The Reserve Bank of India (RBI) is looking to gradually enable payment system operators to become direct members in Real Time Gross Settlement System (RTGS) and National Electronic Fund Transfer (NEFT), two of its Centralised Payment Systems (CPSs). This proposed change would permit non-bank payment system operators, regulated by the RBI, to gain direct membership in CPSs.
Centralised & Decentralised Payment Systems
Centralised payment systems encompass the RTGS and NEFT systems, as well as any future systems that may be implemented by the RBI.
The RTGS system allows for instantaneous transfer of large-value funds into a recipient’s account. With this system, instructions are processed as they are received, and settlements of funds transfers occur individually.
Alternatively, the NEFT is an electronic fund transfer system that processes transactions received up to a specific time in batches. It is primarily utilised for fund transfers of up to Rs. 2 lakh.
Decentralised payment systems include clearing houses managed by RBI such as Cheque Truncation System (CTS) centres, and by other banks like Express Cheque Clearing System (ECCS) centres. The RBI may also implement additional systems in the future.
Key Points
On the subject of direct membership of NEFT and RTGS for payment system operators, it is anticipated that this move will lessen settlement risk in the financial system and increase the accessibility of digital financial services for all user segments. However, these entities will not be eligible for any liquidity facility from RBI to facilitate settlement of their transactions in these CPSs. There will also be a cap of Rs. 2 lakh for non-banks.
Furthermore, non-bank entities such as Prepaid Payment Instrument issuers, card networks, and white label ATM operators will become members of CPS. Mobile wallets like Google Pay and Mobikwik will be able to provide their customers with NEFT and RTGS facilities. Transfers will only be permissible to entities that follow KYC (know your customer) compliance.
Cash Withdrawal Facility
The RBI has proposed a facility to allow cash withdrawals, within a limit, to non-bank entities that possess full-KYC PPIs issued by non-bank PPI issuers. Currently, only full-KYC PPIs issued by banks are allowed to make cash withdrawals. This facility is available through ATMs and Point of Sale terminals.
Advantages and Concerns
There are several anticipated advantages of these changes, such as an increase in digital transactions and transaction records, an expanded market size, and deeper financial inclusion. As seen with the success of Unified Payment Interface (UPI), opening the payment system to non-banks could greatly enhance digital payments and transactions.
However, there are concerns about the changing banking landscape, with traditional banking institutions slowly being replaced by non-bank entities. RBI states that India is on track to becoming Asia’s top FinTech hub, with a Fintech adoption rate of 87%, well above the global average of 64%.
Looking Forward
In a world where FinTech companies are increasingly dominating the volume of digital transactions and playing an integral role in the finance industry, it is crucial for commercial banks to adapt and collaborate with these entities. In doing so, they can become part of the ecosystem rather than compete with FinTech companies for business.
