Preparing digital payments for exponential growth


The Reserve Bank of India (RBI) recently announced its vision document for Payment and Settlement Systems (Vision 2021). The document, detailing RBI’s outlook for the payments space, could not have come at a better time. Payments as a vertical within the Fintech sector is looking to hit escape velocity in India. The Payments regulator’s positioning as an enabler and not as a speed-bump is a positive and sends the right signals.

Vision 2021 lays down 36 specific action points to be adopted during 2019-2021 to improve all aspects of payment systems. The multi-pronged approach looks at achieving 12 measurable outcomes by 2021. These include an almost four-fold increase in digital transactions, 35 per cent increase in debit card transactions, 50 per cent increase in mobile based transactions, 100 bps(basis points) reduction in cost-to-customer, enhanced competition and many more payment system operators. The action points are forward-looking and quite interesting. Innovation in feature phone and USSD-based payments services, internal ombudsman for digital payments, geo-tagging of payment system touch points, enhancing contactless and tokenisation technology, national settlement services for card schemes and increasing adoption of distributed ledger technologies are among the items on RBI’s wish-list.

Forward-looking document

The ambitious document gives us a sneak-peek into what RBI has in store from a regulations point of view in the coming years. These could change the way payment industry participants conduct their business. Some expected regulations are touched upon below.

Regulation of gateway services providers and aggregators. This is not a new suggestion. There is, however, a sense of certainty that we may now expect regulation governing payment gateway service operators and aggregators. RBI had previously imposed rules on online payment gateway service providers from an import payment perspective. It had also exercised some control over aggregators as intermediaries for determining how the latter utilised the funds passing through their accounts. However, we predict something more comprehensive from the RBI. At this stage, it is difficult to guess whether RBI is looking at a formal authorisation protocol for these entities, similar to the requirement for payment system operators. Considering that gateways and aggregators are typically not engaged in clearing or settlement functions, a guidelines-based approach is more likely. The intention would be to ensure that these entities do not misuse their enhanced role in digital payment transactions.

Friction-free inbound remittances. With a view to reducing the cost of cross-border remittances, the RBI has promised to examine the role that payment services providers can play to ensure friction-free cross-border remittances at lower cost. The proposed Fintech Regulatory Sandbox would be a good platform to beta-test the functionality that non-bank payment players can provide here. This assumes importance in the context that cross-border remittances (inward and outward) have traditionally been strictly regulated.

Self-regulatory organisation (SRO). This is an interesting proposal. RBI emphasises the need for a self-regulatory governance framework. An SRO would be instrumental for framing best practices. It would also serve as a communication channel between industry players and the regulator. This practice is not new for the RBI, however. It had earlier appointed the Micro Finance Institutions Network as the SRO for the NBFC-MFI industry. It needs to be seen if an industry body such as the Payments Council of India would be given this responsibility.

Regulatory sandboxes. RBI recognises the need for using regulatory sandboxes to enable innovation while mitigating systemic risk. RBI’s decision to move forward is apparent from the draft ‘Enabling Framework for Regulatory Sandbox’ that was released for comments in April this year. While the draft framework is restrained in my view, it is a start. Hopefully, the RBI will take stakeholder comments into account before finalising the framework. A regulatory sandbox would, apart from fostering innovation, give participants the chance to understand RBI’s thoughts on gaps that need to be filled in the ecosystem. Catering to those requirements would result in a more uniform pattern of growth and innovation in the space.

E-mandates / standing instructions. RBI is considering implementing e-mandates/ standing instructions for retail payment systems. The process has already begun with the RBI having recently given the National Payments Corporation of India approval for implementing e-mandates for both internet banking and debit cards. This would go a long way in simplifying customer experience during retail payment transactions.

Security aspects of mobile payments. RBI is looking to update its mobile banking guidelines with specific standards, minimum requirements, best practices and risk mitigation measures. The updated guidelines should look into the possibility of emerging technologies such as artificial intelligence, internet of things and wearable device technology being utilised for payment services.

Framework for testing resilience of payment systems. Vision 2021 proposes a framework for testing the ability of payment systems to operate even if a system has failed completely. This is an extremely important step. If RBI’s intent is to aggressively push for digital payments and a cash-less economy, there is a corresponding responsibility to ensure business continuity and adequate disaster response mechanisms in case of infrastructure redundancy or other unplanned system down-time.

A promising future

The next three years promise interesting developments in this space, given RBI’s intent of empowering an exceptional e-payment experience. Vision 2021 is important in terms of laying down expectations, from the regulator and participants, as well as from various Ministries and Government Departments that will invariably be involved in some manner of policy making or implementation. It is notable that RBI has recognised inter-regulator (SEBI, IRDA, TRAI, etc.) and inter-department coordination as action points for implementation.

Vision 2021 also assumes significance, considering the recommendations of the Inter-Ministerial Committee for Finalisation of Amendments to the Payments and Settlements System Act (PSSA). The Committee had, in August 2018, recommended creation of an independent regulator for payment systems. RBI issued a dissent note strongly opposing any such move. While PSSA amendments are yet to be finalised and no decision has been taken on a separate regulator, any dilution in RBI’s powers as a regulator may have a bearing on the proposals and action points under Vision 2021.

That said, the action plans being put in place and the expected 2021 outcomes are commendable. While they do look optimistic targets, they are by no means unrealistic. Going by the accelerated growth we are witnessing in the payments industry, a concerted effort to meet these targets can be expected.