Money & Banking
Time for clarity on Fintech regulations
There has been an exponential rise in the number of FinTechs in the country during the last six months. India now ranks 17th in the world in terms of number of FinTech companies present in the country. With the declaration of the Startup Action Plan, there has been a sudden boom in the number of FinTechs. The FinTech segment also attracts a huge number of investors and funding deals. The Indian FinTech segment mainly comprises of –
 
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.
 
Plastic Money
 
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)

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Dhanlaxmi Bank fails to repay a coupon on debt instrument indicating capital pressures
Dhanlaxmi Bank's failure to pay a coupon on a subordinated debt instrument in July 2016 highlights the increased risk to bank capital investors from the mounting asset-quality and capital-adequacy pressures on India's banking sector, says Fitch Ratings.
 
Fitch says, "This was the case in 2014 at United Bank of India, and more recently at UCO Bank and Indian Overseas Bank. However, Dhanlaxmi Bank is a privately owned, small regional bank that was unable to attract new capital from its shareholders. State support appears not to be on offer, and therefore creditors are more exposed to non-performance if there are capital pressures." 
 
"This is the first time investors in India have had to forego interest on a bank capital instrument. We view this as a positive development for a system with a high expectation of support for banks and where moral hazard has developed around the assumption that support could be extended to regulatory capital instruments," the ratings agency says in a report. 
 
The Reserve Bank of India (RBI) can prohibit banks from paying coupons on subordinated debt instruments if capital adequacy ratios fall below the minimum requirements. RBI raised these to 9.625% in April 2016 from 9%, exposing creditors to risks at banks with tight capital ratios. The RBI is progressively pushing minimum capital requirements higher to meet Basel III capital requirements, and will reach 11.5% by end-March 2019. Systemically important banks will have a higher threshold of an additional 0.2%-0.6%. 
 
Fitch says, market concerns about bank capital have increased because of the RBI-imposed asset-quality review, which uncovered higher non-performing loans, triggering first-time losses at some banks. This limits banks' ability to generate new capital internally and makes it more difficult for them to access new sources of capital from the market, it added. 
 
"We believe Indian banks will need to raise an additional $90 billion of capital by 2019 if they are to meet minimum capital adequacy requirements. As long as potential capital shortfalls persist, creditors will remain exposed to high non-performance risk, which will affect banks' market access to new capital. This is likely to put pressure on the government to inject additional capital into the banks, over and above what it has budgeted so far," the ratings agency says. 
 
According to the report, capital ratios at the state-owned banks, which represent around 75% of sector assets in India, are particularly thin. 
 
The RBI appears to be making a distinction between banks that have new capital lined up, which so far have been public-sector banks, in decisions about the performance of regulatory capital instruments. Where capital ratios fell below, or very near to, regulatory minimum requirements, public sector banks have received capital injections from the government and were able to make coupon payments on regulatory capital instruments, it added.  
 
Fitch Ratings says, sovereign support remains a relevant ratings factor for it, particularly for the large state-owned banks and systemically important private-sector banks. 
 
"We think asset-quality indicators are close to their weakest point, but expect bank earnings to remain weak at least for the next 12-18 months. Capital ratios will continue to show signs of strain over the short to medium term, and banks will remain under pressure to raise additional funds. Until they do, risks for creditors will remain high," the ratings agency concluded.
 
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RBI draft circular seeks to protect customers from unauthorised transactions
The Reserve Bank of India (RBI) has proposed that the customer will have no or zero liability in case of fraud being committed because of a bank's negligence or by a third party. In addition, where the customer’s own involvement is not clearly established, customer liability will be limited to a maximum of Rs5,000 if it is reported within four to seven working days, the draft circular says.
 
However, where customer's own involvement is established, customer will be liable, the draft circular on 'Customer Protection - Limiting Liability of Customers in Unauthorised Electronic Banking Transactions' issued by the central bank says.
 
The recent surge in customer grievances relating to unauthorised electronic banking transactions resulting in debits to their accounts and cards, has necessitated a review of the criteria for determining the customer liability in these circumstances, RBI said in a release.
 
"If customer reports beyond seven working days, customer liability will be determined based on bank's Board approved policy," said the draft, on which the RBI has sought feedback till 31 August 2016.
 
On being notified by the customer, the draft said the "bank should credit (shadow reversal)" the amount involved in the unauthorised electronic transaction to the customer's account within 10 working days.
 
"The burden of proving customer liability in case of unauthorised electronic banking transactions shall lie on the bank," the RBI proposed.
 
It is also proposed that banks should ensure that a complaint is resolved within 90 days and in case of debit card or bank account the customer does not lose out on interest.
 
Banks should also ensure that in case of credit card the customer does not bear any additional burden of interest.
 
The RBI said the recent surge in customer grievances relating to unauthorised electronic banking transactions resulting in debits to their accounts/cards, has necessitated a review of the criteria for determining the customer liability in these circumstances.
 
"Banks must ask their customers to mandatorily register for alerts for electronic banking transactions. The alerts shall be sent to the customers through different channels (email or SMS) offered by the banks," it proposed.
 
Suggestions or comments, on the Draft Circular can be sent by post to... 
Chief General Manager, 
Department of Banking Regulation, 
Reserve Bank of India, 
Central Office, 12th Floor, 
Shahid Bhagat Singh Marg, 
Mumbai-400 001, or 
 

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COMMENTS

R Varadarajan

4 months ago

A right step in fraud prevention.

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