2. INTRODUCTION
The payments landscape in India has evolved over the past many years,
stimulated by developments in information technology. Improvements in IT
systems, aided by the push for no-cash transactions has bolstered the digital
payments infrastructure in India with newer cutting-edge technologies being
rolled out constantly by the Reserve Bank of India and the National Payments
Corporation of India.
Since the introduction of online payment mechanisms like NEFT and RTGS in
the 2005 to operationalizing UPI in 2016, India has come a long way in
establishing a robust ecosystem of digital payments. This in turn has provided
a much-needed boost to the fintech industry, evidenced by the increasing
number of start-ups.
Next-generation payment technologies such as UPI, Bharat QR, digital wallets
are expected to thrive and projected to double their contribution to 30% in
the digital payments industry.
According to a report by Google and Boston
Consulting Group (BCG), the Indian digital
payments is estimated to touch $500 billion
by 2020, contributing 15 per cent to the
country’s GDP.
It is estimated that the number of micro –
transactions (transactions lower than INR
100) are going to grow at an enormous pace
with the at least 50% of the person to
merchant transactions being below INR 100.
While wallets were expected to dominate
the ecosystem, the advent of Unified
Payments Interface (UPI) was a
gamechanger in the digital payments
ecosystem. Market trends suggest that UPI
will outshine wallets with a compounded
annual growth rate of almost 13% as stated
in a report published by KPMG.
3. 1. Enactment of
Payment and
Settlement Systems,
Act 2007
2. Launch of Aadhaar
3. Launch of
Immediate Payment
Service (IMPS)
4. Electronic
Payments involving
intermediaries
1. Launch of RuPay
2. Launch of National
Automated Clearing
House (NACH)
3. Launch of National
Unified USSD
Platform (99#)
1. Launch of Bharat
Bill Payment System
(BBPS)
2. Launch of Unified
Payments Interface
(UPI) and Bharat
Interface for Money
3. Launch of Bharat
QR
4. Directions on
Issuance of Prepaid
Instruments by RBI
2012-2014
2015-2018
2006-2011
70% INCREASE IN DIGITAL PAYMENTS
IN INDIA IN 2018
600% INCREASE IN THE NUMBER OF
UPI TRANSACTIONS
6X INCREASE IN THE NUMBER OF
MERCHANTS
PAYMENTS LANDSCAPE IN INDIA
2019-2022
1. Draft Guidelines
for setting up of a
regulatory
sandbox
2. Discussion
paper on
regulating
payment gateways
and payment
aggregators
3. Personal Data
Protection Bill
4. SEBI IRDA TRAI
RBI
NPCI
Payment &
Settlement
Systems Act
REGULATORY FRAMEWORKPayment and Settlement Systems Act
The payments sector is governed by the
Payment and Settlement Systems Act, 2007
and the corresponding Regulations enacted
under it. The Reserve Bank of India (RBI) is
the chief regulator deriving its power from
the aforementioned Act
National Payments Corporation of India
National Payments Corporation of India
(NPCI) is an umbrella organisation for all
retail payment systems in India, set up with
the support of RBI & Indian Banks
Association (IBA).
Other Regulators
The major sector-specific regulators
depending on the nature of the fintech
business are:
1. Reserve Bank of India (RBI)
2. Insurance Regulatory and
Development Authority (IRDA)
3. Telecom Regulatory Authority of India
(TRAI)
4. Securities and Exchange Board of
India (SEBI)
5. CARDS
56.48%NETBANKING
23.80%
UPI
17 %
WALLETS
1.89%
PREFERRED PAYMENT MODES
While mobile wallet transactions grew by only
5% between June 2018-June 2019 with a
decline in the number of transactions in
recent months; UPI transactions increased by
600% in 2018, the share of mobile wallet
transactions in value of digital payments has
also declined in the intervening period from
6% in FY 2018 to 1.87% in FY 2019.
While digital payment transactions have been
growing at a rapid space, the preferred mode
of payment is constantly changing with the
emergence of new technologies. In the years
post demonetization, mobile wallets became
the preferred mode of payment but with the
introduction of UPI, there has been a gigantic
shift from wallets to UPI.
7. Types of PPI
Closed Semi Closed Open
PRE PAID INSTRUMENTS
RBI’s Master Direction dated 11th
October 2017
governs the issuance and operation of PPIs .
A Prepaid Payment Instrument (PPI), facilitates
purchase of goods and services including
financial services, remittance facilities etc.
against the value that is stored on such PPIs.
PPIs are governed by Payments and Settlements
Act, 2007.
Market studies indicate that various companies
intend to shut down wallet offering due to the
increase in the adoption of UPI linked Apps.
Co-Branded
PPIs are primarily of 3 types, Closed, Semi –
Closed and Open. Additionally, the Directions
also enable companies to co brand with
licensed PPI Issuers to issue co-branded PPIs.
8. CLOSED PPI SEMI-CLOSED PPI OPEN PPI
Any Entity Any banking or non-banking
entity
Only banking entities
Not Required Required Required
To avail goods and services
solely from the issuing entity.
Cannot be used for
payments/settlement for third
party transactions.
To purchase goods and services
from a group of clearly identified
merchant locations/
establishments.
Cash withdrawal or redemption
is restricted (whether the issuing
entity is a banking entity or not).
To purchase goods and
services, including financial
services, remittance facilities,
etc. Banks issuing an open PPI
also facilitate cash withdrawal
at ATMs/Point of Sale
(PoS)/Business Correspondents
(BCs).
Restricted Permitted (Subject to KYC) Permitted (Subject to KYC)
FEATURES
Transferability of Funds
Functionality
Approvals
Issuer
9. UPI
*Please note that the numbers denote
the order of the steps
UNIFIED PAYMENT INTERFACE
1. Request for
Payment
8. Confirming
Payment
2. Seeking
Authorisation Details
3. Responding with
Details
4. Request to
debit amount
5. Amount
being debited
6. Request for credit
of amount
7. Confirmation of
credit
The United Payments Interface (UPI) is a
cutting-edge digital payment technology that
facilitates inter-bank transactions in real time
using the Immediate Payments Service (IMPS).
The payment system was designed and
developed by the NPCI. The most important
advantages that UPI provides is that it is cheap,
secure as well as interoperable which can
execute both push & pull transactions unlike
its other predecessors which could only
execute only push transactions. The governing
framework for UPI is the rules & regulations
enacted by NPCI from time to time.
9. Request for
Transaction
Confirmation
10. Confirmation
of Transaction
Remitter
Bank
Beneficiary
Bank
Payee
PSP
Payer
PSP
The number of UPI transactions has increased
approximately by 57,000% since
demonetization!
10. BHARAT BILL PAYMENT SYSTEM
Until now the system catered to only five
services – DTH, water, electricity, gas and
telecom. In September 2019, the RBI extended
the BBPS to include other recurring payments
such as insurance premiums, mutual fund
contributions, municipal taxes and even school
and university fees under the BBPS.
The BBPS is an integrated bill payment system,
introduced by the NPCI and the RBI as an
initiative to promote financial inclusion and
digital payments. BBPS offers interoperable bill
payment service to customers online as well as
through a network of agents on the ground.
Authorised operational
units working on the basis
of the standards set by the
BBPCU
Single authorized entity
operating the BBPS
BBPCU
BBPOU
Customer
Operating Unit
Biller
Operating Unit
Customer and
Biller
Operating Unit
Consumer Customer OU BBPCU Biller OU Biller
1. Consumer uses a
channel (mobile,
internet banking etc)
for payment.
2. Customer OU debits
the account, collates
information and
transfers it to BBPCU.
3. BBPCU undertakes
the settlement and
passes the bill
information to Biller
OU.
4. Biller OU credits
accounts and transmits
information to the
Biller.
BBPS Structure
Transaction Flow
11. Eligibility The eligibility criteria for non-bank entities seeking to operate as BBPOUs is as follows:
a. The entity should be a company incorporated and registered in India.
b. The memorandum of association of the entity must cover the proposed activity of
operating as a BBPOU.
c. The entity should have a net worth of at least INR 100,00,00,000 (Hundred Crores)
d. In case of any foreign direct investment in the entity, necessary approval from the
competent authority is required.
12. BHARAT QR
Bharat QR is an integrated, interoperable Person-to-Merchant (P2M) mobile payment
solution developed by major card payment companies like MasterCard, Rupay, Visa and the
National Payments Corporation of India. The technology allows digital payments for
merchants without the need for having a Point of Sale (PoS) machine.
To make a payment, a user is simply required scan the QR code at a merchant store that has
displayed the Bharat QR code. The codes generated by the merchant can either be static or
generated dynamically for each transaction.
In April 2018, the NPCI issued guidelines on interoperability of all BHIM UPI applications
including merchant and third party applications. This enables the following through BHIM UPI
apps, merchant apps and third party apps:
1) Sending and receiving money using any BHIM UPI ID (VPA)
2) Generating and responding to a collection request
3) Generating, scanning and paying via Bhart QR and BHIM QR
INTEROPERABILITY
13. CARDS
DEBIT CARD
TYPES OF CARDS
DEBIT CARD
CREDIT CARD
CO-BRANDED CARD
Debit cards allows deduction of money directly from a consumer’s bank account to pay for a
purchase. Debit cards can be issued by both banks and NBFCs
Credit cards allow holders to purchase goods and services on credit and enable holders to
obtain cash advances. Credit cards may be issued by both, scheduled commercial banks and
non-banking financial companies (NBFCs).
A co-branded card is sponsored by two parties – typically one is a retailer and the other is a
bank or card network. Banks can issue co-branded credit and debit cards provided they comply
with KYC/AML/CFT norms issued by the RBI. NBFCs are permitted to issue co-branded credit
cards by taking prior approval from the RBI. They are also required to have a minimum net
owned fund of INR 100 crores.
15. UNREGULATED ENTITIES
The framework discussed until now governs certain specific businesses such as lending,
payment settlement, pre-paid instruments etc. It must be noted that there are a whole bunch
of fintech companies that are unregulated (i.e do not require a license or registration) either
because:
1) their operations cannot be categorized as the ones regulated by the relevant legislations,
rules, regulations, directions etc.; or
2) they partner with a licensed entity or piggy back on a licensed entity’s framework in order
to render their services.
The following companies, while fairly large players in the fintech sector as largely unregulated:
1) Payment Facilitators;
2) Payment Aggregators;
3) Loan Facilitators;
5) Crowdfunding Platforms.
However, due to the strong focus on data privacy, security and KYC, it appears that directions
will soon be issued to regulate the operations of such fin tech companies.
16. LOYALTY PROGRAMS
DESCRIPTION
ARE LOYALTY PROGRAMS REGULATED ?
Loyalty Programs are customer retention strategies devised by companies, merchants and
banks to encourage customers to make purchases. There can be various kinds of loyalty
programs such as: (a) Reward points - These reward points can be redeemed for products and
services from the company itself or from third parties, (b) Cash back rewards (c) Loyalty cards.
Whether a specific loyalty program is regulated or not will depend on the type and structure of
the program. For example, meal vouchers are regulated by the RBI but rewards points are
unregulated. The regulation that comes closest to governing reward points are the Pre-Paid
Instruments Guidelines but they do specifically make a mention of the same. Reward points
can generally be exchanged for goods and services and not for cash.
Our view is that the guidelines - as they stand - are not intended to govern rewards points. As
per market study, most companies issuing reward points do not have a PPI license.
17. ELECTRONIC PAYMENT TRANSACTIONS INVOLVING INTERMEDIARIES
In 2011, the RBI in order to safeguard the
interests of the customers and to ensure
that the payments made by them are duly
accounted for by the intermediaries
receiving such payments and remitted to
the accounts of the merchants without
undue delay, issued directions to this effect.
Intermediaries include all entities that collect monies received from customers for payment
to merchants using any electronic/online payment mode, for goods and services availed by
them and subsequently facilitate the transfer of these monies to the merchants in final
settlement of the obligations of the paying customers.
The RBI has mandated that all accounts opened and maintained by banks for facilitating
collection of payments by intermediaries, should be treated as internal accounts of the
banks. The RBI’s directions state that intermediaries have to ensure that such accounts are
not maintained or operated by them.
NODAL ACCOUNT
SETTLEMENT
The RBI has pointed out that it is necessary that banks transfer funds to the ultimate
beneficiaries with minimum time delay. All final settlements to merchants has to be
implemented in the following cycle:
1. All payments to merchants which do not involve transfer of funds to nodal banks should
be effected within a maximum of T+2 settlement cycle (where T is defined as the day of
intimation regarding the completion of transaction.
2. All payments to merchants involving nodal banks should be effected within a maximum
of T+3 settlement cycle.
18. The RBI in April 2019 published a draft framework for regulatory sandbox in India and opened it to
the public and industry experts for comments and recommendations. The objective of proposing a
regulatory sandbox was to “foster responsible innovation in financial services, promote efficiency
and bring benefit to consumers.” In August 2019, the RBI issued an amended version of the Draft
Framework based on the inputs received. An important change in the proposed framework from
the draft framework was the reduction in the minimum net worth of an entity eligible to
participate in the regulatory sandbox and inclusion of the regulatory relaxations that will be
provided to an entity.
REGULATORY SANDBOX
Relaxations
Excluded technologies
Permitted Technologies
Eligibility Criteria
Mobile technology applications (payments, digital identity, etc.), data analytics, application
program interface (APIs) services, applications under blockchain technologies and artificial
intelligence and machine learning applications.
Fintech companies including start-ups, banks, financial institutions and any other company
partnering with or providing support to financial services businesses.
Crypto currency, crypto assets and investing, trading and settling of crypto assets and initial coin
offerings, credit registry, credit information.
Liquidity requirements, board composition, management experience, financial soundness, track
record, etc.
19. PAYMENT GATEWAYS AND AGGREGATORS
Regulatory Approaches
Definition
Background In September, 2019, RBI expressed its intention to regulate payment gateways and aggregators,
citing potential risks as digital transactions continue to rise in India. It stated that fintech entities
may be a source of risk in such a technology and customer experience intensive business if they
have inadequate governance practices which may impact customer confidence and experience.
Payment Gateways and Payment Aggregators refer to entities who –
a. provide technology infrastructure to route and / or facilitate processing of an online
payment transaction and perform other functions without actually handling the funds.
b. facilitate e-commerce sites and merchants to accept various payment instruments from the
customers for completion of their payment obligations.
c. facilitate merchants to connect with acquirers.
The definition covers most players in the fintech sector.
Option 1 : Continue with the existing instructions with minor changes.
Option 2: Limited Regulation, in respect of minimum net-worth, merchant on-boarding,
timelines for settlement of funds, maintenance of escrow account, IT security, etc.
Option 3: Full and Direct Regulation – both on site and off-site monitoring.