Presently India boasts of a robust and advanced payment system ecosystem with the National Electronic Funds Transfer (“NEFT”), Immediate Payment Service (“IMPS”), Aadhaar-Enabled Payment System (“AEFT”), and Unified Payments Interface (“UPI”) among others. The need for bulk and repetitive payment systems is met by systems such as Electronic Clearing Service (“ECS”), the National Automated Clearing House (“NACH”) and Aadhar Payment Bridge System (“APBS”). In the process, National Payment Corporation of India (“NPCI”) has emerged as an exemplary organization. NPCI acts as an umbrella for all retail payments in India and was set up by the RBI along with the Indian Banks Association. A payment system is simply said, a system that supports the transfer of funds from one to another.
On October 22, 2016, the then Reserve Bank of India (“RBI”) Deputy Governor, R. Gandhi gave a speech titled ‘Evolution of Payment Systems in India: Or is it a Revolution?’ discussing the silent revolution that continuously swept India over the last 39 years. In his speech, he narrated the Central Bank’s role in this evolution and a critique of the same. This blogpost and the following blog posts derive their basis from this Speech to explore and explain further in detail, the mechanisms of each such payment system as has evolved to form today’s Digital payments landscape.
Introduction
The Payment and Settlement Systems Act 2007 (“PSS Act”) regulates and supervises payment systems in India and designates the Reserve Bank of India as the authority for all its purposes and related matters. The Board for Regulation and Supervision of Payment and Settlement Systems (BPSS), a sub-committee of the Central Board of the Reserve Bank of India is the highest policy making body on payment systems in the country.
Section 4 of the PSS Act provides for a mandatory RBI approval to commence or operate a payment system. Since its implementation, the RBI has authorized pre-paid payment instruments, card schemes, cross-border in-bound money transfers, Automated Teller Machine (“ATM”) networks and centralized clearing arrangements.
Currency had replaced precious metals which had replaced the barter system. Evolution of banking system enabled bank accounts and the transfer of money to bank accounts. Though earlier it was used for making huge volume transactions, it is now equally used for effecting low-value transactions also. Such transfer required a payment instrument and cheque filled this void. Thus, a system consisting of cheque as payment instruments and infrastructure around the cheque consisting of drawee bank, drawer bank and the cheque clearing houses came on the scene, were known as a payment system.[1]
Development of information and communication technology (“ICT”) has resulted in different kinds of payment instruments and innovations in the instruments and payment systems evolved.
Advancements in Paper-based payment system
The Reserve Bank took a studied stance with reference to ushering in changes to and in the payment systems. Periodically, it constituted various committees like the Rangarajan Committee I & II, Saraf Committee, Patil Committee, Burwan Working Group, etc. to guide the use of ICT for the benefit of banking in general and particularly the payment systems. Further, from 1998 onwards, the Reserve Bank has been continuously bringing out a Payment System Vision document for every three years, enlisting the road map for implementation. The latest one is for the period 2015 -18.[2]
Magnetic Ink Character Recognition (“MICR”)
For a long time, the main payment instrument and payment system that existed in the country was cheque and cheque clearing systems. Even the cheque clearing systems have evolved from manual clearing system to MICR clearing systems in the mid-1980s which brought in great level of automation in cheque clearing process besides standardising the cheque in terms of its physical dimensions.
Cheque Truncation System (“CTS”)
Cheque Truncation System was introduced to restrict the physical movement of cheques and to enable the use of images for payment processing. For this, CTS-2010 Standards and other such standards were introduced to enhance security features on cheque among others.
Electronic Clearing Services (“ECS”)
After around twenty years of MICR, which, though made cheque clearing efficient, challenges arose pertaining to inherent issues while using MICR for bulk and repetitive payments such as the collection of utility payments, payment of dividends etc. As a result, ECS was introduced in the early 1990s. ECS Credit to facilitate one-to-many payments such as dividend, salary, interest payments, etc. and ECS Debit to facilitate many-to-one payments such as utility payments. ECS in itself has undergone many changes from being a local system to a regional system and then a national level system. These changes have been facilitated by the adoption of CBS in banks which has enabled straight-through-processing of payments. Further efficiency has been brought in this sphere with the operationalisation of the National Automated Clearing House (NACH) by National Payments Corporation of India (NPCI). This is a pan-India system for processing bulk and repetitive payments and the ECS is gradually being subsumed into NACH.
While the overall thrust is to reduce the use of paper for transactions, given the fact that it would take some time to completely move to the electronic mode, the intention is to reduce the movement of paper – both for local and outstation clearance of cheques.
[1] https://m.rbi.org.in/Scripts/BS_SpeechesView.aspx?Id=1028 (last visited March 08, 2019).
[2] Ibid.