When we transfer funds from one account to another, a number of steps are involved. We could be paying an electricity bill, withdrawing cash from an ATM, depositing a cheque in someone’s account, swiping a debit or credit card at a merchant establishment to make a purchase, and so on. The steps surrounding these transfers form a payment system. This system needs to be closely monitored and rules formed for smooth functioning. The payments regulator forms the legal and regulatory framework that monitors these steps and the different participants in this system, and ensures that the interests of businesses and people using the payments system are protected. The payments regulator basically ensures safety, efficiency and reliability of a payments system. This is a critical function and in India, this is performed by the Reserve Bank.
The RBI controls India’s monetary policy. As India’s central bank, RBI also has a monopoly over issuing currency. It is RBI’s responsibility to ensure currency supply in the country so that economic activity can take place. Banks only distribute currency that is released by RBI. As per the dissent note released by RBI, it considers payments systems as technology-based substitutes for currency which makes these systems the responsibility of RBI to manage and regulate.
Why did the demand to have an independent payments regulator arise?
Illustration: Ajay Mohanty
The Committee on Digital Payments, headed by Ratan Watal, in its December 2016 report, had made some recommendations to strengthen the digital payments ecosystem. The committee noted that payments systems run by the RBI (RTGS, NEFT, NECS) favoured banks. This created a distortion in the industry. The committee noted that in these cases the RBI performs both an operational and a regulatory role, which led to a conflict of interest. It said that the RBI’s regulations discriminated between bank and non-bank payment service providers (PSPs). Even in payment systems not run by RBI (like UPI), access was restricted to banks only. The committee pointed this too.
The Watal committee considered two options: create a new, independent payments regulator or keep the Board for Regulation and Supervision of Payment and Settlement Systems (BPSS) within RBI but make it more independent. Even though the report pointed out the deficiency of the RBI regulated system, it stopped short of recommending a fully independent regulator but suggested an independent regulator within the RBI. The RBI dissent now is in line with the committee’s recommendation.
Bank-centric payment ecosystem in India: Restricting innovation and competition?
In India the payments system is largely bank-centric. Payments systems are operated either by RBI (RTGS, NEFT, NECS etc) or by the NPCI (IMPS, UPI) which is owned by a consortium of banks.
The Indian ecosystem is criticised for being restrictive as far as non-banking Payment Service Providers (PSPs) are concerned. The Watal committee also took note of this situation. It noted that even in Australia and the UK, the payment ecosystem was bank-led but they recognised the importance of equal treatment for bank and non-bank participants in the payments market. “Accordingly these jurisdictions transitioned to a legal framework, which provided regulatory parity for both bank and non-bank participants, and provided for interoperability and open access to payment systems for all players,” says the report.
The RBI contends that the payment system should remain under its purview as it is bank-dominated but the criticism is that this is so because the RBI’s regulations have made it so.
In the past even the Nachiket Mor Committee had observed that though India’s payment systems had evolved, a vast gap in the availability of basic payment services for small businesses and low-income households remained. Later, other reports also argued that innovation in payments system necessitated a shift away from bank-centric modes of payments.
The Kenya success story
While India is getting used to payment services like PayTM, Google Pay and PhonePe now, Kenya revolutionised how people spend, send or receive money in 2007, and it did not even need the internet. M-PESA was a system to send or receive money using normal mobile phones that was developed by mobile operators in Kenya and it has become such a big success story
that transactions through M-PESA equalled nearly half of Kenya’s GDP in 2017. Ninety three per cent of Kenyans have access to mobile payments
and this led to a reduction in the number of ATMs in the African nation.
However, the service failed to take off in India with high charges and poor user interface being blamed for the failure.
How does the rest of the world deal with this question?
The Federal Reserve, the central bank of the United States of America constituted the Payments System Policy Advisory Committee in 1986. Its role was expanded in 2006 to encompass the role of the Payments System Development Committee. The committee’s members consist of three members of the Board of Governors of the Federal Reserve System and four Reserve Bank presidents.
China National Advanced Payment System (CNAPS) is an electronic inter-bank clearing system owned by the People’s Bank of China (PBoC). CNAPS, which now forms one of the primary components of China’s financial infrastructure, is managed by the country's central bank, PBoC which also regulates payments in China.
European Central Bank (ECB) is the central bank for the European Union (EU), which consists of 19 member countries and is one of the largest currency areas in the world. In 2013, ECB constituted the European Retail Payments Board (ERPB) to develop, regulate the retail market for payments in EU. The ERPB is chaired by a high-level representative of the ECB and among its members it has representatives of the banking community, payments industry on the supply side and representatives of consumers, internet retailers, retailers on the demand side.
The Bank of England is the central bank of the United Kingdom. Another body, known as the Financial Conduct Authority (FCA), is the financial regulatory body of the UK and is independent of the UK government. In April 2015, the FCA created the Payment Systems Regulator (PSR) to foster innovation and competition in payments system. Prior to the PSR, it was the Payments Council (an organisation of financial institutions in the UK) which regulated payments from 2007 to 2015.
Global practices suggest that payment regulation is usually the responsibility of the central banks, often as an independent body within the central bank’s aegis. This is in line with the recommendations of the Watal committee for India’s payment system.
The creation of another regulator for payments also comes with its own challenges, especially about the lack of expertise. Moreover, such a regulator can also become another playground for bureaucratic encroachment with senior bureaucrats looking for sinecures post retirement.
While the RBI has come out strongly to underline payment regulation as its responsibility, it can not escape the criticism about the lack of competition and innovation. The RBI’s opacity and lack of public consultation regarding such regulation is another sticking point that critics assert. The present controversy provides it a chance to remedy this weakness.