Date: 08/11/2022
Relevance: GS-3: Indian Economy and related Issues; RBI and its functions.
Key Phrases: Payment Systems, Merchant Discount Rate, UPI, Reserve Bank of India, RTGS, NEFT, Governor of RBI, Regulation, Fund Transfer Payment System, Merchant Payment System, Operational Cost, Card Network, PPIs, Foreign Exchange Management Act, 1999.
Context:
- Recently, The Reserve Bank of India (RBI) has released a discussion paper on charges in payment systems seeking public feedback.
Key Highlights:
- As announced in the Statement on Developmental and Regulatory Policies, RBI has released a discussion paper on “Charges in Payment Systems” for public feedback.
Rationale for Prescribing Charges:
- Recovery of Costs and generation of Sufficient Returns
- Payment systems operators are independent entities started with an initial outlay of capital.
- They incur further expenditure to create and operate safe and secure payment systems, acquire customers, comply with statutes/regulations and generate public awareness.
- Therefore, like any other industry, the objective of promoters includes recovery of costs and generation of sufficient returns to ensure continued operations.
- Incentive Price System
- Models adopted by the Payment System Operators (PSOs) are generally a function of the type of payment system operated and their ownership structure.
- Adjustment in models may happen when charges are prescribed in the interest of the public good.
- In such a scenario, it becomes important to ensure that payment services are priced in a manner that retains incentives for both, users to access the services and, service providers to offer them.
- No Free Economic Service
- In any economic activity, there does not seem to be any justification for a free service, unless there is an element of public good and dedication of the infrastructure for the welfare of the nation.
- But who should bear the cost of setting up and operating such an infrastructure, is an important point.
UPI
- Unified Payments Interface (UPI) is a very popular funds transfer system, which is quite convenient and fast.
- IMPS, RuPay, UPI, etc., are owned and operated by the National Payments Corporation of India (NPCI), which is a not-for-profit entity promoted by banks.
Types of Payment Systems
- A payment system settles financial transactions between payers and beneficiaries.
- Flow of funds in a payment system in general involves either movement of funds from one account to another or loading of cash to an account or withdrawal of cash from an account.
- Payment systems in India are categorized into two types –
- Funds Transfer Payment Systems – System facilitating
transfer from one account to another account identified by the
originator customer.
- Real Time Gross Settlement (RTGS), National Electronic Funds Transfer (NEFT) and Immediate Payment Service (IMPS) are the main exclusive funds transfer payment systems in the country.
- In a funds transfer payment system, the charges are generally recovered from the originator of the payment instruction
- Merchant Payment Systems – System facilitating payments
for availing goods or services.
- Card networks and PPI issuers provide important merchant payment systems in the country.
- In the case of a merchant payment system, the charges are
generally recovered from the final recipient of money
- Card networks: They facilitate the issuance of
card-based products like credit cards, debit cards and
prepaid cards.
- Card network payment systems can be a three-party or a four-party settlement system.
- The card payment system can also facilitate funds transfer from one card to another.
- PPIs: These are issued both by banks and
non-banks.
- Banks issue them as one of the business segments in their bouquet of products.
- Non-bank PPI issuers are standalone operators of this product.
- Card networks: They facilitate the issuance of
card-based products like credit cards, debit cards and
prepaid cards.
- Funds Transfer Payment Systems – System facilitating
transfer from one account to another account identified by the
originator customer.
Constraints:
- It is often seen that when a cap or floor on charges is attempted, the entire set of stakeholders gets closer to the thresholds, irrespective of the costs actually incurred by them. This poses a regulatory dilemma on intervention or stay afar
Reserve Bank of India
- About
- RBI is India's central bank and regulatory body responsible for the regulation of the Indian banking system.
- It is under the ownership of the Ministry of Finance, Government of India.
- It was established on 1 April 1935 in accordance with the Reserve Bank of India Act, 1934.
- Composition
- The overall direction of the RBI lies with the 21-member
central board of directors, composed of
- The Governor;
- Four Deputy Governors;
- Two Finance Ministry Representatives;
- Ten Government-nominated Directors; and
- Four directors who represent local boards for Mumbai, Kolkata, Chennai, and Delhi.
- The overall direction of the RBI lies with the 21-member
central board of directors, composed of
- Function
- It is responsible for the controlling, issuing and maintaining supply of the Indian rupee.
- It also manages the country's main payment systems and works to promote its economic development.
- The central bank manages to reach different goals of the
Foreign Exchange Management Act, 1999.
- Their objective is to facilitate external trade and payment and promote orderly development and maintenance of the foreign exchange market in India.
- Reserve Bank of India also works as a central bank where
commercial banks are account holders and can deposit money.
- RBI maintains the banking accounts of all scheduled banks.
- The Reserve Bank has custody of the country's reserves of international currency, and this enables the Reserve Bank to deal with crises connected with adverse balance of payments positions.
Way Forward:
- Charges for payment services should be reasonable and competitively determined for users while also providing an optimal revenue stream for the intermediaries.
- While there are both advantages and disadvantages of customers bearing these charges, they should not become a deterrent in the adoption of digital payments,
Conclusion:
- Fees and charges in payment systems should be affordable as well as economically remunerative for the entities involved.
Source: Indian Express
Mains Question:
Q. If charges on payment systems are introduced, should they be administered (say, by RBI) or be market determined ? Critically Analyse. (250 Words).
