BackRegulating the digital payment industry
The payments terrain should expand and be enabled by regulations to accommodate new kinds of participants in the system
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The 8 November 2016 event in India (8/11) is closely linked to the 11 September 2001 event in the US (9/11). The terror attacks led to a large exodus of funds and failures of payment systems brought in the federal banks in the US to aid the system. Correspondingly, the demonetisation event in India has posed for our scrutiny the robustness of our payment systems infrastructure.
India has seen a rapid disintermediation of the payments system that was once restricted to only banks and their traditional clearing facilities. Entrepreneurs abound in the recent digital payment interfaces such as prepaid instruments like mobile wallets. These will replace the traditional clearing systems such as RTGS (real time gross settlement) as also online facilities provided by banks and telecom companies. Unified Payments Interface is in itself a game changer and only banks have been allowed by the Reserve Bank of India (RBI) to become payment service providers keeping wallets and other prepaid instruments out, thus giving a boost to banks in the race to secure a big slice of the payments pie. Poised at a juncture when people are also transforming payment habits by embracing a particular payment mode, especially the unbanked segments of society, the digital transaction regulatory framework requires a comprehensive legal framework assessment.
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A legal framework that can identify and set out the rights and obligations of each payment system participant in the ordinary course of business and in adverse conditions is a robust one. This will require predictability on how the regulator applies its rules and regulations (circulars and guidelines) and oversees its applicability to payment system operators. It will have to cover the plethora of instruments and test them for conflict such as with the new insolvency and banking laws. Seamless cooperation between the bodies involved in policy and regulatory development must be forged so as to oversee consistent application of rules and regulations governing all participants. The playing ground for entrepreneurs must be levelled so as to provide confidence, stability and integrity in the financial system.
This will enable participants in a payment system to move in their own orbits performing functions that when interwoven ensure that the country has an efficient, secure and reliable payment system that reduces the cost of exchanging goods and services. A system that, in contrast, is not efficient, secure and reliable can adversely affect the financial system, and can contribute to systemic crisis. RBI is the sole regulator for the payments industry space and derives its power to oversee the payments industry from the Payment and Settlement Systems Act (2007) and its accompanying regulations (2008). Several circulars and guidelines have been issued for the regulator to govern prepaid instruments, intermediaries and the payment system operator.
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The regulator has hit the road running, has jumped the “know your customer" (KYC) hurdles for electronic wallets and mobile banking by exempting them from KYC compliance for transactions under Rs20,000 and has relaxed the security measure of requiring two-factor authorization to only when one loads money from other banking instruments. RBI has also ensured there is not much float pending with prepaid instruments by requiring certain prepaid instruments to seek its approval and exempting those that facilitate simultaneous settlement and clearance.
Although the regulator is at present vested with powers to call out a systemic risk posed by a participant in the payments space, it may also do well to identify certain payment systems as critical and afford them systemic important status similar to how it identified certain non-banking financial companies as systemically important. Such singling out will ensure that their failure in a nascent payment industry does not trigger further disruptions among system participants and stretch to larger financial markets.
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The regulator must also in the days to come set up an end customer protection/guarantee fund so she is protected when the largest participant/debtor in the payment system fails. This allows for the deflection of liquidity crunch, so settlement system clearances are maintained without the participants knocking on the doors of clogged courts.
Further, in tune with the self-regulated entrepreneurship that the government is encouraging, the system participant should be encouraged to submit a self-certification assessing and disclosing the technical risks it faces at an enterprise level that can balloon into systemic risks.
The ability to grasp the intricacies of the payment systems have grown since the International Monetary Fund-World Bank Financial Sector Assessment Program in the 1990s, yet there are many issues beyond our collective immediate expertise. The when and how of the pace of evolution of the payment systems are not known but the why of it is obvious. The payments terrain therefore should expand and be enabled by regulations to accommodate new kinds of participants in the system. This will foster further innovation that is bound to occur from the disruption caused in the payment spaces, without the regulator having to play catch-up.
The digital payment revolution is the best disruption demonetisation has unleashed. An aspiring economy like India should welcome this brave new world.
Aarthi Sivanandh is a partner at J Sagar Associates, a national law firm. Views are personal.
Comments are welcome at theirview@livemint.com.
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