RBI informed us on 18th August 2020, that it has placed on its web site a framework for authorization of pan-India umbrella entity for retail payments which was released after due deliberations on the basis of comments/feedback received for its draft framework for authorization of pan-India umbrella entity for retail payments which was placed on RBI website on February 10, 2020, expects applications for the umbrella entity which shall be submitted in the prescribed form (Form A) till the close of business on February 26, 2021.
Let us discuss the matter along with similar systems already in operation in the U.S.A. RBI website communication is as under:
Form A is enclosed with the above communication.
What is the objective of setting up a pan-India umbrella entity/entity focusing on retail payment systems?
It shall be a Company incorporated in India under the Companies Act, 2013, and maybe a ‘for-profit’ or a Section 8 Company as may be decided by it.
It needs authorization from Reserve Bank of India (RBI) under Section 4 of the PSS Act, 2007. It shall be governed by the provisions of the PSS Act and other relevant statutes and directives, prudential regulations and other guidelines/instructions.
Who are the eligible promotors and their shareholding?
I can reproduce the information from RBI communication.
“All entities eligible to apply as promoter/promoter group of the umbrella entity shall be owned and controlled by resident Indian citizens’1 [as defined in the rules/regulations framed under the Foreign Exchange Management Act, 1999 (FEMA), as amended from time to time] with 3 years’ experience in the payments ecosystem as Payment System Operator (PSO) / Payment Service Provider (PSP) / Technology Service Provider (TSP)2. The shareholding pattern shall be diversified. Any entity holding more than 25% of the paid-up capital of the umbrella entity shall be deemed to be a Promoter.”
The Memorandum of Association (MOA) of the applicant entity is expected to cover the proposed activities of operating a pan-India umbrella entity for retail payment systems.
Foreign Investment
In case of any Foreign Direct Investment (FDI) / Foreign Portfolio Investment (FPI) in the applicant entity, it will fulfill the requirements of FEMA.
Let us discuss the criteria fixed for promotors or promotor groups.
Conforming to RBI’s ‘fit and proper criteria” along with financial integrity, good reputation, and honesty are expected traits for the director. Director is expected not to fall under the following disqualifications:
- Convicted by a court for any offense involving moral turpitude or any economic offense or any offense under the laws administered by the RBI;
- Declared insolvent and not discharged;
- An order, restraining, prohibiting or debarring the person from accessing/dealing in any financial system, passed by any regulatory authority, and the period specified in the order has not elapsed and not found to be of unsound mind by a court of competent Found to be of unsound mind by a court of competent jurisdiction.
Let us further know the capital structure of the umbrella entity.
The umbrella entity is expected to have a minimum paid-up capital of Rs. 500 Crore with no single promoter to contribute not more than 40% investment in the capital of the umbrella entity. They will demonstrate upfront not more than Rs. 50 Crores at the time of making the application for setting up the umbrella entity. The balance is to be acquired at the commencement of business or during the operations. Dilution is allowed to be diluted to a minimum of 25% after 5 years. A minimum net-worth of Rs 300 Crore is to be maintained at all times. ( I personally feel that the financial structure proposed may need an upward revision when compared to the information quoted by me regarding the U.S.A., later by me in this article)
One of the most important information, namely, the scope of activities has been described as under (from the web site):
“Set-up, manage and operate new payment system(s) in the retail space comprising of but not limited to ATMs, White Label PoS; Aadhaar based payments and remittance services; newer payment methods, standards, and technologies; monitor related issues in the country and internationally; take care of developmental objectives like enhancement of awareness about the payment systems.
– Operate clearing and settlement systems for participating banks and non-banks; Identify and manage relevant risks such as settlement, credit, liquidity and operational and preserve the integrity of the system(s);
– Monitor retail payment system developments and related issues in the country and internationally to avoid shocks, frauds, and contagions that may adversely affect the system(s) and/or the economy in general.
– Fulfil its policy objectives and ensure that principles of fairness, equity and competitive neutrality are applied in determining participation in the system;
– Frame necessary rules and the related processes to ensure that the system is safe and sound and that payments are exchanged efficiently and
– Carry on any other business as suitable to further strengthen the retail payments ecosystem in the country.”
It is expected that the umbrella entity shall offer innovative payment systems to include hitherto excluded cross-sections of the society and which enhance access, customer convenience, and safety and the same shall be distinct yet interoperable.
It is also expected to interact and be interoperable, to the extent possible, with the systems operated by NPCI.
The umbrella entity will be permitted to participate in Reserve Bank’s payment and settlement systems, including having a current account with Reserve Bank, if required.
By international standards, it is taken for granted that the umbrella entity will have to use RBI current account for immediate payments or receipts. Equally, RBI will have to get prepared billions of US D worth transactions every day, though in the last 70 plus years, it has been managing interbank clearing successfully.
What about the” Business Plan” for operations?
The application for setting up the umbrella entity shall contain a detailed business plan covering the payment system/s proposed to be set-up and/or operated along with other documents to duly establish its experience in the payment’s ecosystem.
Such a plan will include technology, security features, market analysis/research, benefit, if any, of such payment systems, operational structure of the payment systems, time-period for setting up the payment systems and proposed scale of operations, etc.
A proposed organizational strategy in terms of fulfilling its responsibility as an umbrella entity shall also be given in the business plan. The umbrella entity shall commence business/operations within a time of 6 months, extendable to a maximum of one year, if required, from the date of ‘in-principle approval’.
Many suggestions had come to RBI to specify the details of the business plan so that the entity may get some guidance.
I strongly feel that the payment systems already in operation in developed countries like U.S.A/U.K. will guide our organizations since we have delayed the matter a lot.
The application is to be submitted in an envelope written on the top “Application for Umbrella Entity ”, addressed to the Chief General Manager, Department of Payment and Settlement Systems, Central Office, Reserve Bank of India, 14th Floor, Central Office Building, Shahid Bhagat Singh Marg, Mumbai – 400 001 and shall be submitted in the prescribed form (Form A) till the close of business hours on February 26, 2021.
RBI will process the application after the due date and make a decision with the assistance of an External Advisory Committee after its submission to the Reserve Bank. Board for Regulation and Supervision of Payment and Settlement Systems (BPSS), who will be the final authority on issuing authorization for setting up of an umbrella entity or entities. RBI has set a target date of completion within the next 6 months of receipt of recommendations.
Let us now concentrate on Payment, clearing, and settlement systems in the United States from the web site as given below:
https://www.bis.org/cpmi/publ/d105_us.pdf
Relevant portions will be quoted and later on discussed with reference to Indian systems.
Some relevant information for comparison purposes.
Payment systems in the United States include mechanisms for processing both wholesale and retail funds transfers. At the wholesale level, two large-value electronic funds transfer systems settle the bulk of the dollar value of all payments in the United States.
At the retail level, non-cash payments are processed over a number of systems, including cheque clearing systems, automated clearinghouse systems and credit, and debit card networks. While a significant but unknown number of payments continue to be settled in cash, almost all non-cash payment instruments, including cheques, settle electronically. In addition, innovation and competition have facilitated the use of new instruments and payment channels that rely increasingly on electronic payment mechanisms.
Legal framework
Two levels of operations with federal and state levels have separate rules and regulations applicable to them.
For payment services operated by the Federal Reserve, Federal Reserve regulations and operating circulars specify the terms and conditions under which services are provided. In addition, the DFA, enacted on 21 July 2010, was one of the most significant pieces of legislation affecting the US financial regulatory framework in many years.
At state level
At the state level, the Uniform Commercial Code (UCC) provides a set of model statutes governing certain commercial and financial activities, including some banking and securities market transactions.
The following articles of the UCC pertain to payment and settlement activities: Article 3 (negotiable instruments), Article 4 (bank deposits and collections), Article 4A (funds transfers), Article 8 (investment securities), and Article 9 (secured transactions). These articles, sometimes with local variations, have been incorporated into the laws of all the states.
Federal Reserve Operating Circulars 1, 3, 4A, 5, 6, and 7 deal with payment systems of federal ones.
In addition, the Expedited Funds Availability Act of 1987 (EFAA) and the Check Clearing for the 21st Century Act of 2003 (Check 21 Act) are important federal statutes governing cheque collection.
Let me quote “what is Federal Reserve” for our clear vision about it.
“The role of the Federal Reserve
The Federal Reserve Act of 1913 established the Federal Reserve as the central bank of the United States and prescribed the general banking powers of the Federal Reserve. The Federal Reserve has responsibilities that encompass issuing banknotes, providing payment services, acting as the fiscal agent and depository of the United States government, supervising and regulating certain banking and financial institutions, and conducting monetary policy. The Federal Reserve System includes 12 regional Federal Reserve Banks located throughout the United States and the Board of Governors in Washington, DC. The Board of Governors is responsible for the general supervision and oversight of the Reserve Banks, which are separately incorporated entities.”
Let us hear the statistical features of American payment systems which are our ideal for achievements in India. (one million- 10 lakhs; 1000 million – I billion; 1000 billion – I trillion. Yes, reaching 5 US D Trillion economy is our goal. Yes, time to learn these words too.) (After mind-blowing statistical details of payments in the U.S.A. we shall also discuss).
- FR notes are issued by the Board and are printed in denominations of USD 1, 2, 5, 10, 20, 50, and 100. Coins are issued by the US Treasury’s Mint in denominations of 1, 5, 10, 25, 50 cents, and USD 1. At year-end 2010, the value of notes and coins in circulation was USD 983 billion, of which USD 942 billion were notes.
- At year-end 2010, the value of transaction accounts held at depository institutions was USD 1.1 trillion.
- Savings deposits (including money market deposit accounts), retail money market mutual funds (general purpose only), and small-time deposits totaled approximately USD 7.0 trillion at year-end 2010.
- An estimated 22.8 billion cheques were paid in the United States in 2010, with a value of USD 29.0 trillion. Of the approximately 16.2 billion interbank paid cheques in 2010, about 8.0 billion, or 49%, cleared through the Federal Reserve Banks.
- ACH transactions are a common form of electronic funds transfer used to make recurring and non-recurring payments. There were about 19.1 billion ACH transactions during 2010, representing USD 38.4 trillion, more than twice as many transactions as there were in 2000 and 30% more than there were in 2006.
- 4 ACH payments may be either credit or debit transactions. In an ACH credit transaction, funds flow from the originator to receiver and in a debit transaction, as with a cheque, funds flow from the receiver to the originator.
- Some 21.4 billion credit card transactions were processed during 2010, valued at USD 2.0 trillion.
- Some 43.8 billion debit card transactions were processed during 2010, valued at USD 1.6 trillion, compared with 26.0 billion processed during 2006, valued at USD 1.0 trillion.
- In the United States, funds transfers occur primarily through the Fedwire Funds Service, CHIPS, the National Settlement Service (NSS), cheque clearing, ACH, and payment card networks.
- The Fedwire Funds Service processed an average of approximately 497,000 payments per day in 2010. The total value of funds transfers originated during 2010 was approximately USD 608 trillion.
- Intraday central bank credit in the form of daylight account overdrafts may be available to holders of accounts at the Federal Reserve Banks, including participants in Fedwire Funds.
- In 2010, aggregate average daylight overdrafts for funds transfers averaged USD 2.4 billion per day and aggregate peak daylight overdrafts for funds transfers averaged USD 13.2 billion per day, which was about 0.6% of the average gross value of transfers settled each day.
Discussion
Now, you will appreciate the dimensions of payments likely to be handled by India, willingly, in the next decade or less. All of us, ordinary customers (Yes, we have 1.33 billion-plus), lakhs of commercial banks/institutions both private and public, and Reserve Bank of India will face the brunt of payments daily without any break. For a 5 USD Trillion economy, we have to get prepared with the best human resources, institutional support, the best hardware/software support, and a human mind to accept daily challenges and willingness to achieve even daily goals which will be trillion in number.
Conclusion
Let us all together achieve even 25% of the achievements of the U.S.A. in 2010 by the next few years. With the youngest population of the world, I shall proudly recall our achievements than in my future articles.
Disclaimer: All views expressed by me are purely personal though I have tried to quote from authorized sources. Obviously, neither taxguru.in nor RBI or foreign institutions are responsible. Anyone serious about the information may refer to web sites given above or more informative web sites.
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