Technological innovation is revolutionising payments at a rapid pace. As the payments sector continues to innovate to meet the consumer demand for more efficient, innovative, and faster payment systems, there is a renewed focus to develop policies and regulations to support the growth of digital payments. My latest report (Report) identifies the hallmarks of a modern payment services law and examines such features in the context of India’s Payment and Settlement Systems Act, 2007 (PSS Act). On this basis, the Report argues for redesigning India’s payments law by focusing on proportionate regulation and balancing regulatory flexibility with well-established statutory mandate to promote competition, innovation, and consumer protection.

 

Regulating Digital Payments - A Snapshot of Global Best Practices

Pursuant to the rapid transformation of the payments sector, many countries have modernized their payments law, using activity-based and risk-based approaches. Modernization efforts aim to foster safety, efficiency, innovation, and competition in retail payments. The Report studies the primary law governing payments in seven select jurisdictions with low cash transactions and high volume of digital payments—United Kingdom, Singapore, Australia, Canada, Hong Kong, Indonesia, and Brazil (Surveyed Jurisdictions). Key takeaways from this review are set out below.  

  1. Many Surveyed Jurisdictions (such as UK, Singapore, and Hong Kong) make a distinction between payment systems (systems that facilitate fund transfer) and payment services (customer-facing payment activities). This distinction is useful to identify different players across the payments value chain and create risk-based regulations.
  2. Most Surveyed Jurisdictions envisage an authorisation framework for payment services and a designation framework for payment systems that pose systemic risk. Such payment systems are typically subject to stringent oversight to protect against systemic risks.
  3. Three primary policy objectives guide the regulation and oversight of retail payment systems and services—(i) safety and soundness of payment systems, (ii) efficiency in the functioning of payment systems, and (iii) protection of consumer interests.
     

Redesigning India’s Payment Systems law - Case for Reform

In India, the PSS Act is the principal legislation governing payments. The PSS Act was primarily enacted to regulate systemically important payment systems and designated the Reserve Bank of India (RBI) (India’s central bank) as the regulator of payment systems. Due to this initial scope, the PSS Act focuses on regulation from a systemic point and confers regulatory powers on the RBI, without setting out corresponding obligations on critical issues for payment system operators. To deal with these gaps, the RBI has relied on its power to issue directions under the PSS Act to regulate payment systems. Since its enactment, the RBI has issued around 280 circulars and notifications under the PSS Act. This has led to a situation where the entire regulatory framework for payment systems in India has evolved through subordinate legislation, without any specific guidance in the primary statute. For instance, the entire regulatory framework for e-wallets and payment aggregators (that have to obtain authorisation under the PSS Act), substantive provisions for the operation of such payment services, obligations relating to risk management, consumer protection, interoperability, etc, emanate through subordinate legislation. 

Since the enactment of the PSS Act, the payments landscape has undergone extensive changes with the emergence of new players and services for retail payments. However, the PSS Act has not undergone any significant changes since its enactment more than a decade ago. There is an absence of provisions necessary to create a conducive ecosystem for retail payments viz. provisions to promote competition, innovation and protect consumers. 

 

Modernising the Payment Services Law in India

The Report argues that the PSS Act must be re-designed to adapt to new payment services and account for the evolving nature of the payments sector. India should enact a separate law to regulate payment activities with the key features discussed below. This will require an amendment of the PSS Act to carve out such payment services from the ambit of the PSS Act, that can continue to regulate clearing and settlement systems.

  1. Given the evolving nature of the payments sector, the proposed law should adopt a principles-based approach. The primary statute should outline principles to set standards by which regulated entities should conduct their businesses. The law should also provide flexibility to the regulator to expand on such principles through subordinate legislation. This approach will promote certainty for businesses, and inspire the confidence of consumers.
  2. A definition of ‘payment services’ should be inserted to capture consumer-facing new and emerging payment services. The identification of such services will provide clarity to new businesses and will also be useful to design an effective regulatory framework while avoiding overlaps and duplication.
  3. A risk-based approach towards regulation should be adopted where regulation is proportionate to the risks posed by a payment service. This allows emerging businesses to innovate without undue regulatory intervention while requiring businesses undertaking higher-risk activities to be subjected to stronger regulatory oversight. The law should provide a two-tiered regulatory structure with authorisation requirements for payment service providers (PSPs) and a designation framework for systemically important payment systems.
  4. The proposed law should outline:
    a)  principles on operational risk management;
    b)  consumer protection obligations for PSPs relating to disclosure of information, grievance redressal, liability for unauthorised transaction, confidentiality of data, etc;
    c)  a framework for ensuring open access to payment system infrastructure on objective and non-discriminatory criteria; and
    d)  provisions on interoperability between payment solutions and designated payment systems.
  5. The proposed law should also clarify the liability of PSPs for third party service providers appointed by PSPs. It should require PSPs to undertake a risk-assessment of such providers and inform the RBI of the appointment or change in critical service providers.

While several demand and supply side factors determine the adoption of digital payments, a key enabler for the promotion of digital payments is a regulatory framework that is conducive for sustained use of such payments by all customer segments.  

 

Shehnaz Ahmed is Senior Resident Fellow and Fintech Lead, Vidhi Centre for Legal Policy, India.