues such as insolvency and contractual relations between parties; (ii) laws and regulations that have specific applicability to payment systems (such as legislation on electronic signature, validation of netting, and settlement finality); and (iii) the rules, standards, and procedures agreed to by all participants of a payments system. Considering the importance of regulation for the development and orderly functioning of not only financial services but also payment systems, the Payment and Settlement Systems Act was legislated in 2007. India is one of the few countries that has a specific payment systems law to ';..provide for the regulation and supervision of payment systems in India and to designate RBI as the authority for the purpose and for matters connected therewith or incidental thereto.'; RBI's scope for regulation extends to the whole gamut of payment systems and instruments as also services provided by banks and non-banks.

In terms of Section 4 of PSS Act, no person other than RBI can commence or operate any payment system in India unless authorised by it. RBI has since authorised various Payment System Operators (PSOs) such as CCIL (financial market infrastructure - central counterparty), NPCI (retail payments organisation), card payment networks, cross-border inbound money transfers entities, ATM networks, PPI issuers, Instant Money Transfer operators, TReDS platform providers and Bharat Bill Payment Operating Units (BBPOUs) to operate payment systems in the country. PSS Act and the Payment and Settlement Systems Regulations, 2008 framed thereunder, provide necessary statutory backing to the RBI to exercise oversight over the payment and settlement systems in the country.

Components of Payment and Settlement Systems

The Bank for International Settlements' (BIS) Committee on Payments and Market Infrastructures (CPMI) defines payment systems transactions to include the total transactions undertaken by all payment systems in the country. Considering this definition, payment systems transactions in India would comprise of transactions processed and settled through (a) Paper Clearing [Magnetic Ink Character Recognition (MICR), Non-MICR, Cheque Truncation System (CTS), Express Cheque Clearing System (ECCS)]; (b) Bulk electronic transaction processing systems like Electronic Clearing Service (ECS), with its variants Regional ECS and National ECS; National Automated Clearing House (NACH) - Debit and Credit; (c) Card Payments (Debit, Credit and Electronic); (d) Large Value [Real Time Gross Settlement (RTGS)]; (e) Retail [National Electronic Funds Transfer (NEFT)]; (f) Fast Payments [Immediate Payment Service (IMPS), Unified Payments Interface (UPI)]; and (g) e-Money [Prepaid Payment Instrument (PPI) Cards and Wallets). Except (a) above and cash transactions, all other payments constitute digital transactions.

In addition to the above payment and settlement systems, RBI has also institutionalised a well-established clearing and settlement system for Government Securities.

The digital revolution is taking the world by storm and no other area has witnessed a metamorphosis as has been seen in the payment and settlement arena, resulting in a myriad of payment options for the consumer. In the last 10 years, India has witnessed an exponential growth in payment systems and a significant shift in payment preference.

The shift in payment preference in the last 10 years is evidenced by the fact that the volume of paper clearing, which comprised of 60% of total retail payments in the financial year (FY) 2010-11, shrunk to 3% in the FY 2019-20. This striking shift in payment preference has been due to the creation of robust electronic payment systems such as RTGS, NEFT and ECS that has facilitated seamless real time or near real time fund transfers. In addition, this decade has witnessed introduction of innovative payment systems that provide instant credit to the beneficiary, with the launch of fast payment systems such as IMPS and UPI that are available to consumers round the clock for undertaking fund transfers, and introduction of mobile based payment systems such as Bharat Bill Payment System (BBPS), PPIs to facilitate payment of bills and purchase of goods and services and National Electronic Toll Collection (NETC) to facilitate electronic toll payments. The convenience of these payment systems ensured rapid acceptance as they provided consumers an alternative to the use of cash and paper for making payments. The facilitation of non-bank FinTech firms in the payment ecosystem as PPI issuers, BBPOUs and third-party application providers in the UPI platform have furthered the adoption of digital payments in the country.

The advent of innovative electronic payment systems that leverage on technology which can be used through internet and mobile, has led to electronic payment systems dominating the retail payment space with around 61% share in terms of volume and 75% share in terms of value during the FY 2019-20. Increased mobile and internet penetration in the country has resulted in significant shift towards use of mobile / internet-based payment systems for effecting payments for purchase of goods and services. Introduction of lightweight acceptance infrastructure (QR codes) has further facilitated the use of mobile based payments across the country. Data shows that low value payments dominate the volume / turnover, and products that afford real time, instantaneous transfers are the most preferred modes of payment.

The last decade, therefore, has seen an explosion of payment systems with consumers having multiple options to choose from. In the approach towards payment system development in the country, safety and security has been of paramount importance to RBI; followed by efficiency, accessibility, affordability and convenience. Payment systems have always been regarded as a public good and an ancillary activity of banks which can be leveraged as a base to provide various other services. Given the sizeable populace of the country, the endeavour is to make the payments space a large-volume, low-average-value and low-cost game for sustained presence and continuance.

A study on payment systems is incomplete without touching some of the institutions which contributed to the efficacy and efficiency of the systems, notable among them being the Institute for Development and Research in Banking Technology (IDRBT) and the National Payments Corporation of India (NPCI) which have contributed to making India's payments ecosystem the showpiece that it is today. It is with great foresight that RBI not only established these institutions but also nurtured them till they were able to stand on their feet.

Source : RBI