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This article is written by Chandana Pradeep, from the School of Law, University of Petroleum and Energy Studies, Dehradun. This article analyzes the types of electronic payment systems as well as the laws which relate to regulating electronic payment systems in India.

Introduction

The Indian economy has developed at such a rapid speed especially since the popularisation of e-commerce, electronic payments and digital payments have gone a long way. With the implementation of demonetisation, electronic payments have been rising and will continue to do so with the current government ensuring that these types of payments are promoted. The tech-savvy generation has been using electronic types of payments more and there are more than 140 crore rupees that have been transacted on different types of electronic payment systems each day. Different governments have also priorities; they are focusing on ensuring that even the rural areas have access to the internet and through that, the people in rural areas can also make payments hassle-free through this method. Due to the abundant usage of electronic payment systems, there are many cases of frauds that have been taking place, to tackle the same various laws that have been introduced and implemented in India and on a global basis.

Types of electronic payment systems

E-Money

The definition of electronic money as per the reports of the Reserve Bank of India in their 2002 report broadly defines this term as “ an electronic store of monetary value on a technical device…. used for making payments to undertakings other than the issuer without necessarily involving bank accounts in the transaction, but acting as a prepaid bearer instrument”. The electronic money is divided into two parts which are prepaid store value card and digital wallets which includes Unified Payment Interfaces (UPI) as well.

Prepaid Stored Value Card/ Electronic Purse

An electronic purse is defined as the store of value on a card, which can be used in a manner similar to cash to pay for travel or other small-scale transactions. The electronic “purse” is secure information stored in a dedicated area or file in the smart-card as per the reports of the world bank. This type of electronic payments serves two main purposes which are to replace cash payment systems and to have a single fundamental type of tariff. Different types of electronic purses are tokens, transport money, micro-purchases etc.

The value in these cards is added in three ways which are prepaid, at the time of use and to top up an existing electronic purse once the value has expired.

Unified Payment Interfaces (UPI)

Unified Payment Interfaces are defined as UPI is a single platform that merges various banking services and features under one umbrella. A UPI ID and PIN are sufficient to send and receive money. Real-time bank-to-bank payments can be made using a mobile number or virtual payment address (UPI ID). these UPI based payment systems have been developed by the National Payments Corporation of India (NPCI), they have been introduced from the year 2015 but gained popularity shortly after the demonetisation.

Credit Cards

The credit cards that are seen now were introduced in the year 1950 and the main purpose for it was for entertainment and business travel reasons, where the individual owners of the credit cards were charged at the end of the month. These cards are also called by the name of non-revolving credit cards because the whole amount has to be paid at the end of a month for the expenses done by the individual.

Bank transfers

This type of transfers can be done with the help of the internet virtually, and this allows the person to transfer or withdraw a sufficient amount that is needed just by a single click.

Advantages of electronic payments

  1. Speed and Efficiency– Electronic payments are convenient as they provide a hassle-free means of payment, as the individuals making any sort of payment does it at their own time and convenience, whereas the traditional forms of payments requires the individual who wants to make the payment to be physically present while making the payment and is more time taking and has a lot of restrictions of time etc. Electronic payments are used to avoid risks and concerns which are present while handling hard cash.
  2. Increase in the number of sales– With the increase of the sales through online mode, sales have increased and the people who resort to electronic modes of payments have increased as well. It has come to a point where individuals do not carry a lot of hard cash in their wallets and most individuals prefer to keep the digital or electronic type of money and pay with the same when needed. Due to the number of people who opt for electronic payments, the business has a competitive edge over the individuals who still resort to paying in the traditional method.
  3. Transaction costs are reduced– transaction costs are eliminated or reduced while making payments through the electronic method, where the traditional method costs additional charges such as if an individual is going to shop there will be additional expenses such as the expense incurred to travel till the shop for purchase. In the case of electronic payment, there is a minimum to no charge that is availed for a transaction which saves a lot of money for the individual as well as the business.

Disadvantages of electronic payments

  1. Concerns relating to security– Although a majority of the electronic payment systems have encryption in place, there is still a risk of phishing where private information is hacked from unsuspecting users to hack information such as financial and personal information. There is high security that is available for these electronic payment systems, making many people scared to use this form of payment. Even if some of these payment systems are secured to the fullest with the developing technology, there is no such guarantee that it cannot be hacked.
  2. Disputes in Transactions– If a dispute takes place in the electronic payment, it can be refunded but without sufficient information that can prove the same it will be very difficult to do so.
  3. Increase in the cost of business– Business has a lot more additional costs with the progression of popularising the electronic form of payment a lot of the businesses which have their own form of electronic payment have to incur additional costs so as to ensure that the sensitive information of the individual while making the payments are secured and protected.

Regulatory bodies governing electronic payments in India

Reserve Bank of India

The Reserve Bank of India (RBI) is the primary regulator for electronic payments in India. In the beginning, the regulations governing this ambit was very general till recently where it turned into full-fledged regulation due to increased use of the electronic payment system. The Reserve bank of India, responds to the fluctuations to the market very easily and therefore change its regulations according to the circumstance which arises.

Digital transactions- Ombudsman Scheme

On January 31, 2019, under the approval of the RBI, the banking ombudsman was appointed to take care of matters relating to unauthorised money transfers, frauds etc. which were accorded during any digital transaction. It was an easier approach for customers to approach in the time of need.

Regulations relating to Electronic Payment systems

Payment and Settlements Systems Act, 2007

The Payment and Settlements Systems Act (PSS), 2007 is the Act which governs the electronic payments systems in India. This Act gives the Reserve Bank of India (RBI) the power to oversee all the matters which relates to electronic payment systems, the settling of it as well as the legalities which are included. The PSS Act specifies that no person, other than the RBI, can operate a payment system except with due authorization issued by the RBI (unless specifically exempted by the terms of the PSS Act itself). The Act provides for netting and settlement finality and gives formal oversight powers over overall payment and settlement systems with the RBI.

The Reserve Bank of India has introduced the concept of regularities to safeguard the interests of the customers while making a payment or a transaction through the mode of electronic payments. In the year 2009, the RBI issued a regulation which dealt with the opening and controlling of the accounts for electronic payments which has an intermediary involved hence these regulations were called the intermediary regulation.

This regulation stated that any such entity to become a payment system had to mandatorily have an approval from the RBI. There were exceptions given to some types of payment systems because they settle their accounts with the help of a nodal account and are not involved in settling any transaction between a customer and businessmen.

The Act of Payment and Settlements is one that was issued under this Intermediary regulation. The Act deals with Appoints the RBI as the authority that regulates payment and settlement systems; Makes it compulsory to obtain RBI authorization to operate a payment system; Warrants the RBI to regulate and supervise payment systems by determining standards and calling for information, regular reports, documents etc; Warrants the RBI to audit and conduct on- and off-site inspections of the payment systems; Warrants the RBI to issue directives; and Provides for netting and settlement to be final and irrevocable.

Recent developments

With the gaining popularity of electronic payments, there has been a dire need for the implementation of guidelines for electronic payments since many people are finding loopholes and using these forms of payments for fraud etc. The Reserve Bank of India (RBI) issued new guidelines as part of the “Vision Statement on payment and settlements systems in India 2019-21” where the main objective was to make guidelines which were much more strict and up to date to match with the development of these electronic payments systems. As part of this objective, there was a discussion paper which was released by the Reserve Bank of India (RBI) seeking suggestions from the public on how the guidelines should be formulated so as to be on par with the developments that have been taking place each day.

The Reserve Bank of India had issued the new guidelines in accordance with these suggestions called “Guidelines on Payment Aggregators and Gateways” which was issued in March 2020 and would come into effect by April 2021.

Contents of the new guidelines issued by the RBI

  1. Authorisation– Payment aggregators who are not a bank, will need prior approval from the RBI. And those who are non-banks who have become a payment aggregator before these guidelines were issued will have to apply for authorisation before 30th July 2021 and can work without any disturbance till the approval is given by the RBI.
  2. The requirement of Capital– The starting net worth of the payment aggregators should be 15 crores at the initial stages and will continue to increase 25 crores which will have to be kept maintained as per the new guidelines of the RBI.
  3. Govern- According to the guidelines, the RBI is supposed to be kept notice about any change that occurs in ownerships, policies etc in the payment aggregators
  4. Laundering– The Prevention of Money Laundering Act, 2002 is applied to the payment aggregators as per this new guideline.
  5. Merchants– All the payment aggregators have to do a thorough background check on the merchants before they are made to do any business so as to ensure that they are genuine and not entering into a business with the intent to fraud any individual.
  6. Dispute Settlement– According to this new guideline, the payments aggregators have to ensure that there is a proper mechanism so that any dispute which arises is solved.
  7. Management of Risk– A Board is supposed to be appointed as per this guideline to ensure that there is minimal risk and it is the duty of the Board to make sure that the guidelines of the RBI are followed in the prescribed manner.

Future of Electronic money

With the implementation of these new guidelines from the Reserve Bank of India, the regulations are much more strict in nature. The new guidelines have more focus on protecting the customers from any sort of fraud or malpractice that can take place while doing the transaction.

The guidelines were formulated so as to govern the intermediaries but there is another set of guidelines which were issued by the RBI to govern but is likely that only one of them will govern the scope of electronic money as otherwise, both these guidelines will override each other making it more difficult.

Suggestions

  1. No clear law- The intermediary directions (enacted before), as well as the regulations, are present which governs digital or electronic money and this will give rise to more confusion in the future if the intermediary directions are not repealed.
  2. Certain ambits not specified- In the new guidelines, features such as instant payments are not included in the guidelines, making it more prone to ambiguities.
  3. More pressure on payment aggregators- The provision on the guidelines that the patent aggregators have to do a thorough background check of the merchants, though it is good for the customers as their transactions will be secured and they will not be any risk of fraud happening, there is an increased pressure on the payment aggregators to make sure that the merchants do not enter with the intention to fraud otherwise, the payment aggregators will have to face huge penalties as per the new guidelines issued by the Reserve bank of India.

Conclusion

As mentioned before, the use of the digital mode of money or UPI based transactions is skyrocketing in India which makes it absolutely necessary for the laws also to be implemented as per the developments taking place. The newly issued guidelines make sure that the laws are up to date and have all the plausible solutions for any disputes that may arise. 

References


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