Freeing non-bank entities from licensing ‘may not be appropriate for payment industry’

Calls to free up the licensing mechanism for non-bank entities may not be appropriate for the payment industry, according to R Gandhi, Deputy Governor, Reserve Bank of India.

Gandhi observed that there is an implied suggestion that this (non-bank) sector needs to be freed of the licensing mechanism, and once a set of criteria are fixed any number of entities meeting those criteria should be allowed to function. However, the RBI differs from this idea.

“Such a free entry may not be appropriate for the ‘payment industry’. We must remember that the payment service provider is ‘entrusted’ with money and, therefore, “fit and proper” criterion is of utmost importance and consequently, “free entry” based on tick-box exercise will be a risky phenomenon,” he said at the launch of ‘Bharat QR Code’.

As regards the opening up of access to various systems and activities for non-bank entities, Gandhi felt that the RBI has been opening up the space and allowing entry to non-bank entities. He added that it is a misconception that non-bank entities are being discriminated against, as compared to banking entities.

The Deputy Governor emphasised that at origination, in between the originating and destination banks and at the receiving end, there is no restriction for a non-bank entity to be present. Examples include the pre-paid instrument (PPI) issuers, Bharat Bill Payments Service (BBPS) operating units, Trade Receivables Discounting System (TreDS), White Label ATMs (WLAs), payment aggregators, etc.

On why a non-bank cannot be allowed to keep “accounts”, Gandhi said: “Our answer is simple. If you maintain “an account”, then you are a bank and you need a banking licence.

“When you keep the money of the public in “an account”, you are a financial entity taking deposits and you must be public trustworthy and so be regulated as a deposit-taking financial entity.”

Citing one of the recommendations of the Ratan Watal Committee (to review the payments systems in the country and recommend appropriate measures to encourage digital payments) that the law should be amended to explicitly cast responsibility on the regulator to promote competition and innovation in the payment industry, Gandhi said though the RBI does understand the spirit behind this recommendation, it differs in the way in which it is sought to be achieved.

“For competition, there is a separate statue and authority associated. Enshrining it within PSS (Payment and Settlement Systems) Act can lead to overlapping jurisdictions which can best be avoided.

“Likewise, if promoting innovation is to be hard coded in the Act, defining what would constitute “an innovation” would be difficult,” explained Gandhi.

Flagging another recommendation of the Committee relating to data protection and consumer protection, the Deputy Governor emphasised that the RBI agrees that data protection and consumer protection are essential.

“The role of the regulator and supervisor of payment systems is to ensure the safety, security and soundness of the systems and hence consumer protection is a very relevant objective. However, the concept of data protection is relevant much beyond the payment system; it should in fact encompass any digital data.

“Appropriately, this should be enshrined in Information Technology Act; otherwise, again there will be overlapping jurisdictions, which is best avoided,” he said.

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