Inclusion, E-payments and the Payments and Settlement Systems Bill

INCLUSION, E-PAYMENTS AND THE PAYMENTS AND SETTLEMENT SYSTEMS
BILL

A. Introduction and Background

This note investigates the emerging and proposed regime governing
the new electronic payment systems (such as smart cards, multipurpose
prepaid cards, mobile-purse, e-wallet, etc). It recognizes that such
payment mechanisms are likely to emerge as a major tool in ensuring
the accessibility of the large un-banked masses to the financial system.
It also recognizes that the emerging interaction and communication
technologies such as the Internet will only require greater and greater
use of such systems. In such an environment the proposed Payments
and Systems Bill achieves special significance. What vision does it lay
out for this sector? Can it be strengthened? These issues are covered
in this note. In the process it points out the importance of the
legislature laying out a broad vision that can then act as a constant
guide to the regulator (the RBI) to ensure growth, equity, accessibility
over and above maintaining financial stability. Last, this paper suggests
specific points that should be included in the proposed bill.

A1. Electronic Payment Modes

The currently prevalent electronic payment systems can be categorised
as (i) Stored Value Cards (SVCs), (ii) Smart Cards, and (iii) credit card
systems, (v) debit cards and (iv) network money. In addition there are
many other variants that may be envisaged currently, but are not yet
popular such as mobile-purse, e-wallet etc.

SVCs and “smart cards” are debit cards but where the amount stored
is not in a linked bank account, instead the prepaid amount is
‘inscribed’ on the card. The purchaser prepays the issuer, who issues a
card with the relevant amount stored, and the amount is electronically
recorded on the SVC. As the user charges her purchases on the card,
the stored value progressively declines. Smart cards are another

Laveesh Bhandari: Payments & Systems Bill, 2007 1

mechanism that are gaining popularity. These cards contain
programmable microchips, which can be set to identify the total value
of the card (in the case of quot;pre-paidquot; cards), or the amount of funds on
deposit in the user's associated bank or virtual cash account. E-money
or network money also represents a stored value that is pre-paid by the
user however the difference with SVC is that the value is stored on
devices attached to the Internet such as computers instead of a plastic
card.

Credit card systems are primarily credit instruments. Bank account
Debit Cards are linked to the users’ bank account, and are another
mode by which the bank account holder can transact. IN that sense
they are a substitute to checks.

As mentioned there are other modes as well. These include electronic
cheques, mobile based payments, etc. Moreover, many other
possibilities, as yet un-envisaged may come up in the future. The
critical difference has to do with the following issues:

 Prepaid versus post-paid: Whether the user pays the full value
before or after usage
 Location of value storage: Whether the value is stored on the
instrument (magnetic strip/chip/etc) or a distantly located
computer/server.

Within the above possibilities are a range of other options. These
include:
 Amount stored – high or low: Typically most card/chip options
are low value storage. Computer or mobile-based storage
systems can be much higher.
 Acceptability – the payment can be made to a (a) single or a
limited set of service/goods providers (closed loop), (b) to a
multiple set of service/goods providers (open loop).

Indeed it is difficult to list out all the various technological options.
But within the above set of possibilities what is most important for

financial inclusion of the un-banked and service provision including e-
governance initiatives are pre-paid systems that are based on cards or
chips. These are critical as these tend to be the lowest cost options for
low value transactions and hence there scalability is most likely. Here
it should be noted that the cost of delivery becomes quite an issue.
Current scales being what they are the smart card approach is quite
costly for low value transactions. Other cost addition factors include
extent of user verification before cards are issued, electronic squaring
of accounts etc.

A2. This Paper

The paper proceeds as follows. First, it puts in context the importance
of e-payments. For this purpose it reviews the range of experiments
and initiatives in the private and public sectors in ensuring the success
of the rural Internet kiosks. The objective is to lay out the criticality of
the bill, and why the legislature needs to think through the various
ramifications of the bill. Second the paper reviews the current bill, and
finds that it is currently not laying out a general direction for the
regulator to follow. Third, it presents certain principles that a
Payments Systems regime needs to incorporate to ensure inclusive
growth and financial stability.

B. Including the Un-serviced through Rural Kiosks

About 71% of India lives in its villages and though the per capita
income at Rs. 21,479 is less than half the per capita urban income of
Rs. 49,790, the nation cannot afford to let growth pass by more than
800 million Indians. With balanced and inclusive growth as the vision
for the 11th Plan, the government has been instrumental in formulating
strategies that will transform the countryside under the National E-
governance Plan.


While the main focus of the NeGP is to link the government to the
common man, it proposes to set up one hundred thousand Common
Service Centers (CSCs) - one CSC for every six villages in India that
will provide world class IT and connectivity at the last mile. CSCs are
positioned as the retail extension hubs of rural India. Private corporate
firms have already been quick to realise that though the significant
constraints of access to infrastructure, markets and information make
rural India a formidable marketing challenge, it is a challenge that
yields high returns through volume. It is the lack of opportunities that
prevents low incomes from being converted into purchasing power.
The shampoo and detergent sachets that introduced ‘luxury’ items into
villages have proved that innovation in marketing and product
positioning enables even the poor to become credible consumers.

The method of creating linkages of markets and information was
established by the famous ITC e-choupals in 2000. Though the
initiative has been replicated by other organisations, there has been
limited impact of rural kiosks and in 2006 there were reportedly 15,000
kiosks spread all over India. One of the main stumbling blocks for the
scalability of this model has been the issue of sustainability. Unless
sufficient revenues are generated through the kiosks, entrepreneurs
cannot be attracted to these schemes. With the roll out of the one
hundred thousand CSCs, a new model has been proposed, partnership
between the government and the public. While this may seem more
viable in the long run, it will still need to be supported by provision of
sufficient number of revenue generating services.

With India on a high growth path, it is increasingly important to bring
rural India into the fold and while CSCs form a vital link in the
strategy, it is crucial to look into the future and expand the
opportunities available to assure sustainability at the unit level. India
will be investing Rs. 26,000 crore through its NeGP; but putting in the
necessary infrastructure is merely the first step. Community
participation is vital to ensure that the programme achieves its desired
objectives. With the focus of the paper on the need to ensure


community participation in the kiosks, two possibilities that show
potential for the future are the mobile phones and cash cards. Both
have gained popularity abroad and recently in India as an instrument to
access financial services for all those consumers who are not a part of
the banking system.

This section puts forth the point that without good, cheap, and
flexible e-payment systems the CSC initiative will fail and so will
most other private initiatives.

B1. The Telecentre and Common Service Centres

There are many different models currently being experimented on the
rural kiosks front. Needless to say the rural kiosk or telecentre
approach has been the focus of much debate and discussion. Though
highly successful models are currently rare, different learnings have
already occurred.1 These experiments span a range of activities
including education, e-governance, entertainment, etc. We review
some of those experiences in the Appendix. The objective is to
provide to the reader an appreciation of the richness of the
experimentation that is occurring both within and outside the
government. While some or many of these endeavours may not
eventually be sustainable, their learnings will show us the way for the
future.

There are a range of private initiatives being experimented upon such
as:
 E Governance – The example of Drishtee
 Agriculture Information Delivery – The example of ITC e-
choupals
 Entertainment – The example of Aksh
1
For an excellent review of these issues and experiments see, Nirvikar Singh, “Information Technology and
Rural Development in India” mimeo, University of California, Santa Cruz.


 Health and Agriculture Diagnosis – The example of n-Logue
 Education – The example of TARAhaat

The experience of most of these initiatives has been that there is great
potential, but sustainability remains a big question. And for this
reason various revenue streams are being envisaged and experimented
with. But an economically sustainable model is yet to emerge. More
importantly even a successful subsidy model is yet to emerge in areas
where there can be public-private partnerships. The critical elements
have to do with (i) ability to provide low cost services (ii) ability to
create a low transaction cost payment system, (iii) ability to access
credible information on usage of services for non-insiders, and the
ability to (iv) create strong partnerships both vertically and
horizontally. It is well known that a necessary pre-condition for these
abilities is a low cost electronic payment system. These issues are also
important from the government’s own initiative – this is discussed
next.

The Common Service Centres

As mentioned before, the Common Services Centres Scheme is a part
of the ambitious National e-Governance Plan (NeGP) with a total
budget outlay of Rs. 22,600 Cr.2 It is a 3-pillar model that incorporates:
 Enabling e-Government Services through State Data Centres
(SDC)
 Connecting the State Government offices up to Block level
through the State Wide Area Network (SWAN)
 Offering a network of access points for e-Government services
at the doorstep of the citizen through the Common Services
Centres (CSCs)

The CSCs or rural kiosks are the last mile delivery mode of the
scheme. About a 100,000 Common Services Centers have been
2
The IL&FS has been appointed as the Program Management Agency for a period of three years to support
the Department of IT, Government of India to facilitate the Scheme rollout.


envisaged in Rural India and another 10,000 in urban India. Each CSC
will service a cluster of 6 villages. Given an average population size of
1500 per village about 8,000 persons will be serviced through each
CSC. Clearly the potential serviceable population is high enough to
ensure economic feasibility. Provided, or course, that adequate and
appropriate services are available.

The Service Center Agency (SCA) will build, own and operate the
CSCs in a financially sustainable manner; this will require it to (i) set up
the CSC locations with the necessary IT infrastructure and branding;
(ii) identify, select and train the kiosk operators; (iii) undertake content
and services partnerships; (iv) set up back-end data center and a
centralized CSC portal; (v) operate and monitor the CSC business,
especially the revenue support mechanism (Source: IL&FS
documents).

As per the ILFS, the range of services envisaged is quite
comprehensive. E-governance is supplemented by a range of potential
services that can be classified as G2C, B2B, and B2C:

 E-Government Services –G2C
o Land Records
o Birth/Death Certificates
o Grievances
o Form downloads and submissions
o Bill payments –water, electricity, telecom, etc.
o Licenses, permits, subsidies
o Property Tax and Registration
o Buss pass, Railway tickets, Passport, etc.
 Business to Consumer Services –B2C
o IT services (Printing, Scanning, DTP, web surfing, etc.)
o Agri-business services (consulting, testing, information,
procurement, etc.)


o Telecom Services (PCO, Post-paid/pre-paid connections,
mobile phone sales)
o Commercial Services (Matrimonial, Astrology, Bio-data, etc.)
o Retail Sales & Referrals (FMCG, Consumer Goods, etc.)
o Education Services (IT, English Speaking, etc.)
o Health (Tele-medicine)
o Commerce (Online shopping, airline tickets, etc.)
 Business to Business –B2B/G2B
o Market Research
o BPO Services
o Advertising, Branding and Promotions

This is of course more of a wish list related to the various possibilities.
But between the various mission statements, and possible range of
services that are being envisaged, one element of the CSC is very clear
even at this pre-inception stage – A strong emphasis on the revenue
model. At the scales it is being envisaged the very success of the CSC
model hinges on a profitable revenue stream to the kiosk operator.
Smooth and low cost revenue collection mechanisms therefore
will be necessary for the economic feasibility of the proposed
structure.

The figures below (sourced from IL&FS) illustrate the complexity of
transactional relationships between the various stakeholders. Central
Government, State Governments and their various departments,
(potentially) Local Governments, the kiosk operators, the service
providers, the infrastructure suppliers, the content providers, etc. The
model depends upon two-way flow of information and would need to
have the flexibility for a two-way flow of money. That is, information
would flow from information/service providers through the
infrastructure providers to the consumer; the consumer may in turn
provide information that then may flow to other consumers, service
providers or government departments. Similarly the consumer would
pay for some of these services; but some of these relationships also
involve subsidies to flow to the consumer.


The traditional hierarchical organization structure that most of us are
familiar with is not being envisaged in the CSC model. Indeed it
should not be. The CSC organization will be a network, where terms
such as upstream and downstream, supplier and buyer, up and down
the value chain, will not apply. The suppliers will also be buyers, the
rural consumer may also be the information provider, the seller may
also provide subsidies.

A cash based system would be too costly for many reasons. One, the
typical transaction would be a low value transaction. Two, it would
need to be low transaction cost if the various entities involved are
profitable. Three, it would be spread over a very wide geographical
area. Four a range of transactions would occur from each kiosk. Cash
based systems have the following problem – the physical collection
and depositing of cash would need to be combined with account
keeping, ensuring books are in order, proper audits, etc.


B2. The importance of electronic payment systems for Internet
kiosks

As is apparent from the above, the SCA will not only need to invest, it
will need to ensure revenue generation and also build and oversee the
revenue support mechanism. In a sense therefore the SCA is an aggregator
of content and services and also an aggregator of demand. This
aggregation on the demand and supply side will enable it to benefit
from the necessary scale and scope economies.

The critical aspect to bring a vast range of services would of course
require it to be able to monitor the transactions being undertaken from
the kiosks. And cash based transactions will be quite costly, if not
impossible, to monitor at the scales envisaged.

But monitoring is necessary for two reasons. The first is of
course to ensure minimal leakages. But that is the less
important benefit. The more important one has to do with the
necessity of coming up with credible information on transactions
that it can share with its upstream partners. This information
will need to be third party verifiable if partnerships with content
and service providers are to be built and sustained.

Another aspect that is critical to the model is the wide bouquet of
services that are being envisaged. The SCA will need to tie up with
many different content providers. In fact the wider the range of
services available the greater is the likelihood of success. A model
where a service/content provider does not tie up with the SCA, but
where the SCA gets a share/fee if a transaction occurs through its
CSC, will have an even higher likelihood of success. Such issues are
discussed in greater detail in later sections.

In other words, sooner or later, it will become essential for the
SCA to introduce electronic payment mechanisms, and base all
its commercial services on this mode of payment. These will be
required simply because there will be no other method by which
payments can be monitored and verified with the necessary
detailed information on service provision on such a complex set
of operations.

Not just the government backed CSCs. Even the private
initiatives or the other public private partnerships will require to
be based on e-payment systems. This is because there are
multiplicities of service providers. These providers will need a
verifiable log of services provides, prices charged, payments and
received. Verifiability is important here as partnerships and
collaborations cannot be based purely on trust, they have to be
backed by credible information. And here as well e-payments
score over all others.


A summary note

This section seeks to underscore three critical elements in the success
of delivering on e-inclusion, e-governance, and the delivery of public
services either through solely private efforts or by way of public
private partnerships (PPPs).

 The variety of possibilities that are currently being experimented
 The search for a yet to evolve financially sustainable model
 The importance of electronic payments
 The importance of third party verification

It is therefore clear that electronic payments are the only way; however
the specific characteristics of a payment mechanism that will facilitate
India’s objectives of inclusive and equitable growth and universal
delivery of public services are as of now unknown. As a consequence
whatever be the institutional/regulatory mechanism that is set up,
would need to be based on the following principles.

 Low cost entry of new parties
 Availability of various options
 Flexibility

The payment and systems bill needs to be studied in this context.

C. Payments and Settlement Systems Bill

The proposed PAYMENTS AND SETTLEMENTS Bill seeks to
enable the RBI to comprehensively monitor and regulate the various
payment systems in operation. As per the ‘Statement of Objects and
Reasons’ of the proposed bill, ‘…the payment and settlement systems
serve as a backbone of financial system of a country.’ The Bill
recognizes that there are a range of systems both electronic and non-


electronic that are operation and the lack of comprehensive legislation
in the past needs to be remedied.

Some of the payment systems currently in operation include:
1. Manual paper based clearing
2. Real Time Gross Settlement (RTGS) System for facilitating non
cash mode of payments
3. MICR Clearing,
4. Electronic Funds Transfer Systems (including the Electronic
Clearing Services),
5. Card Based Payment Systems,
6. Government Securities Clearing,
7. Forex Clearing, etc.

As per the objectives laid out in the bill, it was considered necessary to
enact “a specific legislation which would empower the Reserve Bank
of India to act as the designated authority with the following powers
and functions, namely:
a) To regulate and oversee the various payment and settlement
systems in the country including those operated by non-banks
like CCIL, card companies, other payment system providers and
the proposed umbrella organization for retail payments;
b) Lay down the procedure for authorization of payment systems as
well as revocation of authorization;
c) To lay down operational and technical standards for various
payment systems;
d) To call for information and furnish returns and documents from
the service providers;
e) To issue directions and guidelines to system providers;
f) To audit and inspect the systems and premises of the system
providers;
g) To lay down the duties of the system providers;
h) To levy fines and impose penalties for not providing information
or documents or wrongfully disclosing information, etc.; and
i) To make regulations for carrying out the provisions of the
proposed legislation.”


In other words, the bill does not provide any direction or vision but is
an empowering one. It will enable the RBI to set up a comprehensive
regime that would bring together various types of ‘payment systems’
under a single regulatory framework. But what should be the overall
vision of such payment systems, who should it include, what should be
provided greater weight – competition, innovation, and growth of
coverage, or financial security? These issues are missing from the law.

This is brought out quite clearly “The Bill, inter alia, seeks to provide
for the following matters, namely,…to designate the Reserve Bank of
India as the designated authority for the regulation and supervision of
payment systems in India for their smooth operations…”

As such it is difficult to critique the bill, it does not get into any
specifics except empowering the RBI to do so. Therefore to better
understand the status we need to better understand what directions the
RBI has been taking. We briefly review four documents. The first are
the 10 core principles put out by the Bureau of International
Settlements. The second is the RBI's vision document on payment
systems. The third is one related only indirectly – on electronic funds
transfer. And the fourth is the report of the Cama working group by
the RBI on E-payments.

The Committee on Payment and Settlement Systems (CPSS), of the
Bank for International Settlements (BIS) published 10 core principles
for systemically important payment systems. Moreover, with IOSCO,
the (International Organization for Securities Regulators), it has put
forth a set of recommendations for securities settlement systems and
one for central counter parties. Together, these form a body of
standards, codes and best practices that are form the basis of financial
architecture worldwide. The Core Principles for Systemically
Important Payment Systems, published in January 2001 (henceforth
BIS, 2001) are not specific blueprints but suggestions of what the key
characteristics should be.


Box: Ten Core Principles

The following ten principles were published by the Committee on
Payment and Settlement Systems (CPSS) of the BIS in January 001.
These principles still provide the benchmark by which high value
payment systems are judged:
1. The system should have a well-founded legal basis under all
relevant jurisdictions.
2. The system’s rules and procedures should enable participants to
have a clear understanding of the system’s impact on each of the
financial risks they incur through participation in it.
3. The system should have clearly defined procedures for the
management of credit risks and liquidity risks, which specify the
respective responsibilities of the system operator and the
participants and which provide appropriate incentives to manage
and contain those risks.
4. The system should provide prompt final settlement on the day of
value, preferably during the day and at a minimum at the end of
the day.
5. A system, in which multilateral netting takes place should, at a
minimum, is capable of ensuring the timely completion of daily
settlements in the event of an inability to settle by the participant
with the largest single settlement obligation.
6. Assets used for settlement should preferably be a claim on the
central bank; where other assets are used, they should carry little
or no credit risk and little or no liquidity risk.
7. The system should ensure a high degree of security and
operational reliability and should have contingency arrangements
for timely completion of daily processing.
8. The system should provide a means of making payments, which is
practical for its users and efficient for the economy.
9. The system should have objective and publicly disclosed criteria
for participation, which permit fair and open access.
10.The system’s governance arrangements should be effective,
accountable and transparent.


* Systems should seek to exceed the minima included in these two
core principles.

The BIS 10 core principles are important as they form the basis of
much of the future regulations and procedures governing the financial
sector. There is nothing in the principles that one could argue against.
Indeed the key requirement for the success is a part of the core
principles as well (see number 8) “The system should provide a means of
making payments which is practical for its users and efficient for the economy.”
There are two important issues that need to be addressed related to
this point.

The first is applicability. By design of its framers, the principles are
limited to high value payment systems. There is a reason for limiting this
applicability, and that is recognition that there are significant costs of
regulations. A related issue is that of what is systemically important. If a
payment system is not a large enough component of the financial
framework of an economy, then it cannot be considered to be
systemically important, and therefore the regulatory oversight would
need to be on the basis of proportionality. A complementary note on
how these principles need to be implemented (see section 2.4 of BIS,
2001) is quite explicit on this.

“Payment systems consume substantial resources. Accordingly, it is
important that the designers and operators of payment systems are
conscious of the resource costs of their systems and the charges they
will need to pass on to users if resources are to be used efficiently.
Cost constraints are likely to require choices to be made about a
system’s design, which will have an impact on the system’s
functionality and safety. The functionality required will vary from one
system to another according to the demands of participants and users.
Systemically important payment systems must always achieve a high
level of safety appropriate to their potential for triggering or
transmitting systemic risk. Little, however, would be gained if a
payment system were designed with such extensive safety features that
it became so difficult, slow or costly to use that no one was prepared


to do so. System operators should keep their choices under review, as
financial markets and the local economy develop and as technological
and economic advances improve the range of solutions available.”

In other words, regulatory oversight should not be at the cost of
growth of electronic payments. And payment systems such as pre-
paid cards discussed above should not be included under its
aegis as they are not systemically important in this nascent stage
of their development in India.

As per the RBI document (Payment Systems in India – Vision 2005-
08) published in 2005, the objective of any payment systems regime is
the ‘establishment of safe, secure, sound and efficient payment and
settlement systems’. It recognizes that the primary goal of a national
payment system is to enable the circulation of money. The document
also states that public policy objectives are to protect the rights of
users of payment systems, enhance efficiency and competition, and
ensuring a safe, secure and sound payments system. This can be
achieved through four tenets:

 Safety will relate to addressing risk, so as to make the systems
risk free or with minimal risk
 Security will address the issues relating to confidence, with
specific reference to the users of these systems
 Soundness will be aimed at ensuring that the systems are built
on strong edifices and that they stand the test of time
 Efficiency will represent the measures aimed at efficiencies in
terms of costs so as to provide optimal and cost effective
solutions.

These action points reveal an RBI that is quite forward looking in its
interest to expand the usage of newer forms of payment mechanisms.
However the report only mentions smart cards. Other forms of card
based e-payment mechanisms such as stored value cards; prepaid cards
etc are not covered. In other words, some recognition of the


importance of newer modes exists, but no sense of RBI’s internal
thinking is available.

In the report of the RBI “Study Group on Migration from Paper
Based Funds Movement to Electronic Funds Transfer” three of the
action points of the group emphasize the importance of keeping costs
of electronic modes low and encouraging them vis-à-vis paper modes.
Apart from this aspect there is no mention of importance of prepaid
and stored value cards and other types of e-payments.

The Report of the Working Group on Electronic Money, 2002,
differentiated between the following types of pre-paid stored value
cards
1. Single purpose: where the issuer and the acceptor are identical.
That is, it is designed to facilitate only one type of transaction
such as store-specific cards, telephone calls, etc.
2. Closed system or limited purpose: where a limited set of very
well defined points within well defined locations may accept the
card such as in university campuses.
3. Multi-purpose card: Also sometimes referred to as open-loop
cards. These are cards that are accepted by several vendors.
Credit cards, debit cards, stored value cards are some examples.
These are also the cards that typically are the most used over the
Internet.

The working group recognizes that the risks are limited where single or
limited purpose cards are concerned, and concentrates a large part of
its recommendations on multi-purpose e-money. It states the
following: “multipurpose e-money may be permitted to be issued only
against payment of full value of central Bank money, or against credit,
only by the banks…”

The group’s key concerns are the possibility of monetary policy
becoming less sensitive to Central bank action, if such payment forms
become prevalent. By placing these instruments solely in the hands of
the Banks it felt that RBI would be better able to monitor as well as


implement its monetary policy objectives. The group goes on to state
various reasons for its preference for Banks, these include:
a) Implication of e-money on accelerating velocity of money
b) Impact on access by the RBI to the latest monetary statistics
c) Option to impose reserve requirement on e-money
d) Concerns on e-money being issued as credit and also technical
security.

This is a highly flawed set of arguments. First, there is no reason why
putting e-money only in the ambit of banks will help reduce money
velocity, and there is no evidence that lower money velocity will help
either the country’s growth or equity objectives or the safety of its
financial system. Second, the fact that e-money is used electronically
also implies that there will be more information generated and will be
better accessible for the regulating entity to monitor. (Paper money is
always worse at generating information for the regulator than e-
money.) Further, non-banking entities can generate the same
information as banking entities. Third, reserve requirements will only
increase costs and by extension the range of services available to the
consumers. Fourth, if e-money cannot be issued on credit then all the
more reason why e-money should not be limited to banks. A whole
range of entities should be allowed to issue them.

But the banker dominated group was quite categorical “non-banks
should not be permitted to issue multipurpose e-money… unless other
non-bank issuers also confirm to certain prudential norms”. This
author prefers the latter route than prevent non-banks. That is, have
certain norms and make them open to whoever can fulfil these norms.
Note that banks have been rather unsuccessful at reaching the
underprivileged and rural hinterlands.

In other words, the key direction taken by the working group was that
preservation of financial stability should not be compromised and it
associated the non-banks’ e-money to be more likely to compromise
the integrity of the financial system. However, as long as certain
prudential norms are being followed, integrity of the financial system


and financial stability can be met even with non-bank entry into e-
payments.

A summary discussion

In short, the RBI itself has not revealed much on its position on e-
payments and especially those related to multipurpose prepaid stored
value systems. This suggests that the RBI has yet to develop a position
on this matter. The BIS is quite unambiguous in its recommendations
– as long as the payment system is not important enough, keep
regulatory oversight to the minimal, and increase it as the system
becomes more important. In other words, the BIS supports the
principle of proportionality.

The proposed Payment Settlement Bill is silent on many important
issues. It leaves such issues to the RBI to deal with, but itself provides
no direction or grand vision towards e-payments. On its part as well,
the RBI’s grand vision on payment systems also does not include any
specific mention on such prepaid and stored value systems. The RBI
and other monetary authorities will tend to follow the BIS’ 10 core
principles. However those core principles also do not apply to the
low value prepaid stored value cards - Another reason why they
should not be included under the proposed bill.

Two other issues need to be addressed that are not mentioned in the
above documents. The first is related to security issues and the second
money laundering.

Security: Many law breakers have been arrested on the basis of
tracking made possible by following their payments trail. It has been
sometimes argued that e-payments would not enable this as easily as
was possible through the paper payments trail. To the contrary, e-
payments make it possible to track certain cards on a real time basis
and may even better facilitate security agencies in their tasks. Here, we
might be tempted to put in Know Your Consumer (KYC) systems.
However the KYC systems tend to be costly. Identification,


documentation, verification, physical and electronic storage, all have
significant costs. Industry estimates of these costs range in between
Rs. 100 to 200 per card. This is too high a cost if our primary target is
the underprivileged and un-banked segment of the population.

Money laundering: Since these cards can be purchased at various
points and then used to purchase, many believe that such systems will
make it easier to use and even launder illegal money. This is perhaps
one of the more fallacious arguments against e-payments. Such cards
are typically low value. Money laundering however typically is on a
very large scale. Large purchases of pre-paid cards would be a very
impractical method of laundering money. There are far more quite
well known, efficient, and low cost methods through which money can
be laundered.

C. Proposed Character of Multipurpose Stored Value E-payment
System3

We suggest certain principles and specific characteristics of regulation
essential for our objectives of growth and equity. They incorporate the
overall objectives of the desired bill, and how they should be put in
place. They include efficiency, economy, innovation, competition and
management responsibility.

Efficiency and economy are self-explanatory and need not be
elaborated, in that transaction costs of the system should not be
inordinately high. The principle of proportionality essentially ensures
that unnecessarily stringent regulations are not put in place relative to
the size of the benefits. This is important as in the initial stages the
benefits are unlikely to be high and therefore overly stringent
regulations will impede growth. Of course, as the market size gets
larger, regulatory oversight can be increased.

3
See “The regulation of electronic money issuers”, Financial Services Authority, UK, consultation Paper 117,
December 2001. Also see “A Summary of the Roundtable Discussion on Stored Value Cards and Other Prepaid
Products” The Federal Reserve Board, New York (Undated).


Innovation in this space is essential for it to succeed. Already many
consider smart cards to have been a failure in countries such as
Sweden. The experience in USA of prepaid cards has been one of
high costs. In India as well, the experiments are still going on and no
unqualified success example has yet been put forward. As a
consequence, system providers will need to experiment before an India
relevant model is derived.

Competition is always essential for efficiencies to be sustained.
Competition needs to come in both from incumbents as well as new
entrants. At the same time efficiency should not be compromised and
therefore appropriate regulatory oversight would be required on that
front. Last, recognizing that the senior management is responsible for
its action will enable to the regulator to not put in too many pre-
emptive rules.

We end this monograph with two sets of recommendations. The first
are the proposed additions to the Payments and Systems Bill. This
merely requires the government to set a broad vision for the RBI. The
second are broad directions for the RBI to build its future regulatory
oversight upon.

Recommendations for the Parliament: Changes to the proposed
Payments and Settlement Systems Bill

The preamble to the Bill should be changed to include the following.
Coverage

To provide for the regulation and supervision of systemically important payment
systems in India and to designate the reserve Bank of India as the authority for
that purpose and for matters connected therewith or incidental thereto.

Explanation: The underlined term systemically important needs to be
added to the preamble; this is essential as that ensures that regulation
does not stifle the growth of systems that are currently not systemically


important. This would make the bill in line with internationally
accepted norms of regulation not being at the cost of growth of new
transaction technologies.

Vision

Motivation: India has a large segment of its population that is currently deprived
of accessing banks. This un-banked population earns, spends and saves in large
numbers. It’s per household earning, spending, or saving capacities however tends
to be quite low. Despite intensive efforts a large part of this population remains
un-banked. This un-banked population remains in urban as well as rural areas
and has been deprived of many of the services. As e-governance and other efforts
of the government accelerate, we need to bring such groups rapidly into the
banking fold. However, it is well known that this would be difficult if not
impossible for many reasons, three of the most important being – high levels of
illiteracy and lack of access to the banking system; problem of access specially in
the rural hinterland, and high cost of servicing remotely located customers.
Moreover Internet and other electronic modes of interaction are rapidly becoming
more and more important as a source of information on professional as well as
personal fronts. It is the governments desire to ensure that such or
other payments systems are able to empower the masses in a
short enough period of time. For this purpose the regulator
would aim at ensuring greatest spread through low transaction
costs, higher safety and security.

Explanation: The government will thus ensure that there is a national
consensus on bringing in new technologies that can fill the current gap
in financial sector penetration among the most underprivileged.

Broad Directions

The regulator will seek to achieve the following:
 Empower the masses to be able to use electronic payments
 Ensure safety and security
 Promote efficiency


It will do so by following the principles of:
a) Efficiency and Economy
b) Proportionality
 Restrictions imposed on firms and markets should be in proportion to the
expected benefits for consumers and the industry.
 Avoid unnecessarily distorting, entry barriers or impeding competition

c) Innovation
 Facilitate innovation, for example by avoiding unreasonable barriers to
entry for banks and non-banks or restrictions on existing market
participants
 Facilitating launch of new financial products and services.

d) Competition
 Facilitate entry of all who can offer services
 Ensure entry along with security and efficiency.

Explanation: The above additions set the main vision for the RBI
without changing the basic character of the current bill. This will also
build into the bill directions for the regulator.

Beyond the above the regulator should also attempt to build a
framework for the future. The broad directions are suggested below.

Proposed directions for the RBI - Aimed at facilitating progress
of the e-payments sector

Topic Specifics Notes
Definition E-money: monetary value Allows for all types of
stored on an electronic systems, based on cards or
device and accepted as a other means and removes
means of payments by single purpose cards from
third parties the ambit of such regulation


Inclusion E-money includes a range Various new forms are
of modes and media, going to emerge that are
specifically including but currently difficult to predict;
not limited to value the definition should be
being carried in various inclusive.
types of electronic
devices including smart The regulatory framework
cards, magnetic strip needs to be technology
based media, etc.; Can neutral
be used to purchase
products and services,
redeemed for cash, and
whose value can be
updated;
Issuer Both banks and non- A level playing field
banks are allowed to between banks and non-
issue; certain norms, banks needs to be
reporting and established and this needs
information criteria etc. to be explicitly recognized.
Also small issuers
should be encouraged to
enter.
Risk Payment system to build Build in monitoring
mitigation in the following risks processes of the same in the
(tech.) and associated costs: regulatory framework.
unauthorized creation,
transfer or redemption;
Concerns of risks many
incorrect attribution of
times get translated into
funds, etc. limiting activity. Better
reporting and associated
monitoring mechanism can
eliminate many of these
concerns.
Use of The payment from the This is the key concern for
deposits consumer to the issuer allowing non-banks. By


will need to be ensuring better protection
protected. There are of the users non-bank entry
many ways of doing so will be made easier in this
including adequacy field.
norms, restrictions on
usage of deposits
received, etc.
Granting of Credit providing entities Currently MFIs are allowed
credit governed by stricter to provide micro-credit
norms. facilities by RBI. Lower
norms for systems not
based on credit.

Authorization Only granted to those This procedure needs to be
(Entry) who meet the following as smooth and as open as is
criteria related to possible. It should explicitly
explicit: be recognized that small
Legal status and identity, issuers’ entry should be
pre-specified threshold facilitated and not barred in
conditions, the interest of financial
stability concerns.
Supervision The laws should allow The regulator should be
for supervision able to crosscheck various
including ability of the informational claims made
regulator to examine all by the issuers in case it so
transactions of the desires.
issuer; all transactions
also need to be
maintained in clearly laid
out uniformly
implemented database
and data warehousing
systems.
Enforcement Enforcement powers A balance would need to be
should rest with ensured between two forces


regulator, which would – the need to provide
include cancellation of adequate powers to the
permissions, fines and regulator. And the need to
censures, prohibition of maintain some third party
activities and oversight over the regulator
individuals, initiation of as well.
court proceedings etc.

In case of non-
compliance of the
regulator's orders or in
case of some
disagreement between
the regulator and the
issuers some
arbitration/resolution
mechanism would be
built in.

Prudential Corporate structure: a With cleanly laid out
Requirements formal structure of the systems of commands and
entity undertaking this associated responsibilities
activity should be
essential
Capital A minimum initial The minimum initial capital
capital requirement is amount should not be too
one such option. Scales high; this would ensure that
dependent upon the scales are not necessarily
amount of initial capital high and at the same time
could be another unprepared entities are
possibility that would prevented from entering.
enable both small and
large players to enter.


Asset-liability Non-bank issuers must
management have investments of an
amount not less than
outstanding e-money
To ensure both stability and
liabilities
confidence in the system
Liquidity Issuers must have
sufficiently liquid assets;
such norms can be easily
specified.
Safety and Recognize that low By ensuring that databases
Security value cards are not can be shared with the
viable money laundering regulator real time
options, as other monitoring of criminal
methods are much activities as well as money
easier and less costly. laundering is possible.
User None for low value Recognize that e-money is a
Identification cards, as this will substitute for cash.
increase costs of
delivery and therefore Moreover, user
reduce spread. identification one of the
primary factors why the
poor are kept out of the
banking sector.

Large seasonal migrant
labour, poor urban migrants
are only some examples

D. Summary Conclusion

The proposed Payments and Settlements Bill is a document that is
difficult to critique as it merely places the overall payment and
settlements regime in India within the ambit of the RBI’s powers. The


RBI itself has not yet explicitly laid out its position on the various
options that are likely to be available. But what is clear is that there is a
great need for a framework to be developed. The proposed Payments
and Settlements Bill needs to explicitly lay out a vision that the RBI
can then build upon. The first is related to the government’s vision of
e-payment and what it seeks to achieve. We suggest some specific
additions to the bill that do not change the basic character of the bill.

Where the regulator is concerned, this paper therefore calls for
building a framework that explicitly states what the regulatory system
that oversees the consumer e-payment systems should be like. It
suggests certain important characteristics that ensure:
(a) Stability
(b)Innovation, entry and competition
(c) Entry of small players into e-payment services
(d)Secure and safe e-payment system

We are therefore able to answer some important questions that are not
addressed adequately by the proposed bill. These issues will need to
be decided by the regulator

1. Whether prepaid cards fit into the definition of System Providers
is not clear; but as that flexibility of defining such providers has
been given to the RBI in the proposed bill it will only become
clear what route the RBI will take later.
2. Should this segment that is at such a nascent stage be regulated?
Regulation will impose costs with little immediate benefits at this
point and therefore some may prefer regulation to be delayed.
However, if regulations ensure entry with safety and security,
they will only accelerate the spread of the e-payments system.
This should be a critical element for developing a legal
framework for emerging transaction technologies.
3. Who should provide such services and who should not? The
question of entry is important, as undue regulation will prevent
entry and therefore competition from the non-bank sector. Here
it is essential that all segments, not just the Bank sector, should


be able to provide such payment system services. Moreover
explicit mention should be made on facilitating the entry of small
players.
4. How should issues of safety and security be addressed? Fears
such as money laundering or use in illegal cross border trade are
quite unfounded as there are other much easier means to
undertake these tasks. However, as long as basic monitoring and
reporting systems are being followed, these can be directly
addressed. With electronic payments it would be easier to trace
as well as well as identify both activities as well as persons
indulging in such activities.

IN conclusion, the current bill should be updated to include broad
principles that should be followed by the regulatory entity. The
government needs to specifically mention the broad vision that will
then translate into broad principles related to entry, competition,
innovation, equity and growth. The reason is the regulator may be
interested in maintaining security and stability and may not give
enough weight to the fact that a growing and inclusionary economy
needs many different types of providers to meet the demands of the
different types of potential users. The poor and rural users, the un-
banked population, small groups, payment over the Internet, etc. all
need to be facilitated and coverage growth needs to be accelerated.
This broad vision is currently missing and needs to be incorporated to
act as a guide and constant reminder and beacon for the RBI.

***

Appendix

Some examples of the various private initiatives in the Telecentre
space

E Governance – The example of Drishtee


This model involves the setting up of kiosks primarily in rural areas
that provide a range of services that include agriculture and related
information, complementing e-governance initiatives, etc. Transactions
include obtaining, filling out and submitting government forms. The
kiosk service suppliers’ fee for this is then set at about 10 percent of
the estimated transaction cost, also taking into account
ability/willingness-to-pay considerations.

The benefits, apart from greater accessibility, include savings from
reduced travel and time costs. There may also be benefits in terms of
improving the effectiveness of transactions (e.g., if a complaint
through this channel s more likely to be addressed), but these are
harder to quantify.

The centres also provide other services such as matching buyers and
sellers, or providing horoscopes or matrimonial advertising.
Additional services require partners who can provide software,
maintenance, content or other components of the complete service.
Education is also included in Drishtee’s offerings, though kiosk
owners have often used the presence of a computer and peripherals to
offer computer training, as well as other offline services such as
printing and games. The benefits in these examples are reductions in
transaction costs for existing transactions, improved quality of
successful matches, and potentially most significant, completion of
activities (e.g., training, entertainment, and communications) that
would otherwise not take place because of high transaction costs.

Currently the model is predominantly based on cash payments where
the kiosk provider charges the user, and has synchronous agreements
with the service providers. The transactions costs tend to be high in
such models. These issues are discussed later.

Agriculture Information Delivery – The example of ITC e-choupals


ITC has set up a large number of telecentres under the name o ITC e-
choupals. These are currently focussed on specific agri-commodities
though they are designed to scale up to cover a range of activities to
benefit the farmer. Take for instance soy-choupals in MP designed to
facilitate soyabean transaction between the farmer and ITC. Soy-
choupals are used as registry points for procurement of soybeans.
Though procurement occurs at factories and warehouse hubs, initial
logging in is done through the soy-choupal. The choupal also provides
price information from local mandis, as well as global price
information on soybeans and derivative products.

The initial benefits include a significant reduction in transaction costs,
from 8 percent of the transaction in such agro-transactions, to
approximately 2 percent. Though some of these benefits may be at the
expense of traditional intermediaries at mandis (arhatiyas), there are
great efficiency gains, including clearer quality guidelines and
measurement, greater timeliness and reduced waits, quicker payments,
and reduced uncertainties for the farmer.

The organization has been able to expand its range of services by tying
up with organizations like Agriwatch that provide a range of
agricultural information to farmers including mandi prices. Agriwatch
is developing a large-scale Internet portal for farmers, and Drishtee’s
role is that of providing last-mile access to this rich information base,
through its kiosks.

Entertainment – The example of Aksh

The Aksh services model, the revenue model, and pricing structures
are currently similar to those of the Drishtee model. With one major
difference. Aksh had initially partnered with Drishtee for the
development and maintenance of kiosks that would act as distribution
points for cable TV access, as well as Internet kiosks. The importance
of cable TV revenues, points towards the importance of entertainment


options - that kiosks can provide a range of entertainment services in
addition to utility services such as agriculture-related information or e-
governance.

Cable TV is only one entertainment possibility. With the expected
increase in availability of digitised audio, video, gaming, and social
networking options, entertainment options have a large role to play in
rural India. Moreover, since delivery costs of conventional modes are
quite high the telecentre approach may lead to significant savings in
delivery costs and therefore greater scalability.

Health and Agriculture Diagnosis – The example of n-Logue

The n-Logue model is rather different in that it charges the kiosk
operator for connectivity; further n-Logue has progressed well beyond
being simply a connectivity provider, to delivering a range of services
that can be adapted to different connectivity technologies. close links
with IIT Chennai have given n-Logue access to a range of software
innovations for delivery and implementation of various applications in
the fields of education, health and agriculture. For example, web cams
have been used for remote diagnostics for diseases of people, animals
and plants. A considerable amount of local language software has been
created.

In other words, audio-visual communications can enable a far richer
set f services than is currently envisaged. Te ability to provide
diagnosis services can dramatically reduce health care accessibility
issues across rural India. IN this case as well, low transaction costs
payment mechanisms are crucial. Again these issues are discussed
later.

Education – The example of TARAhaat


These kiosks were very much along the lines of those implemented by
Drishtee and n-Logue, with a mix of e-governance services, market
price information, and so on. TARAhaat’s long-range plans include a
comprehensive portal for rural information services and perhaps most
important – education. It has an educational content partner, called
TARAgyan. In association with various partners, TARAgyan is
developing local language content and software. Basic IT education is
an important part of TARAgyan’s actual and potential offerings, but it
is notBox: A Study of Kiosks, Inclusiveness and Sustainability
the exclusive focus. In fact, there has been a substantial
diversification into developing materials for English language
Thus, whilerural find that roughly 5% development, and so on. villages
instruction, we marketing, personality of the population in the
studied have used the kiosk this 5% was clearly not selected “at random”
from not villagewhich aspects a whole; some selection biases drove kiosk
It is the clear population as of the various education offerings will
use. In particular, the most successful, but clearly, educational services of
eventually become we find these diffusion biases along dimensions
gender (more males to provide especially in the hinterlands. Electronic
are quite expensive than females), age (users are usually younger than 30),
caste (scheduledless costly and reduce the fixed use the facilities save in
media make it caste members are less likely to cost element in that
those villagesinfrastructure need not be created. SC area), … educational
idiosyncratic where the facility is located in an
attainment (with few illiterate users), and income (users are richer as
measured by standard surrogate indicators).
There are of course many different models and range of services that
We found that of the 77 kiosks that were established incombination of
various organizations are experimenting with. The the region by June
2004, 29 of thewill kiosks run by self-employed entrepreneurs had closed
services that 35 evolve as the basic service delivery model of
down….Theacross reasonsIndia will be determined kiosks being run by
telecentres main rural behind the closure of the in due course.
self-employed entrepreneurs were lack of long-term the location the
Moreover, it is likely that depending upon financial viability and
lack of adequate operational and technical support But … the clear
combination of services will also differ across kiosks. by what is internet
service some set of economically feasible models will evolve within the
is that provider and organization responsible for coordinating with other
entities sector. If the government’s actions also play financialenvisagedwas
private for delivery of services. The lack of long-term out as viability
mainly due to the are even of the kiosks to diffuse widely within their communities
the possibilities inability larger.
and attract more users. As pointed out in this study, the kiosks continued to
attract users mainly from the relatively higher socio-economic strata
within their communities and failed to upgrade … to make it more
relevant to a wider section of the village population. … underscore the
importance of making the kiosks diffuse more widely among their
communities for long-term … sustainability.

Source: Social Impact and Diffusion of Telecenter Use: A Study from the
Sustainable Access in Rural India Project, Rajendra Kumar, 2007, mimeo

Inclusion, E-payments and the Payments and Settlement Systems Bill

Recommandé

Recommandé

Contenu connexe

Plus de Indicus Analytics Private Limited

Plus de Indicus Analytics Private Limited (20)

Dernier

Dernier (20)

Inclusion, E-payments and the Payments and Settlement Systems Bill