RBI's Guidelines For Digital Payment Companies – An Analysis

India has always been inclined towards cash transactions. With the increase in usage of mobile phones and the accessibility of the internet, the digital payments system in India has witnessed exponential growth. The Government of India has been taking various steps/initiatives to change the mode of funds transfer in the country, aiming to create a Digital India. Most of these steps have been initiated by the government since the announcement of demonetization in India in 2016. Initiatives like Digital India, Direct Benefit Transfer, Jan Dhan Yojana have helped increase the number of bank accounts which has encouraged cashless transactions. Financial service providers recognized an opportunity to expand in this specific market. In fact, technology advancement in every sector also contributes to the growth of digital payments in India.

In the last decade, the payments sector has witnessed massive growth and usage. This has been primarily because of the new technologies that have come into light and have changed the process of transferring funds rather quickly and hassle free, like the click of a button. Digital/Virtual currencies sparked a debate in India. Square, a payments platform, could make a smartphone into a payment system that accepts cards. ApplePay is another digital wallet that uses the device's internal security like the biometric system to make payments. While it is user friendly, it also preserves and protects the personal data of the user, therefore benefitting its users in every way. The digital payment system is a revolution in India, and all banks and financial service providers are entering the field, which makes it essential to have specific and effective guidelines to regulate it.

A Digital payment system can be defined as a payments system where both the parties have electronic/digital means to send and receive money. Reserve Bank of India (hereinafter referred as "RBI") is the statutory body which oversees the payment and settlement system in the country. It was RBI's vision to set up the National Payments Corporation of India ("NPCI"), an organisation for creating a robust Payment and Settlement Infrastructure in India. Therefore, with the vision to set up a uniform mode of payment, in the year 2016, the NPCI, launched United Payment Interface ("UPI"), which was considered to be a game-changer in the digital payment scenario in the country. UPI is a real-time, interoperable system that acts as a common platform for all digital payments. Any person with a bank account can use UPI to transfer money through his/her phone from one bank account to another. Bharat Interface for Money ("BHIM") is yet another governmental initiative, launched by the Prime Minister in the year 2016, post the demonetization. It provides a fast, secure, reliable medium to make digital payments through your mobile phone using UPI platform via Mobile App and USSD.

Growth of Digital Payment Systems

Recent years have seen tremendous growth in the FinTech industry. The specialists have expected that by the year 2022, the global FinTech market will be 309.98 billion USD at an annual growth rate of almost 24.8 percent. Swiping of debit cards has increased by 27%, and swiping of credit cards grew by 22% in March 2021 as compared to the corresponding period in 2020. In contrast, ATM withdrawals have increased by merely 15%, according to RBI data. The main reason for this is the high usage of digital payments across the globe. People have realized that digital payments are faster, quicker, easier, more convenient, and cost-efficient. Payments for various goods and services via cryptocurrency, loyalty points, and other digital cash alternatives have also boosted in trend. Government officials across the world have been supporting and promoting the usage of digital payments and spreading awareness, which is an added factor that has led to its high usage.

RBI also played a crucial part over decisions regarding the country's currency. In the year 2016, the demonetization affected the circulation of Rs 500 and Rs 1000 notes. This initiative of the government was taken hand in glove with the RBI, to bar the ongoing illegal activities and circulation of black money in the country. The demonetization caused cash shortages and chaos while requiring extra spending from the RBI for printing more money at the same time. The direct advantage of this step was that it increased tax collection. RBI, through its notifications, periodically provided with the rules/guidelines on cash withdrawal and deposits with the banks. It instructed the banks to report and monitor amounts debited to bank accounts and instances of counterfeit notes while exchanging. In November 2016, RBI encouraged the public to utilize alternative payment facilities in order to avoid chaos and rush at the ATMs. This was the first step to encouraging digital payments in India.

The increasing use of UPI applications and the promotion of new digital payment modes by traditional businesses have resulted in creating a digital ecosystem in India. Digital Transactions have increased by almost 383% since the year 2019. Razorpay's report on Digital Transactions shared some interesting insights on the tremendous growth of digital payments in India. The reports suggested that since the year 2019, the hike in the usage of digital payments has been to the extent of 109% as compared to its previous years. These figures indicate a tremendous growth of digital payments in India.

The above statistics depict that India is slowly and gradually inclined towards digital india. Ease of using it is the only reason for its upswing. Additionally, the use of smart cards and discounts on using digital transactions are also reasons for its rapid growth. It can also not be denied that there is no going back from where we have reached in terms of advancement in technology.

With growing involvement and use of technology, comes in sundry ways in which cyber frauds could be a potential threat, however, RBI has left no stone unturned to create regulations and guidelines, preemptively, to try to curb all illegal and unlawful activities.

In June 2020, the RBI issued a directive on Loans Sourced by Banks and NBFCs over Digital Lending Platforms: Adherence to Fair Practices Code and Outsourcing Guidelines, in which the RBI ensured that Banks and NBFCs lend any money either directly through their own digital platforms or through a digital lending platform under an outsourcing arrangement. The direction provided six brief guidelines that every lender must ensure before lending the money. In August 2020, RBI issued another directive on the Direction for Online Dispute Resolution (ODR) System for Digital Payments. Through this direction, the RBI highlighted the need for technology-driven, rule-based, customer-friendly, and transparent dispute redressal systems. As a step in this direction, authorized Payment System Operators (PSOs) and their participants were advised to put in place a system for ODR for resolving disputes and grievances of customers. These guidelines have five minimal requirements that PSOs have to follow mandatorily. Lastly, in October 2020, RBI issued direction for Digital Payment Transactions – Streamlining QR Code infrastructure, upon the recommendations of a committee constituted to review the current system of Quick Response (QR) Codes in India. It enforced certain measures to reinforce the acceptance infrastructure, provide better user convenience due to interoperability and enhance system efficiency.

2021 Guidelines on Digital Payment Platforms

Reserve Bank of India (Digital Payment Security Controls) Directions, 2021, a directive introduced by RBI on February 18, 2021 for digital payments services and products, in which guidelines for the regulated entities were introduced that aimed to set up a robust governance structure and implement minimum standards of security controls. It lays down a detailed system for mobile payments, internet banking, customer protection, card payments, and grievance redressal mechanism. The payment landscape of India is witnessing a heightened activity across multiple player categories ranging from device manufacturers to technology firms, telecom companies, and fintech startups. Therefore, it is believed that these regulations will play a critical role in determining the nature and success of payment solutions provided to customers in India.

The current directions would be relevant to four sector entities - Small Finance Banks, Scheduled Commercial Banks (excluding Regional Rural Banks), Credit Card Issuing NBFC, and Payment Banks. The basic guidelines are as follows:

1. Registered entities would have to formulate a policy for digital payments and products. This policy must include the payment security requirements from the angles of functionality, security, and performance angles.
2. The policy must protect the confidentiality of customer data and integrity of data.
3. The infrastructure such as technology with necessary backup must be prepared. Assurance that the payment product is built in a secure manner offers robust performance, ensuring safety, consistency, and rolled out after necessary testing to achieve desired FSP.
4. There must be minimal customer service disruption with high availability of systems and channels so as to have minimal technical declines.

Apart from this, the registered entities must formulate policies for the Digital Products and their payment mechanism. The policy document further requires a definition of starting point, critical intermittent stages/ points and endpoint in the digital payment cycle, security aspects, validations until the digital payment is settled, clear pictorial representation of a digital path, and exception handling. The direction has also provided measures to ensure the authentication of the system so that there is no room for cyber-attacks. To do so, entities must have proper risk management systems, the configuration of suspicion, system alerts, customer protection, awareness, and Grievance Redressal Mechanism, Guidelines and Training Materials, the right Customer Grievance system, Internet Banking Security Controls, and Mobile Payment Application Control.

Conclusion

It has been established that UPI is a five-star payment system in India that is quick, safe, and real-time. Integrating it into your system is a faster method for payments. Unified Payment Interface is only available in India at the moment, and the present version that is used is UPI 2.0, which was released in 2018. Four out of five people used cash as a mode of payment in 2015, and now, there are more than a billion transactions through UPI in June 2021. With Covid-19 and compulsory lockdown, a lot of people were forced to switch their mode of transaction from cash to digital methods. In five years, UPI has gained customer confidence and market trust and has proved to be a gamechanger in digital systems.

The financial industry is experimenting with predictive analytics, automation, new delivery platforms, blockchain digital-only banking, and much more. This innovation in the fintech sector is continuous, and consumer expectations have been increasing for digital payment methods. India becomes second in the number of mobile phone users globally, which has led to the mass adoption of digital payment. It would not be wrong to say now that Indians have been used to these quicker, real-time systems than carrying physical cash. I believe that while UPI is a digital payment solution that is customer-centric, it will not work if businesses and merchants do not collaborate and focus on customer needs. The incentives and discounts given to people using UPI are also an encouraging factor. There is fierce competition between fintech to become TSPs and banks for PSPs. With these disruptive technologies, there will be new regulations and technological standards as well.

While the Indian economy is steadily accounting for a greater share of the global economy, it is expected that the RBI will gain greater attention while also growing in stature as one of the world's most-watched central banks. RBI is in the process of publishing a composite digital payment index (DPI) that would capture the extent of digitization. Through its publication titled "Assessment of the Progress of Digitisation from Cash to Electronic", dated February 24, 2020, it has acknowledged that factors hindering the digital autonomy are inadequate acceptance infrastructure, connectivity issues, lack of familiarity with newer modes, delay in getting complaints resolved, alternative payment methods, and security and privacy issues.