The Finance Act, passed yesterday in Parliament using a voice vote, will enable the setting up of a Payments Regulatory Board, to regulate payments in the country. The changes essentially amend provisions of the Payment and Settlement Systems Act, 2007, to replace the Board for Regulation and Supervision of Payments and Settlement with the Payments Regulatory Board, for the regulation and supervision of payments and settlement systems. The new board will consist of the Governor of the RBI as its Chairperson, Deputy Governor in charge of Payment and Settlement Systems as member, another officer nominated by the board of the RBI as member, and three nominees of the Central government. The board will define its own processes regarding meetings, venue of meetings and other matters, according to the explanation given in the finance bill.

This means that the Payments Regulatory Board will remain under the RBI which isn’t neutral

The Watal Committee report had pushed for a payments regulator independent of the RBI. It pointed towards heavy-handedness of banks, saying “Fintech companies that require to connect to banking systems to serve their customers tend to face restrictive practices. This anti-competitive setting is not conducive for innovation and consumer interest”. The committee pointed towards specific instances where the RBI isn’t neutral:

a. Payment systems run by RBI are conflicted: The Watal Committee pointed towards payments systems run by the RBI that favor banks: “The most notable distortion in the market, is the case of RTGS, NEFT and NECS, where the RBI performs both commercial functions, as well as regulatory functions. This leads to a conflict of interest, and goes against the principles of competitive neutrality.”

“In order to eliminate any conflict of interest, the Committee recommends that the RBI should focus on its role as the banking regulator and not combine that with the role of operating payment systems. In this regard, the option of implementing a time bound plan to hive off RTGS and NEFT to an independent entity (which in turn would be regulated by the RBI) could be considered, subject to an assessment of the costs and benefits associated with such divestements.

b. RBI’s regulations discriminate against bank and non-bank payment service providers (PSPs): “For instance, RBI’s regulations relating to receipts of inward foreign exchange remittances into PPIs, treat bank and non-bank PSPs differently.”…”Similarly, direct access to payment systems is limited to bank-led PSPs. This has inherently tilted the regulatory framework in favour of bank-led PSPs”…”To this end, several stakeholders pointed out that access to payment systems such as UPI have been restricted to banks. Similarly, while the PPIs issued by banks are open loop cards, non-banks are restricted from issuing open loop PPIs.”

c. Issues with the Board for Regulation and Supervision of Payment and Settlement Systems (BPSS):
“This Board is a sub-committee of the RBI and is not independent of the central banking functions of RBI. However, banking as an activity is separate from payments, which is more of a technology business. Microprudential regulation of banks may not by itself improve competition in payments market. The Committee noted that in major common law jurisdictions, the competition and innovation objective in payments is kept separate from the central banking and micro-prudential objective.”

While the committee pointed out that the law doesn’t impose any obligation on authorized payment systems to provide open access to all payment systems providers, we see this as a failure of the BPSS as well.

The Watal Committee had considered an independent regulator for payments, but…

The Watal Committee had weighed two options: (i) create an new payments regulator, or (ii) make the current Board for Regulation and Supervision of Payment and Settlement Systems (BPSS) within RBI more independent.

The independent regulator it considered was going to be called the Indian Payment Authority (IPAY) and was to be outside the control of the RBI: “to bring out a structural and regulatory separation between payments and banking services, and provide for an exclusive institutional framework to bind all stakeholders involved in effecting a digital payments transactions. The proposed regulator would draw a majority of its membership from businesses having direct familiarity with the payment process, or allied businesses such as technology companies or banks.”

For no apparent reason, the Watal Committee chose to recommend making the BPSS independent, instead of the formation of IPAY. On competition issue, it passed the buck to other organisations, which aren’t necessarily geared up to deal with payment industry specific issues: “The Committee recommends that while issues relating purely to competition principles (such as disputes over denial of open access) should be referred to the Competition Appellate Tribunal (COMPAT), whereas challenges to regulatory actions (such as authorisation, suspension and penalties) may be referred to the SAT.”

The fact that the board largely is still largely controlled by the RBI, doesn’t augur well for the opening up for regulation of the payments ecosystem in a manner that it doesn’t favour banks over independent payment companies. The government has done the same thing.

Apart from this, do read how the NPCI is also operating to the exclusion of non-banking payment companies.

Changes in the Finance Act

1. Payments Regulatory Board will be under the RBI:” The Reserve Bank shall be the designated authority for the regulation and supervision of payment systems under this Act” and “The Reserve Bank shall exercise the powers, perform the functions and discharge the duties conferred on it under this Act through a Board to be known as the “Payments Regulatory Board”.”

2. Constitution of the board:
(a) the Governor of the Reserve Bank — Chairperson, ex officio;
(b) the Deputy Governor of the Reserve Bank who is in-charge of the Payment and Settlement Systems—Member, ex officio;
(c) one officer of the Reserve Bank to be nominated by the Central Board of the Reserve Bank—Member, ex officio; and
(d) three persons to be nominated by the Central Government—Members.

3. Functions of the Payments Regulatory Board:
(4) The powers and functions of the Board referred to in sub-section (2), the time and venue of its meetings, the procedures to be followed in such meetings (including the quorum at such meetings) and other matters incidental thereto shall be such as may be prescribed.’
149. In section 38 of the principal Act, in sub-section (2), in clause (a), for the words, brackets and
figure “Committee constituted under sub-section (2)”, the words, brackets and figure “Board referred
to in sub-section (2)” shall be substituted.