Navigating Payment Aggregators under the Aegis of India’s Payment System and Settlements Act, 2007

Introduction

Traditionally the mode of transferring money to someone else was to give cash, write cheques, however, due to the advent of technology, the mode for transferring money has gone through a humongous change.¹ One such way is Unified Payment Interface (UPI); it is a mechanism that allows individuals to transfer money, and make payments and others by just using applications.² Reserve Bank of India (RBI) has given National Payment Corporation of India (NPCI) the power to look into the UPI network, provides services and coordinates the system of UPI.³ The NPCI is officially registered as a payment system provider under the Payment and Settlement Systems Act, 2007⁴ (hereinafter referred to as “the PSS Act”) it runs the UPI network, provides services, and coordinates the system.⁵

A system provider is needed to be approved by the RBI. The RBI looks at various things while deciding whether to accept the application, including the need for the planned system, the technical standards and design, the applicant’s financial situation, the bank’s policy on money and credit, consumer interest, and more.⁶ If the application is turned down, the RBI must provide an opportunity to the other person for being heard and write the reason in writing for such rejection. The RBI has permitted several payment system operators to run payment systems in the country. NPCI which runs India’s retail payment and transfer systems, is one of these organisations.⁷

In 2006, it was thought necessary to pass a legislation that would give the RBI power to establish rules, processes, operational and technical standards for India’s payment systems. So, the PSS Act was passed by our Parliament. The Act provides that without the approval of RBI no one run a payment system. In addition to the PSS Act, PSS Regulations, 2008⁸ were made to govern and guide the ones running payment system, these regulations came into effect on 12-8-2008.

The digital payments foundation was laid down in India by the NPCI in 2010 when it introduced the Immediate Payment Service (IMPS). IMPS allowed transactions from one account to another by using mobile devices.⁹ Introducing IMPS does not change the digital payment market tremendously due to the lack of infrastructure dealing with IMPS. Other method was mobile banking, it is a service provided by banks in which consumers can transfer money by using an app provided by the banks. A significant turning point in the era of cash payment was when the Government of India in 2016 announced a moratorium on the 500 and 1000 banknotes. Consequently, the public has been compelled to adopt digital payments.¹⁰ By a report¹¹ published in December 2016 online transactions amount to only 20% of all the transactions done. Over the years, the following institutional mechanisms have been brought in place to facilitate payments and settlements in India. RBI on the 16-3-2020 released a Circular that states that it is being notified to the general public that cashless transactions for buying goods and transferring funds are available therefore they can avoid social contact (this Circular was issued to mitigate the effects of Coronavirus Pandemic)¹², it also includes transferring money via UPI.

The situation regarding the rules and regulations governing Google Pay (GPay) and Paytm in India is not clear as of now. The objective of the Parliament behind enacting the PSS Act was to provide for regulation and supervision of payment systems in India or any matters connected with payment systems.¹³ This Act has given the power to the Central Bank of India to give authorisation to the entity that wants to become a payment system provider. For any entity to be covered by the PSS Act, it has to qualify as a payment system provider.

Section 2(i) of the Act provides what a payment system means, it means that a system which allows one to make a payment between a payer and beneficiary¹⁴

The application must be properly filled out and sent to the RBI with the needed documents.¹⁵ The Act says that any organisation that runs payment systems or wants to set one up needs to ask for permission first. The PSS Act, 2007 says that anyone who uses a payment system without permission is breaking the law and can be punished under that law.

For Google Pay, Paytm or any other apps that work as a facilitator in online payment to be held liable for any wrong under the Payment and Settlement Systems Act, they should qualify under Sections 2(i) and (q) of the Payment and Settlement Systems Act. If we go by the definition of payment system and apply the same to Google Pay and Paytm they would qualify as payment systems and they should be governed by the PSS Act but this proposition when challenged before courts, has taken an unexpected turn.

In PayPal Payments (P) Ltd. v. Financial Intelligence Unit India¹⁶, this case was related to the Prevention of Money-Laundering Act, 2002¹⁷ (PMLA) but it is relevant for us, it raises an important point because the definition of payment system is same in both the PSS Act and PMLA. In this case the petitioner challenges order passed by Financial Intelligence Unit India. Payments (P) Ltd. case¹⁸ was held to be a reporting entity and payment system following the PMLA.

The petitioner contended that they are only a facilitator platform and not a payment system. They relied on the RBI affidavit submitted in another case where the RBI has taken a stance of the petitioner not being operative or participating in a payment system and hence the PSS Act would not apply to the petitioner. The Court held that RBI and Union of India (UOI) are directed to take a clear stand on whether platforms such as the petitioner are considered payment systems and whether they would come under the purview of the PMLA. Additionally, the Ministry of Finance is being directed to constitute a Committee and clear the air regarding whether platforms such as the petitioner would be considered as payment system operators.

In Abhijit Mishra v. RBI¹⁹ a petition has been filed as public interest litigation (PIL) for directing the RBI to direct authorities to stop the functions of Google Pay India because GPay is unable to comply with the provisions of the PSS Act. GPay is performing the function of a payment system provider without obtaining valid authorisation from RBI as required by the PSS Act. It is submitted by the counsel of the RBI that GPay is only working as an application that is giving its services on a UPI platform and it is not a payment service provider (PSP). Additionally, it was submitted that GPay is neither a payment system nor a system provider and since they are not a system provider the requirement for authorisation under the PSS Act is not necessary. GPay according to the PSS Act is not a payment system provider therefore they were not been enlisted on the RBI website as a payment system.

It was held by the Court that the GPay is not a payment system hence the authorisation required under the PSS Act is not necessary and it is only a mere third-party app providers (TPAPs). The TPAPs are guided by the guidelines issued by the NPCI and they have a binding effect on such TPAPs.

Conclusion

The author concludes that the situation regarding the governance of third-party app providers in India is not conclusive, because it does not come within the ambit of the PSS Act. The RBI in one of the recent cases has hold that these third-party app providers are not governed by the RBI, this clears the air regarding whether they would be governed by the PSS Act but it also creates a doubt that who is the governing authority of the third-party app providers.

The author would suggest that the RBI and the Ministry of Law clears the air on this point that who would be the governing authority if the third-party app providers commit any fraud.