1. E-wallets / mobile wallets
2. Smart tax solutions
4. Payment gateways,
However, for the FinTech-based startups, the regulatory aspect still remains unclear.
As most of the activities mentioned above involve handling of large financial data of the general public, the general presumption is that a separate registration would be required. However, these activities either do not come under the scanner of the Reserve Bank of India (RBI) or do not need any registration requirement.
Most fintechs are a fusion of a payment solution and technology (Pay-tech) to avail goods and services. Innovative payment solutions are a result of advance in technology and lower communication cost. This has enabled us to experience cashless transactions. This fundamental barrier of risky cash transactions can be overcome with the exchange of information in place of hard cash between the parties to the transaction.
To overcome this barrier, the Payment and Settlement Systems (PSS) Act, 2007
was enacted to govern and regulate the activities which involved payment and settlement of transaction as a substitute to paying or settling a transaction by cash or by other means of physical movement of payment instruments to settle a transaction.
The RBI in exercise of the powers given to it by the PSS Act, issued the Payment and Settlement Systems Regulations, 2008
. These regulations were made applicable to all the entities desirous of setting up the payment system. The words “applicable to all the entities desirous of setting up a payment system in the nation”
is read differently by different entities, which is the main cause of confusion for FinTechs engaged in activities related with facilitation of payments and settlements. At first, it seems that the Payment and Settlement Systems Regulations, 2008, is applicable to all entities engaged in activities of payments and settlements. This view however, changes when we go a bit deeper into the modus operandi
of the activities of the FinTechs engaged in payments and settlements.
FinTechs whose activities are directly related to payment, clearing and settlements of transactions are – M-wallets, E-wallets, Payment Gateways and Pre-paid Payment Instrument Issuers. The entities engaged in the above mentioned activities directly form part of the payment and settlement system and hence, are regulated by the RBI except the payment gateways. This is because the activities of the payment gateways are not seen as payment and settlement of transactions. To understand the point as to why the payment gateways are not seen as payment system providers by the RBI, we need to first understand three important points –
1. Who is a payment system provider?
The PSS Act defines a system provider as – ‘system provider’ means a person who operates an authorised payment system.
2. What is a payment system?
The PSS Act defined a payment system as - “payment system” means a system that enables payment to be effected between a payer and a beneficiary, involving clearing, payment or settlement service or all of them, but does not include a stock exchange;
3. Modus operandi of payment gateways.
a. The buyer/ cardholder fills out a payment information form to pay for a purchase at a merchant's website checkout.
b. The gateway collects the payment information and forwards it (securely encrypted) to the processing bank (gateway's nodal account maintaining bank) for authorization.
c. The processing bank sends the request, through Visa, Master Card or RuPay’s payment networks, to the card issuer or directly to the buyer's bank (in case of net-banking transaction).
d. The card issuer or bank approves or declines the transaction and sends its response, through Visa, MasterCard or RuPay, to the processing bank.
e. The processing bank forwards the response, through the gateway, to the merchant who completes the transaction accordingly.
f. In the case of an approved transaction, the merchant deposits the receipt with its processing bank, requesting payment.
g. The processing bank then credits the merchant’s account and submits the transaction to Visa, MasterCard, RuPay or buyer's bank for a settlement.
h. Visa, MasterCard, RuPay or buyer's bank then pays the processing bank, while simultaneously debiting the card/ account holder's account.
The entire process is completed in less than five seconds, by way of high-speed transfers of encrypted data from one point to the other and back.
From a reading of the above points, we can understand that, to be identified as a payment system provider the entity must be in the activity of –
i. Effecting payments between payer and beneficiary; and/ or
ii. Effecting clearing and settlement service.
Clearly, the gateways merely act as information exchanges, facilitating payments and settlements and not providing the services to effect payment, clearing and settlements. The activities of payment, clearing and settlements are carried out by the processing banks. Hence the gateways are not recognised as payment system providers by the RBI.
However, the gateway does handle sensitive information of public, which includes credit or debit card numbers, ATM PIN, internet banking passwords, CVV numbers of the cards and other information. This information can be misused. While the PSS Act has paved the way to move on to a cashless economy, where payments and settlements will be by way of information exchange between centralised data centres, we need comprehensive regulation to keep a check on the activities of these emerging business activities.
(Ameet Roy works as Executive in Financial Planning Division at Vinod Kothari Consultants Pvt Ltd)