Chapter 13: Payment and Settlement Systems PDF

Chapter 13: Payment and Settlement Systems Central banks have always been closely associated with payment and settlement systems. Central banks throughout the world seek strong economies and stable financial markets. These goals, in turn, rest to a considerable degree on well-functioning payment sy...

Chapter 13: Payment and Settlement Systems Central banks have always been closely associated with payment and settlement systems. Central banks throughout the world seek strong economies and stable financial markets. These goals, in turn, rest to a considerable degree on well-functioning payment systems. Payment systems, especially retail systems, are evolving rapidly across the globe. Electronic payments are becoming the norm. New technologies, new participants, and new market structures continue to arise. Long before central banks became responsible for monetary policy, they were the banks designated to issue banknotes: the means of payment protected by legal tender status. The origin of central banking lies precisely in this revolution in payment technology: from metal to paper, from commodity money with intrinsic value to fiduciary money. From the Latin “fiducia”, the value of this kind of money lies in the trust it generates. However, trust is not something that can be left simply for the invisible hand to generate. Trust needs institutions to maintain it. The central bank was the institution designed to maintain trust in money. A payment is a transfer of money from the payer to the payee. In most cases, the payment is a discharge of an obligation assumed by an economic agent whenever it acquires real or financial resources. Central Banks play three main roles in the Payment and Settlement Systems viz. system provider, regulator and user. System Provider  Operator Owner: Central Banks have traditionally performed the development role of starting payment systems in most countries. Where central banks have not run the systems, they have provided various services for payment systems to develop and still in most countries the large value payment systems (LVPS) is run by Central Banks.  Settlement Systems: Most central banks allow for settlement of LVPS in the central bank books. Even when the payment system is run by private operators, the settlement finally happens in the books of the Central Bank. There are compelling arguments why finality of settlements is achieved best through settling in central bank money, the most important of which is the ability of the central bank to provide liquidity against collateral as a lender of last resort to enable the smooth functioning of the systems. Regulator  Overseer/supervisor: Central bank oversight is a key central bank activity. Central banks monitor and oversee payment systems by setting the rules (generally backed by a legal framework).  Catalyst and Facilitator: Payment systems are developed with a global perspective, fostering international cooperation to serve the common good of secure and efficient financial transactions. The availability of an efficient payment system allows not only for efficient economic transmission but also facilitates the seamless transmission of monetary policy and mitigation of systemic risk. User As the banker to the banks and the Government, the central banks operate in a unique role as a part of the payment and settlement systems. This role enables the central banks to perform the role of the oversight and act as a counterbalance in case of disruptions. Payment and Settlement Systems in India Payment instruments and mechanisms have a very long history in India. The earliest payment instruments known to have been used in India were coins, which were either punch- marked or cast in silver and copper. While coins represented a physical equivalent, credit systems involving bills of exchange facilitated inter-spatial transfers. In the Mauryan period, an instrument called “adesha” was in use, which was an order on a banker desiring him to pay the money of the note to a third person, which corresponds to the definition of a bill of exchange as we understand it today. The most important class of credit Instruments that evolved in India were termed Hundis. Their use was most widespread in the twelfth century and has continued till today. In a sense, they represent the oldest surviving form of credit instrument. Hundis were used as remittance instruments (to transfer funds from one place to another), as credit instruments (to borrow money [IOUs]) and for trade transactions (as bills of exchange). Paper money, in the modern sense, has its origin in the late 18th century with the note issues of private banks as well as semi-government banks. Amongst the earliest issues were those by the Bank of Hindoostan, the General Bank in Bengal and Behar, and the Bengal Bank. Later, with the establishment of three Presidency Banks, the job of issuing notes was taken over by them. Each Presidency Bank had the right to issue notes within certain limits. The Paper Currency Act of 1861 conferred upon the Government of India the monopoly of Note Issue bringing to an end note issues of private and Presidency Banks. The private banks and the Presidency Banks introduced other payment instruments in the Indian money market. Cheques were introduced by the Bank of Hindoostan, the first joint stock bank established in 1770. In 1833, cash credit accounts were added to the Bank of Bengal's array of credit instruments. Buying and selling bills of exchange became one of the items of business to be conducted by the Bank of Bengal from 1839. In 1881, the Negotiable Instruments Act (NI Act) was enacted, formalising the usage and characteristics of instruments like the cheque, the bill of exchange and promissory note. The NI Act provided a legal framework for non-cash paper payment instruments in India. With the development of the banking system and higher turnover in the volume of cheques, the need for an organised cheque clearing process emerged amongst the banks. With the setting up of the Imperial Bank in 1921, settlement was done through cheques drawn on that bank. After the setting up of Reserve Bank of India under the RBI Act 1935, the Clearing Houses in the Presidency towns were taken over by Reserve Bank of India. Evolution of Payment Systems and role of RBI RBI has always played a significant role in the development and nurture of payment and settlement systems in our country. As per Section 3 of the Payment and Settlements Act 2007, RBI is the designated authority for the regulation and supervision of payment systems under the Act. The PSS Act, 2007 provides for the regulation and supervision of payment systems in India and designates the Reserve Bank of India (Reserve Bank) as the authority for that purpose and all related matters. The Reserve Bank is authorized under the Act to constitute a Committee of its Central Board known as the Board for Regulation and Supervision of Payment and Settlement Systems (BPSS), to exercise its powers and perform its functions and discharge its duties under this statute. The Act also provides the legal basis for “netting” and “settlement finality” (generally it is defined as the discharge of an obligation by a transfer of funds or/and a transfer of securities that have become irrevocable and unconditional). This is of great importance, as in India, other than the Real Time Gross Settlement (RTGS) system all other payment systems function on a net settlement basis. The Department of Payment and Settlement Systems assists the Board in performing its functions. Since 1998, the Reserve Bank has been continuously bringing out a Payment System Vision document for every three years, enlisting the road map for implementation. Computerisation of clearing operations was the first major step towards modernisation of the payments system. The rapid growth of cheque volumes in the eighties made the task of manual sorting and listing a very difficult task. Banks were unable to cope with the huge volume of cheques which had to be physically handled prior to their presentation in the clearing house. The solution was the introduction of Magnetic Ink Character Recognition (MICR) based mechanised cheque processing technology. The existing cheques were redesigned incorporating a MICR code line which could be read by document processing machines called reader-sorters. These were installed in Mumbai (1986) followed by Chennai, New Delhi (1987) and Calcutta (1989). Soon after other MICR processing centres at the main metros and other major centres were started. These MICR centres were run by banks. After nearly twenty odd years of MICR clearing, the cheque truncation system (CTS) was introduced first in New Delhi in 2008 and all the MICR centres have been subsumed into three grid-CTS systems at New Delhi, Chennai and Mumbai. All the three grids are now integrated into single grid National grid for CTS at Chennai. Further, standardisation of cheque features with built-in fraud prevention measures have also been brought in the form of CTS-2010 cheque standards. Meanwhile electronic payment systems developed rapidly in the early 90s. The Electronic Clearing Service (ECS) was introduced in early 1990s, ECS Credit to facilitate one- to-many payments such as dividend, salary, interest payments, etc. and ECS Debit to facilitate many- to-one payments such as utility payments. ECS in itself has undergone many changes from being a local system to a regional system and then a national level system. These changes have been facilitated by the adoption of CBS in banks which has enabled straight-through- processing of payments. Further efficiency has been brought in this sphere with the operationalisation of the National Automated Clearing House (NACH) by National Payments Corporation of India (NPCI). The earlier EFT system also launched in the 90s has evolved into a state-of-the-art NEFT. In the year 2004, the first RTGS was introduced in the country which has been upgraded into a new system dedicated to the nation in 2013. National Electronic Funds Transfer (NEFT) system and Real Time Gross Settlement (RTGS) system are being managed by the Reserve Bank to settle the retail and wholesale payments, respectively. An important landmark was reached in the journey of these systems with NEFT and RTGS functioning on a 24x7x365 basis from December 16, 2019, and December 14, 2020, respectively. National Payments Corporation of India (NPCI) In 2008, National Payments Corporation of India (NPCI), an umbrella organisation for operating retail payments and settlement systems in India, was established as an initiative of Reserve Bank of India (RBI) and Indian Banks’ Association (IBA) under the provisions of the Payment and Settlement Systems Act, 2007, for creating a robust Payment & Settlement Infrastructure in India. NPCI, has been incorporated as a “Not for Profit” Company under the provisions of Section 25 of Companies Act 1956 (now Section 8 of Companies Act 2013), with an intention to provide infrastructure to the entire Banking system in India for physical as well as electronic payment and settlement systems. NPCI is focused on bringing innovations in the retail payment systems through the use of technology for achieving greater efficiency in operations and widening the reach of payment systems. Classification of Payment Systems While all payment and settlement systems are equally important to the nation’s financial infrastructure, the monitoring of these systems can be classified into the systemically important systems, which are large in terms of value and are called Financial Market Infrastructure (FMIs) and other systems collectively known as Retail Payment Systems. Financial Market Infrastructures Financial Market Infrastructure (FMI) is defined as a multilateral system among participating institutions, including the operator of the system, used for the purposes of clearing, settling, or recording payments, securities, derivatives, or other financial transactions. The term FMI generally refers to systemically important payment systems, Central Securities Depositories (CSDs), Securities Settlement Systems (SSSs), Central Counter Parties (CCPs), and Trade Repositories (TRs) that facilitate the clearing, settlement, and recording of financial transactions. FMIs play a critical role in the financial system and the broader economy and contribute to maintaining and promoting financial stability and economic growth. At the same time, the FMIs also concentrate the risk and, if not properly managed, FMIs can be sources of financial shocks or a major channel through which these shocks are transmitted across financial markets. To address these risks, the Committee on Payment and Settlement Systems (CPSS) and International Organization of Securities Commissions (IOSCO) have issued a comprehensive set of 24 principles titled “Principles for Financial Market Infrastructure” (PFMI) published in April 2012. These principles have strengthened the existing standards, introduced new standards, and enhanced the responsibilities of authorities. A payment system authorized by the RBI is categorized as a Financial Market Infrastructure (FMI) if it has the potential to trigger or transmit systemic disruptions or if it attains systemic or system-wide importance. The RBI assesses this based on several parameters, including the volume and value of transactions processed, market share, the markets in which it operates, the number and types of participants, the degree of interconnectedness, and the criticality of concentrated payment activities. Based on these criteria, the RBI has identified and regulates the following entities related to payment and settlement infrastructure as FMI:  Real Time Gross Settlement System (RTGS) – RTGS system was implemented in March 2004. RTGS system is owned and operated by the RBI. It is a Systemically Important Payment System (SIPS) where the inter-bank payments settle on a 'real' time  and on gross basis in the books of the RBI. RTGS system also settles Multilateral Net Settlement Batch (MNSB) files emanating from other ancillary payment systems including the systems operated by the Clearing Corporation of India Limited and National Payment Corporation of India. RBI implemented the Next Generation RTGS (NG-RTGS) in 2013 which is built on ISO20022 standards with advance liquidity management functions, future date functionality, scalability, etc. RTGS system was updated and upgraded from March 15, 2023, with new functionality like Foreign Contribution (Regulation) Act (FCRA) code introduction, improved and efficient automated message flow, among various nodes of RTGS. Apart from these, the security features of the system have been upgraded in terms of better user management control and compatibility with latest digital certificates issued by the certifying authority, viz., Institute for Development & Research in Banking Technology (IDRBT). RTGS started functioning 24*7*365 since December 14, 2020.  Securities Settlement Systems (SSS) – The Public Debt Office (PDO) of the RBI, Mumbai manages and operates the Securities Settlement Systems for the Government securities, both for outright and repo transactions conducted in the secondary market. Government securities (outright) are settled using DVP model 3 mechanism on a T+1 basis. Repos are settled on T+0 or T+1 basis. Additionally, the PDO system also acts as depository for dematerialized government securities. With implementation of the Core Banking Solution (CBS) in the RBI, the securities settlement system has been migrated to the CBS platform.  Clearing Corporation of India Ltd (CCIL) systems – CCIL is a Central Counterparty (CCP) which was set up in April 2001 to provide clearing and settlement for transactions in Government securities, foreign exchange and money markets in the country. CCIL acts as a central counterparty in various segments of the financial markets regulated by the RBI, viz. the government securities segment, USD-INR and forex forward segments. Moreover, CCIL provides non-guaranteed settlement in the rupee denominated interest rate derivatives like Interest Rate Swaps/Forward Rate Agreement market. It also provides non-guaranteed settlement of cross currency trades to banks in India through Continuous Linked Settlement (CLS) bank by acting as a third-party member of a CLS Bank settlement member. CCIL also acts as a Trade Repository (TR) for OTC interest rate and forex derivative transactions. Other Payment Systems Retail Payment Systems Retail payment systems can be broadly classified based on the medium of transactions, i.e., Paper based systems, card-based systems, electronic systems and mobile based systems, though the lines are blurring due to innovation. o Paper Based Systems Paper based systems like cheques, demand drafts and payment orders are largely cleared through the Cheque Truncation System (CTS) by NPCI. In the smaller centers, a magnetic media-based cheque clearing system called Express Cheque Clearing System (ECCS) was used. However, from September 2020, all the non- CTS clearing houses (ECCS centres) have been migrated to CTS. o Card Based Systems  Cards can be classified on the basis of their issuance, usage and payment by the card holder. There are three types of cards (a) debit, (b) credit, and (c) prepaid. A card can be dipped (Chip based card), tapped (Contactless Near Field Communication {NFC} Card) or swiped (Magnetic-Stripe card) at a PoS terminal. Reserve Bank of India has permitted the card providers to offer card Tokenisation services to the customers. Tokenisation replaces sensitive card details with a unique identifier or token for secure transactions. The Reserve Bank of India (RBI) guidelines allow tokenisation for various devices, require explicit customer consent, and mandate compliance with security standards. Merchants are prohibited from storing actual card details. These measures aim to enhance security, reduce fraud, and protect consumer data. All Card Present (CP) and Card Not Present (CNP) transactions on cards issued in India are secured with Additional Factor Authentication (AFA). This AFA can be in any form and few commonly used forms are PIN, dynamic one-time password (OTP), static code, etc. Further, in order to enhance security, reducing fraud by verifying cheque details such as amount, date, and payee before payment, Positive Pay System has been introduced wherein it mandates that banks re-confirm key details for high-value cheques (₹50,000 and above) from the issuer before clearing them. o Electronic Systems For bulk and repetitive payments such as collection of utility payments, payment of dividends, etc., RBI was running the Electronic Clearing System (ECS). Further efficiency has been brought in this sphere with the operationalisation of the National Automated Clearing House (NACH) by NPCI. This is a pan-India system for processing bulk and repetitive payments and the ECS has gradually been subsumed into NACH. The NACH system provides a robust, secure and scalable platform to the participants with both transaction and file-based transaction processing capabilities, which is available on all days of the week, effective August 1, 2021. It has best in class security features, cost efficiency & payment performance (STP) coupled with multi-level data validation facility accessible to all participants across the country. National Electronic Funds Transfer (NEFT) system run by RBI is one of the prominent retail electronic payment systems. NEFT is a nation-wide payment system facilitating one- to-one funds transfer. Under this Scheme, individuals, firms and corporates can electronically transfer funds from any bank branch / mobile banking / internet banking to any individual, firm or corporate having an account with any other bank branch in the country participating in the Scheme. Individuals, firms or corporates maintaining accounts with a bank branch can transfer funds using NEFT. Even such individuals who do not have a bank account (walk-in customers) can also deposit cash up to a permitted limit at the NEFT enabled branches with instructions to transfer funds using NEFT. However, such cash remittances are subject to a limit. The system currently runs 24*7 with settlement done every half hour in batches. The National Payment Corporation of India (NPCI) has a suite of payment products. The National Financial Switch (NFS) which was taken over by NPCI from IDRBT in 2009 connects all ATMs all over the country for card transactions. In addition to allowing seamless switching, the NFS network allows sub-membership model which enables smaller, regional banks including RRBs and local co-operative banks to participate in the ATM network. NPCI has also tied up with international card schemes like Discover Financial Service (DFS), Japan Credit Bureau (JCB) and China UnionPay International (CUPI) which allows their cardholders to use ATMs connected to NFS network. Rupay cobranded cards with these networks are accepted in over 200 countries. Based on NFS and its IMPS platform, NPCI has come up with many innovative electronic retail payment systems. Some of these innovative new payment systems are given below: Immediate Payment System (IMPS) – The Immediate Payment System (IMPS) operated by NPCI provides 24x7 convenience to small remittances. IMPS provides robust and real time fund transfer which offers an instant, 24X7, interbank electronic fund transfer service that could be accessed on multiple channels like Mobile, Internet, ATM, SMS, Branch. IMPS is an emphatic service which allows transferring of funds instantly within banks across India in a safe and economical way. The stabilization of the IMPS platform has allowed NPCI to come up with other innovations. Unified Payments Interface (UPI) – UPI is a system that powers multiple bank accounts into a single mobile application (of any participating bank), merging several banking features, seamless fund routing and merchant payments into one hood. It also caters to the “Peer to Peer” collect request which can be scheduled and paid as per requirement and convenience. Being a digital payment system, it is available 24*7 and across public holidays. Unlike traditional mobile wallets, which keep customer’s money up to permitted limits in their wallets, UPI withdraws and deposits funds directly from the bank account whenever a transaction is requested. It uses Virtual Payment Address (a unique ID provided by the bank), Account Number with IFSC Code, Mobile Number with MMID (Mobile Money Identifier), Aadhaar Number, or a one-time use Virtual ID. An MPIN (Mobile banking Personal Identification Number) is required to confirm each payment. Many banks have built Apps based on the UPI. NPCI have launched their own UPI based app called Bharat Interface for Money (BHIM). Currently, savings account, overdraft account, prepaid wallets, RuPay credit cards and pre-sanctioned Credit Lines at banks can be linked to UPI. National Electronic Toll Collection (NETC) – NPCI has developed the National Electronic Toll Collection (NETC) program to meet the electronic tolling requirements of the Indian market. It offers an interoperable nationwide toll payment solution including clearing house services for settlement and dispute management. Interoperability, as it applies to National Electronic Toll Collection (NETC) system, encompasses a common set of processes, business rules and technical specifications which enable a customer to use their FASTag as payment mode on any of the toll plazas irrespective of who has acquired the toll plaza. FASTag is a device that employs Radio Frequency Identification (RFID) technology for making toll payments directly while the vehicle is in motion. FASTag (RFID Tag) is affixed on the windscreen of the vehicle and enables a customer to make the toll payments directly from the account which is linked to FASTag. FASTag offers the convenience of cashless payment along with benefits like - savings on fuel and time as the customer does not have to stop at the toll plaza. Bharat QR Code – At the instance of RBI, the major card networks, MasterCard, VISA and NPCI have developed the interoperable, Bharat QR Code. The QR code or Quick Response code is a two-dimensional machine-readable code, which is made up of black and white squares and is used for storing URLs or other information. These can easily be read by the camera of a smartphone. Merchants need to display QR codes in their premises. User can scan these QR via BQR enabled mobile banking app and pay using Card linked account / VPA / IFSC + Account / Aadhaar. Aadhar enabled Payment System (AePS) – AePS is a bank led model which allows online interoperable financial inclusion transactions (cash deposit, cash withdrawal, intrabank or interbank fund transfer, balance enquiry and get a mini statement) at Micro ATMs through the Business correspondent of any bank using the Aadhaar authentication. USSD (*99#) - While bank App based models are widely prevalent for not only payments but to do all forms of mobile banking, NPCI has launched the National Unified USSD Platform (NUUP) to make mobile banking more accessible by providing basic banking services to all non-smart phone users as well. *99# service has been launched to take the banking services to every common man across the country. Banking customers can avail this service by dialling *99#, a “Common number across all Telecom Service Providers (TSPs) on their mobile phone and transact through an interactive menu displayed on the mobile screen. Key services offered under *99# service include, Sending and Receiving interbank account to account funds, balance enquiry, setting / changing UPI PIN besides host of other services. *99# service is a unique interoperable direct to consumer service that brings together the diverse ecosystem partners such as Banks & TSPs (Telecom Service Providers). It is available in several regional languages to facilitate interaction in vernacular for common person. Aadhaar Payment Bridge (APB) - NACH’s APB system, developed by NPCI has been helping the Government and Government Agencies in making the Direct Benefit Transfer scheme a success. APB System has been successfully channelizing the Government subsidies and benefits to the intended beneficiaries using the Aadhaar numbers. The APB System links the Government Departments and their sponsor banks on one side with beneficiary banks and beneficiary on the other hand. RuPay Card Network – The Indian banks issue a wide variety of cards of all major international card networks including MasterCard, VISA and American Express. NPCI has launched its indigenous card network called Rupay. RuPay card payment scheme launched by the NPCI, has been conceived to offer a domestic, open-loop, multilateral system which will allow all Indian banks and financial institutions in India to participate in electronic payments. RuPay cards are accepted at all automated teller machines (ATMs) across India under National Financial Switch, and under NPCI's agreement with DFS, RuPay Cards are accepted on the international Discover network. The banks issue RuPay’s prepaid, debit and credit cards with largest issuance of debit cards among the three. Recent liberalizations allowing tokenization of cards will allow cards to be used safely from the device of the user where they can be tokenised in a secure manner and enabled for transactions through the Near Field Communication (NFC) technology. The cards are used extensively in online transactions, ATMs and Point of Sale terminals. National Common Mobility Card (NCMC) – National Common Mobility Card (NCMC), is an inter-operable transport card conceived by the Ministry of Housing and Urban Affairs of the Government of India. It was launched on 4th March 2019. The transport card enables the user to pay for travel, toll duties (toll tax), retail shopping, and withdraw money. It is enabled through the RuPay card mechanism. The NCMC card, which is powered by qSPARC (Quick Specification for Payment Application of RuPay Chip) specification, is issuable by partner banks as a combo of an account linked prepaid, debit, or credit RuPay card usable for regular online payments with another prepaid component having on card balance that can be used for small value offline payments in transit. qSPARC is a Dual Interface Open loop payment specification, with the option of loading multiple payment applications on a single card. NPCI International Payments Limited (NIPL) was incorporated on April 3, 2020, as a wholly owned subsidiary of National Payments Corporation of India (NPCI). As the international arm of NPCI, NIPL is devoted for deployment of NPCI’s indigenous, successful Real-Time Payment System – Unified Payments Interface (UPI) and Card Scheme – RuPay, outside of India. Other Retail Payment & Settlement Initiatives White Level ATMs (WLA) - ATMs set up, owned and operated by non-banks are called WLAs. The rationale to allow non-bank entities to set up WLAs has been to increase the geographical spread of ATMs for increased / enhanced customer service, especially in semi-urban / rural areas. Pre-paid instruments (PPIs) – PPIs are a specific category of payment products which have gained prominence in recent times, particularly due to the use of mobile wallets. PPIs can be issued in closed, semi-closed and open systems. PPIs are issued by both banks and non-banks after obtaining license from RBI. The open PPIs which allow for cash withdrawal can be issued only by banks. The PPI guidelines allow for two kinds of PPI, one with minimum KYC and the other with full KYC with different limits. It shall be mandatory for PPI issuer to give the holders of full-KYC PPIs (KYC-compliant PPIs) interoperability through authorised card networks (for PPIs in the form of cards) and UPI (for PPIs in the form of wallets). Bharat Bill Payment System (BBPS) - Bharat Bill Payment System (BBPS) is an integrated bill payment platform which enables payment / collection of bills through multiple channels (Mobile Apps, Mobile Banking, Physical Agents, Bank branches, etc.) using various payment modes (UPI, Internet Banking, Cards, Cash, Prepaid Payment Instruments, etc.). The system provides multiple payment modes and instant confirmation of payment. The BBPS operates as a tiered structure with a single Bharat Bill Payment Central Unit (BBPCU) and multiple Bharat Bill Payment Operating Units (BBPOUs) – i.e., Biller Operating Units or Customer Operating Units or both. NPCI Bharat BillPay Ltd. (NBBL), a subsidiary of NPCI is the authorized BBPCU. The system is a one-stop payment platform for all bills providing an interoperable and accessible “Anytime Anywhere” bill payment service to all customers across India with certainty, reliability and safety of transactions. NBBL has put in place a dispute resolution framework for centralised end-to- end complaint management in compliance with RBI’s guidelines on Online Dispute Resolution (ODR) System for Digital Payments. Trade Receivables Discounting System (TReDS) is a digital platform for financing trade receivables. The objective of the TReDS is to facilitate financing of invoices / bills of MSMEs drawn on corporate buyers by way of discounting. MSME invoices / bills are converted into “factoring units”, which are then traded on the TReDS platform where financiers can bid, and the seller can select the best bid. The transactions processed under TReDS are “without recourse” to the MSMEs. To encourage financing / discounting of payables of buyers irrespective of their credit ratings, insurance facility is permitted on TReDS and accordingly, insurance companies are permitted to participate as a “fourth participant” on TReDS, apart from the MSME sellers, buyers and financiers. All entities / institutions eligible to undertake factoring business under the Factoring Regulation Act are permitted to participate as financiers in TReDS. To allow financiers to offload their existing portfolio to other financiers, TReDS platforms have been allowed to enable a secondary market in the same platform. Payment Aggregators (PAs) are entities that facilitate e-commerce sites and merchants to accept various payment instruments from the customers for completion of their payment obligations without the need for merchants to create a separate payment integration system of their own. PAs facilitate merchants to connect with acquirers. In the process, they receive payments from customers, pool and transfer them on to the merchants after a time period. Payment Aggregator-Cross Border (PA-CB) are entities that facilitate cross-border payment transactions for import and export of permissible goods and services in online mode. Payment Gateways (PGs) are entities that provide technology infrastructure to route and facilitate processing of an online payment transaction without any involvement in handling of funds. Business Continuity and Customer Protection Initiatives a) Perpetual Validity for Certificate of Authorisation (CoA) issued to PSOs - The Reserve Bank of India (RBI) has granted perpetual validity to payment system operators (PSOs) in order to reduce licensing uncertainties and enable them to focus on their business. This is subject to certain conditions, including:  Compliance: The PSO must fully comply with the terms and conditions of their authorization.  Entry norms: The PSO must meet the entry norms for capital and net worth.  Regulatory concerns: There should be no major regulatory or supervisory concerns about the PSO's operations.  Customer grievance redressal: The PSO must have an effective customer grievance redressal mechanism.  Adverse reports: There should be no adverse reports from other departments of the RBI or other regulators or statutory bodies. In addition, Reserve Bank of India has mandated PSOs to obtain prior approval for any takeover, acquisition of control, or sale of payment system activities, especially when transferring these activities to unauthorized entities. b) Access for Non-banks to Centralised Payment Systems – Membership to the RBI-operated Centralised Payment Systems (CPSs) – RTGS and NEFT – were limited to banks, with a few exceptions, such as specialised entities like clearing corporations and select development financial institutions. As the role of non-bank entities in payment space [e.g., Prepaid Payment Instrument (PPI) issuers, Card Networks, White Label ATM (WLA) operators, Trade Receivables Discounting System (TReDS) platforms], has grown in importance and volume, as they have innovated by leveraging technology and offering customised solutions to users, Reserve Bank of India has allowed, with effect from July 28, 2021, direct access to CPSs to the non-bank entities subject to certain conditions.. Direct access for non-banks to CPS lowers the overall risk in the payments’ ecosystem. It also brings advantages to non-banks like reduction in cost of payments, minimising dependence on banks, reducing the time taken for completing payments, eliminating the uncertainty in finality of the payments as the settlement is carried out in central bank money, etc. The risk of failure or delay in execution of fund transfers can also be avoided when the transactions are directly initiated and processed by the non-bank entities. c) Cyber Resilience and Digital Payment Security Controls for non-bank PSOs Cyber resilience is a concept that brings business continuity, information systems security and organizational resilience together. The concept describes the ability to continue delivering intended outcomes despite experiencing challenging cyber events, such as cyberattacks, natural disasters or economic slumps. A measured level of information security proficiency and resilience affects how well an organization can continue business operations with little to no downtime. RBI has issued a direction in this regard to non-bank Payment System Operators mandating a comprehensive governance framework with a designated Chief Information Security Officer (CISO) and regular risk assessments. Payment system operators must implement robust cyber security controls, including encryption, secure coding, and multi-factor authentication. Continuous monitoring and incident reporting mechanisms are required, along with a well-defined incident response plan. Third-party vendors must comply with security standards, and regular training and awareness programs for employees are essential. Compliance with RBI directions and regular audits to assess security controls are mandatory to ensure the integrity of digital payment systems. d) Limited Liability - In cases of unauthorized transactions, if a customer reports an unauthorized transaction promptly, his/her liability is limited to a predefined amount, and the time taken to report the incident. Limited liability rules apply only if the loss was not due to negligence by the customer. For transactions reported within three days, the customer’s maximum liability is set at zero. If reported between four to seven days, the liability increases but remains capped. Beyond seven days, the liability is determined based on the issuer's board-approved policy. These measures aim to protect customers from significant financial losses due to unauthorized transactions while encouraging timely reporting of such incidents to enhance security and trust in digital payment systems. e) Tokenisation enhances the security of card transactions by replacing actual card details with unique tokens. Card issuing banks are required to offer tokenisation services, allowing merchants to store tokens instead of card details, thus minimizing the risk of data breaches. The guidelines mandate that customer consent is obtained before tokenising card details, ensuring transparency and control. Tokens can only be used for transactions at the merchant that requested the token, enhancing security. Strict compliance with data security standards has been stipulated and regular audits have been mandated. Banks are required to handle the customer grievance redressal and educate customers about the benefits and process of tokenisation. This initiative aims to foster trust and security in digital transactions while maintaining convenience for users. f) E-Mandates for recurring online transactions - The framework for processing of e-mandates for recurring transactions was introduced in August 2019 to balance the safety and security of digital transactions with customer convenience. The limits for execution of e-mandates without Additional Factor of Authentication (AFA) has been set as ₹1,00,000/- per transaction for the following categories with effect from December 12, 2023: (a) subscription to mutual funds, (b) payment of insurance premiums, and (c) credit card bill payments. g) RBI – Digital Payments Index - Reserve Bank of India has constructed a composite Digital Payments Index (DPI) to capture the extent of digitisation of payments across the country. The RBI-DPI comprises of 5 broad parameters that enable measurement of deepening and penetration of digital payments in the country over different time periods. These parameters are – (i) Payment Enablers (weight 25%), (ii) Payment Infrastructure – Demand-side factors (10%), (iii) Payment Infrastructure – Supply-side factors (15%), (iv) Payment Performance (45%) and (v) Consumer Centricity (5%). Each of these parameters have sub-parameters which, in turn, consist of various measurable indicators. The RBI-DPI has been constructed with March 2018 as the base period, i.e., DPI score for March 2018 is set at 100. RBI-DPI is being published on the Bank’s website on a semi-annual basis. h) The Payments Infrastructure Development Fund (PIDF) scheme – The scheme launched in January 2021 (and last extended up to December 31, 2025) provides financial assistance to banks and non-bank financial companies (NBFCs) to increase the number of payment acceptance devices in India. The scheme's objectives include:  Promoting payment infrastructure in smaller regions  Encouraging the deployment of payment acceptance infrastructure  Deploying payment acceptance technology in tier-3 to tier-6 centers  Fostering financial inclusion The scheme offers financial aid for: Point-of-sale terminals, other payment acceptance infrastructure, Soundbox devices, and Aadhaar-enabled biometric devices. The subsidy amount varies from 60% to 90%. i) Geo-Tagging - To deepen digital payments and ensure inclusive access across India, a robust payment acceptance infrastructure with multiple touch points is needed. Geo-tagging, which captures the geographical coordinates of payment touch points, enables better monitoring of regional digital payment penetration and infrastructure density. This data supports targeted policy interventions and digital literacy initiatives, helping optimize payment system deployment. j) Online Dispute Resolution (ODR) System for Digital Payments – In August 2020, Reserve Bank has introduced guidelines on Online Dispute Resolution (ODR) systems for payment system operators (PSOs) to streamline the resolution of consumer complaints in digital transactions. These guidelines mandate that PSOs implement ODR mechanisms that is transparent, rule- based, system-driven, user-friendly and unbiased mechanism for resolving customer disputes and grievances, with zero or minimal manual intervention, with effect from January 01, 2021. The RBI's focus is on enhancing the customer experience by ensuring transparency, timely redressal, and efficiency in addressing disputes related to digital payments. The guidelines prioritize disputes involving failed transactions and aim to expand ODR coverage to other grievance types in a phased manner. This initiative is part of the RBI's broader goal to promote trust and reliability in digital payments and ensuring a seamless and secure experience for consumers. Vision for Future The journey of payment systems in India has been phenomenal in the last eight years. The Payments Vision documents are prepared to further elevate the payment systems in the country. Vision 2025 promises towards a realm of empowering users with affordable payment options accessible anytime and anywhere with convenience. The potential of UPI has been recognised world over by numerous authorities. Reserve Bank actively supports the global outreach initiatives to expand the footprint of domestic payment systems by collaborating with relevant stakeholders.