RBI's Approval Essential for New Payment System Operators
RBI approval is crucial for new payment systems, ensuring regulatory oversight and financial stability.
Photo by SumUp
The Reserve Bank of India (RBI) has reiterated that its approval is mandatory for any entity seeking to operate a new payment system in the country. This emphasizes the central bank's critical role in regulating India's rapidly evolving digital payments landscape.
The requirement ensures that new payment systems adhere to stringent security, operational, and financial stability standards, protecting consumers and preventing systemic risks. This regulatory oversight is vital for maintaining public trust in digital transactions and fostering a secure and efficient payment ecosystem.
UPSC Exam Angles
RBI's regulatory powers and functions under various acts (RBI Act, PSS Act)
Evolution and types of payment systems in India (UPI, RTGS, NEFT, PPIs, Payment Banks)
Challenges and opportunities in India's digital payments landscape (financial inclusion, cybersecurity, data privacy)
Role of regulation in fostering innovation versus ensuring stability and consumer protection
Interplay between government initiatives (Digital India, Jan Dhan) and RBI's regulatory framework
Visual Insights
RBI's Approval Process for New Payment System Operators
This flowchart illustrates the mandatory steps an entity must undertake to receive approval from the Reserve Bank of India (RBI) to operate a new payment system, emphasizing the central bank's regulatory oversight.
- 1.Entity identifies need for new payment system & prepares application
- 2.Submission of application to RBI as per PSS Act, 2007 guidelines
- 3.RBI conducts detailed scrutiny & due diligence (Fit & Proper criteria)
- 4.RBI assesses adherence to security, operational, & financial stability standards
- 5.RBI grants 'In-Principle' Authorization (valid for 6-12 months)
- 6.Entity develops system, sets up infrastructure, & complies with conditions
- 7.RBI conducts final audit & grants 'Certificate of Authorization'
More Information
Background
Latest Developments
Practice Questions (MCQs)
1. With reference to the regulation of payment systems in India, consider the following statements: 1. The Reserve Bank of India (RBI) derives its power to regulate payment and settlement systems primarily from the Banking Regulation Act, 1949. 2. Prepaid Payment Instruments (PPIs) like mobile wallets fall under the purview of RBI's regulatory framework for payment systems. 3. The National Payments Corporation of India (NPCI) operates as a not-for-profit entity under the guidance of the RBI and the Indian Banks' Association. Which of the statements given above is/are correct?
- A.1 and 2 only
- B.2 and 3 only
- C.1 and 3 only
- D.1, 2 and 3
Show Answer
Answer: B
Statement 1 is incorrect. The RBI primarily derives its power to regulate payment and settlement systems from the Payment and Settlement Systems Act, 2007 (PSS Act), not the Banking Regulation Act, 1949. The Banking Regulation Act primarily deals with the regulation of banking companies. Statement 2 is correct. Prepaid Payment Instruments (PPIs) are indeed regulated by the RBI under the PSS Act, and the RBI issues guidelines for their operation, including mobile wallets, gift cards, etc. Statement 3 is correct. NPCI is an umbrella organisation for operating retail payments and settlement systems in India. It is an initiative of the RBI and Indian Banks' Association (IBA) under the provisions of the PSS Act, 2007, and is a 'not for profit' company.
2. In the context of India's digital payment landscape, which of the following statements is NOT correct regarding Payment Banks?
- A.Payment Banks can accept demand deposits up to a certain limit per customer.
- B.They are allowed to issue credit cards to their customers.
- C.They can facilitate remittances and payments through various channels.
- D.They are required to maintain a Cash Reserve Ratio (CRR) with the RBI.
Show Answer
Answer: B
Statement A is correct. Payment Banks can accept demand deposits (current and savings accounts) up to a maximum of ₹2 lakh per individual customer (initially ₹1 lakh, later increased). Statement B is NOT correct. Payment Banks are restricted from undertaking lending activities, which includes issuing credit cards. They can issue debit cards and ATM cards. Statement C is correct. Facilitating remittances and payments is a core function of Payment Banks, leveraging digital platforms. Statement D is correct. As licensed banks, Payment Banks are required to maintain CRR and Statutory Liquidity Ratio (SLR) with the RBI, similar to other commercial banks, to ensure liquidity and financial stability.
3. Consider the following statements regarding the objectives behind the Reserve Bank of India's stringent regulation of new payment system operators: 1. To ensure interoperability across different payment platforms and systems. 2. To prevent money laundering and terrorist financing activities. 3. To foster competition and prevent monopolistic practices in the digital payments sector. 4. To safeguard consumer data privacy and prevent fraudulent transactions. Which of the statements given above are correct?
- A.1, 2 and 3 only
- B.2, 3 and 4 only
- C.1, 2 and 4 only
- D.1, 2, 3 and 4
Show Answer
Answer: D
All four statements represent valid objectives behind RBI's stringent regulation of new payment system operators. 1. Interoperability is a key goal to ensure seamless transactions across various platforms and promote wider adoption, which RBI actively pushes for (e.g., UPI). 2. Preventing money laundering and terrorist financing (AML/CFT) is a core responsibility of financial regulators globally, and payment systems are vulnerable channels. 3. While regulation might sometimes be perceived as hindering competition, a well-designed regulatory framework, especially for new entrants, aims to create a level playing field, prevent dominant players from stifling innovation, and ensure fair practices, thus fostering healthy competition. 4. Consumer protection, including data privacy and prevention of fraud, is paramount for building trust in digital transactions, which is a primary reason for RBI's oversight.