The Reserve Bank of India (RBI) has published the latest of the payments vision documents titled ‘Payments Vision 2025’ with a view to build on the recent success in the digital payments space in India and the successful implementation of Payments Vision 2021. We will discuss the key developments in payments which the RBI envisages till 2025.
The RBI in its Payments Vision 2025 has set out a core theme on its vision on payments. The theme is E-payments for everyone, everywhere, everytime (4 Es). The vision set forth by the RBI in Payments Solution 2025 is to provide every user with six attributes with respect to E-payments. These are Safe, Secure, Fast, Convenient, Accessible and Affordable E-payment options. The RBI has published Payments Vision 2025 across five anchor goalposts of Integrity, Inclusion, Innovation, Institutionalisation and Internationalisation, with specific directions for each of the goalposts.
The use of technology has seen a steep rise in the number of payment intermediaries. These intermediaries help in making the payments ecosystem more efficient and accessible. Currently, only online Payment Aggregators are regulated by the RBI. Under Payments Vision 2025, the RBI will consider bringing significant intermediaries under direct regulation including offline Payment Aggregators.
The FinTechs and BigTechs currently play a vital role in providing accessibility and onboarding users on digital payments systems. Many of these FinTech and BigTech firms are becoming systemically important to the financial market of India. The RBI shall now publish a discussion paper on the need for proportionate regulation for the FinTechs and BigTechs that are in the payments space. This discussion paper will explore regulation with respect to domestic incorporation, reporting, data usage, etc.
Mr. Shantikanta Das, Governor, RBI, in his recent speech on ‘Disruptions & Opportunities in the Financial Sector’ on June 17, 2022 at the Financial Express Modern BFSI Summit, Mumbai spoke about the kind of approach the regulator could take with respect to FinTech regulations. These approaches are: (1) Entity Based Regulation – where regulations are applied to entities engaged in similar and specified activities; Activity Based Regulation – where similar activities are regulated similarly, irrespective of the legal status or nature of the entity; and Outcome Based Regulation – where the regulation specifies what it intends to achieve rather than actions which need to be taken for compliance. Mr Das also stated that India has traditionally followed a hybrid of Activity Based and Entity Based Regulations and the RBI would continue to monitor the sector to fine-tune the regulations based on the changing landscape of the FinTech sector.
The RBI currently uses e-Kuber and Real Time Gross Settlement (RTGS) for settlement of payments, which mitigates settlement risks. The RBI is keen to increase the efficiency of liquidity management by members, and shall be exploring a possibility to build a liquidity bridge between the two systems. This would allow transfer of funds from one system to another without intervention from the members.
National Electronic Funds Transfer (NEFT) currently operates in half-hourly batches. The RBI under Payments Vision 2025 shall review the frequency of batches for NEFT payments and increase the same to settle such transactions faster.
United Payments Interface (UPI) is an interface which allows instant real-time settlement through a Virtual Payment Address. Due to instant real-time funds transfer offered by UPI, transactions through this payment interface have been consistently increasing. Currently, UPI only allows users to link bank accounts and debit cards to their UPI Virtual Payment Address. The RBI shall explore the avenue of linking credit cards and credit component of a bank account to UPI in order to provide convenience to users making payments from their UPI Virtual Payment Address.
Any payments made at point of sale machines (PoS) are currently only processed through the concerned card network while all ATM transactions are processed through either National Financial Switch (NFS) or the relevant ATM networks. The RBI shall explore the possibility of implementing a National Card Switch to process such transactions and to foster competition which would lead to better products for the users of these cards.
Legal Entity Identifier (LEI) code is a 20-digit unique code to identify parties to financial transactions worldwide. LEI is a measure to improve the quality and accuracy of financial data systems for better risk management. The use of LEI in payment systems helps in unique identification of the parties involved in the payment as well as facilitates having a single identity for an entity across different applications. The RBI shall now explore the use of LEI in key areas like sanctions screening, Know Your Customer (KYC), corporate invoice reconciliation, and fraud detection.
RTGS currently settles domestic transactions only as per ISO 20022 standard. The RBI under Payments Vision 2025 aims to streamline RTGS with the globally accepted standard of cross-border payments. The RBI shall also explore the possibility of expanding RTGS to settle payments in major global currencies such as the Euro, US Dollar, Yen, pound, etc., through bi-lateral or multi-lateral arrangements.
Continuous Linked Settlement (CLS) is a global initiative with payment vs. payment mode to mitigate the settlement risk associated with foreign exchange trades. CLS currently provides cross-currency settlement in 18 currencies. Clearing Corporation of India participates in CLS as a third- party member acting as an aggregator for its member banks. Global acceptance of INR would increase greatly if it is included as a currency in CLS. The RBI aims to initiate a dialogue to get the INR included as a currency in CLS as India already has an excellent financial market infrastructure.