Reserve Bank of India vides its communication dated 18th August 2020 has placed in its web site a draft framework for the grant of recognition to an industry association as a Self-Regulatory Organization (SRO) for Payment System Operators (PSOs). The SRO shall cover operators in all segments of payment systems and will be expected to observe best practices on security, customer protection, and competitiveness. The SRO shall also serve as a two-way communication channel between the PSOs and Reserve Bank and work towards establishing minimum benchmarks and standards in the payments space, observing disciplined behavior by its members. Anyone can send the comments to dpssfeedback@rbi.org.in to reach on or before September 15, 2020.
It is obvious that this article will not only cover details of this communication but also the implementation of a similar one in the U.K. as early as 2015. This article intends to compare the two for better understanding.
From RBI web site,
https://www.rbi.org.in/Scripts/BS_PressReleaseDisplay.aspx?prid=50233
(Draft framework for recognition of a Self-Regulatory Organization (SRO) for Payment System Operators)
‘Payment System’ IS defined under 2(i) of Payments and Settlement Systems Act, 2007; Operators include System Participants and System Providers as defined under Section 2(p) and 2(q) of the Act.
Let me recollect the names as under:
India has multiple payments and settlement systems, both gross and net settlement systems. For gross settlement India has a real-time gross settlement (RTGS) system called by the same name and net settlement systems include Electronic Clearing Services (ECS Credit), Electronic Clearing Services (ECS Debit), credit cards, debit cards, the National Electronic Fund Transfer (NEFT) system, Immediate Payment Service and Unified Payments Interface (UPI)
Why do we need a Self-Regulatory Organization for payment system operators?
Though RBI will continue as a regulator, to release regulatory resources, to set self-regulated systems to conform to international standards, to give the best services with adequate protection to the customers using the service of members, like in the U.K. or any other developed nation, it has been proposed to encourage setting up of a Self-Regulatory Organization(SRO) that would set up rules, enforce them and voluntarily ensure discipline among the members of Payment Systems Operators community.
Being a non-governmental organization, it will discipline its members who do not keep the required ethics, offer the expected service, or meet the internationally expected standards in meeting the customer expectations. Being self-imposed, the members would have to obey the rules scrupulously.
What are the benefits of an SRO?
Let us enumerate them:
- An SRO is constituted with an expectation to provide a link between the regulator and market participants through a less formal set-up. It makes for the structured participation of the PSOs in the regulatory process and helps in meeting regulatory expectations in a more participative manner. The benefits of an SRO are:
- Expertise – SROs are widely considered as experts in their fields and hence have in-depth knowledge of the markets they operate in. This is helpful to their members as they can be called in to participate in deliberations and learn more about the nuances of the industry.
- To set a higher standard of conduct – their formation ensures member organizations follow a self-accepted higher ethical standard to serve the clients, thereby enhancing the confidence in the ecosystem.
- To work as a watchdog and facilitate better communication among all stakeholders including the regulator.
- To enable customers to have world-class service from PSOs.
What are expected to be the characteristics of an ideal SRO?
It has a legal authority to set policies/standards and ensure its observance by its members, establish robust governance standards, and apply standard processes to ameliorate conflicts among themselves as well as customers. By having the best internationally-accepted oversight and surveillance methods and enforcing impartial methods and processes, it is expected to usher in a transparent style.
The Board of Directors and management of the SRO is expected to meet the fit and proper criteria prescribed by the Reserve Bank, on an ongoing basis. Any change in directorship or adverse development about any Director shall be immediately reported to the Reserve Bank.
Who is expected to give recognition as an SRO?
RBI as a regulator is empowered to invite applications from bodies interested to meet the expected standards set and after meeting the required high standards, the recognition will be given as SRO.
After getting a recognition as SRO, what are expected to be its obligations and normal functions?
The following expectations have been set up to meet international standards in its functioning:
1. It will serve as a two-way communication channel between its members and Reserve Bank.
2. To work towards establishing minimum benchmarks, standards and help instill professional and healthy market behavior among its members.
3. To inform Reserve Bank about any violation that comes to its notice of the provisions of the Payments and Settlement Systems Act or any other regulation issued by the Reserve Bank.
4. To impart training to the staff of its members and others. It shall conduct awareness programs for spreading safe digital transactions.
5. To establish a uniform grievance redressal and dispute management framework across its members.
6. To conduct or promote research and development for creating a secure and safe digital payment ecosystem.
7. To investigate any matter referred to by the Reserve Bank and provide the required information to RBI.
An approved SRO is expected to keep the interests of all stakeholders, abide by the higher standards set by RBI, offer excellent service to customers who avail payment systems through its members and basically work as a watchdog of the ecosystem of payment methods of its members.
Due to the excellent reception given by the Indian public, payment methods have yielded historic results requiring an establishment of an SRO to keep an ethical and outstanding experience to the customers of payment methods.
Let us delve into the SRO from the United Kingdom which was established as early as 2014 and got better shape in 2015 and offering world-class performance.
Let me take you to the relevant web site from the U.K.
https://www.psr.org.uk/about-psr/psr-purpose
Some relevant information will enthrall you with world-class standards. From the above web site, the following information has been compiled.
Who is the PSR?
“Every time anyone uses a cash machine, transfers money, uses contactless, or gets paid, they use a payment system. Payment systems are always evolving and the PSR is here to make sure they work well for everyone.
In a fast-moving environment, we challenge the industry to adapt by supporting innovation and improving competition so that the UK benefits from world-leading payment systems.
We encourage collaboration to help solve problems and, when we need to, we take difficult decisions and use our powers. We change our approach to get the best outcome for everyone.”
Let me bring in their vision.
“Our vision
“Payment systems are accessible, reliable, secure, and value for money.
Our approach will bring change to the payments industry, injecting competition, and innovation where it is needed most and putting the interests of the people and businesses that use payment systems front and center.”
It is easy to see their clear vision to help the common man with the best technology, secure the processes, and help all stakeholders.
What are PSR powers?
The PSR has a range of strong regulatory and competition powers. They can:
- give directions to take action and set standards
- impose requirements regarding system rules
- require operators to provide direct access to payment systems
- require PSPs to provide indirect access to smaller PSPs
- amend agreements relating to payment systems, including fees and charges
- investigate behavior which isn’t consistent with our directions
- act where we see anti-competitive behavior, alongside the Competition & Markets Authority
Let us learn some of the interbank systems now prevalent in the U.K:
Interbank payment systems were developed to enable people and businesses to make payments across any PSP in the UK. Each payment system supports a different kind of payment service.
The six interbank payment systems as designated by the Treasury are as follows. • Bacs – the interbank system that processes payments through two principal electronic payment systems: Direct Debit, which is used for example by individuals to pay bills, and Bacs Direct Credit, used among others by businesses and government to pay salaries and pensions.
- C&C (Cheque & Credit) – the interbank payment system in England, Scotland, and Wales that processes cheques and other paper instruments.
- CHAPS – the UK’s real-time, high-value sterling interbank payment system, where payments are settled over the Bank of England’s Real Time Gross Settlement (RTGS) system.
CHAPS processes both wholesale (e.g. short-term lending between banks) and retail payments (e.g. house purchases).
- Faster Payments Scheme (FPS) – the interbank payment system that provides near real-time payments as well as Standing Orders. Almost all internet and telephone banking payments in the UK are now processed via FPS. It is also used by PSPs to process other services such as mobile payments.
Comparison between two systems of India and U.K. with regard to adoption of Self-Regulatory Organization:
U.K. took the lead in 2014 followed by 2015 detailed discussion with all stakeholders to introduce the system of SRO. RBI has just put up its proposal for public comments. Even the address for sending the comments were not given on the web site. I have to ring to RBI corporate office at Mumbai to get the web address. U.K. authorities quoted a large number of observations from all stakeholders to formulate their systems and procedure. RBI may also arrange detailed discussions with all types of payment holders.
Conclusion
The initiatives recently taken by RBI are edging India towards the world-class facilities being offered for a common man since the Indian population has given India an opportunity to experiment with the best available methods for transmission of funds. I have mentioned in one of my earlier articles as how the U.S.A. could not transmit funds so quickly as Indian Central government which managed to contact 800 million Indians by opening their accounts, educated them their usage of the banking facilities and avail the best financial offerings of both central/state governments immediately without wastage of time. At this massive scale, the introduction of self-managed SRO under the regulatory control of RBI but with self-managed rules and discipline will produce outstanding results for the system.
Like anyone I am anxiously waiting for the outcome of SRO after September 15, 2020.
The views expressed are my personal views and naturally, neither taxguru.in nor RBI is responsible for my views. One should refer to the web sites for detailed information.
Author Bio
