Chapter 06 - Payment & Settlement System

Prelims Syllabus

Introduction to Chapter
Practise Questions

Ans A👇

Who Regulates Payment & Settlement in India
1. Board for Regulation of Payment and Settlement System
2. It is a Statutory Board under Payment & Settlement System Act
Important Topics and Pointers
Types of Payment Systems in India

Paper Pay Includes - Cheques and Demand Drafts

Remittance - From One Account to Another Account Transfer

Bulk Clearing - High Volume Repetitive Transactions
1. Remittance
  1. by RBI - NEFT & RTGS
  2. By NPCI - IMPS
2. Prepaid Card
  1. Metro Card
3. PPI → Prepaid Issuers → Pay TM, Ola Wallet, All Entities which can issue Pre Paid Instruments in the form of waller or something else
4. NUUP - National Unified USSD Platform - Payment System which can be used by People who are using Feature Phones
  
  Issue : It is not successful → Hence a New Payment System called UPI 123 Pay
5. Bulk Clearing
  1. NACH - National Automated Clearing House
    
    Enables Auto Debit for various recurring expenses
    
    Used in : Subscription Models of Online Platform && Deduction of EMI’s
  2. ECS - Electronic Clearing Service - Developed by RBI

Cheque-Based Payment System
- Two Important Development in Paper Based System are
  1. CTS - Cheque Truncation System
  2. PPS - Positive Pay System (in 2021)
- Sample of a Cheque is
- IFSC Code
  1. IFSC - Indian Financial System Code
  2. It is 11 Digit Code
- MICR Code
  1. MICR - Magnetic Ink Character Recognition Code
  2. It is 09 Digit Code
    1. First 3 - City Code
    2. Next 3 - Bank Code
    3. Next 3 - Branch Code
  3. Why is it called as Magnetic Ink
    
    It is printed with Iron Oxide i.e Magnetised Ink
- How Does Payment of Cheque Happen - Earlier
  
  Time Consuming Process
  1. Cheque Issued from : HDFC Delhi
  2. Cheque Issued to : ICICI Mumbai
  3. Cheque used to travel Physically. Hence, the Problems were
    1. Physical Damage
    2. Tampering Issues
    3. Time Consuming
- How Does Payment of Cheque Happen - Now (CTS)
- How Does Payment of Cheque Happen - Now (PPS)
NPCI - National Payment Corporation of India Limited
1. National Financial Switch
2. UPI
3. IMPS
4. NACH
5. Positive Pay System
UPI - Developed by NPCI
1. UPI - Unified Payment Interface
2. UPI is an Application Programming Interface (API). Its an Open Interface
3. UPI can be used to
  1. Request Payment from Someone
  2. Make Payment to Someone
4. Single UPI ID for Multiple Bank Accounts is possible
5. Factor of Authentication
  1. How Many Levels of Authentication is needed to complete a Transaction
  2. UPI has 2FA
    1. Front End : UPI PIN
    2. Back End : Mobile Number & Device Number ( IMEI Number )
6. Limit on UPI
  1. In Most Cases Upper Limit is Rs 1 Lac
  2. In Certain Specific Cases Limit is Rs 5 Lac
ONDC - Open Network for Digital Commerce
1. in E Commerce we have - Duopoly → Amazon & Flipkart
2. Open Source Platform which can be Integrated as and when needed
3. Co Win Platform is an Example of Open Source Platform
4. They are example of Digital Public Good
AePS - Aadhaar Enabled Payment System - To Have Access to his Bank Account

Business Correspondent Carries : Micro ATM Machine

Linking of Aadhar & Mobile Number
Aadhar Pay - Pays to a Merchant
JAM Platform - Jan Dhan Aadhar Mobile - JAM Trinity
1. Using Aadhar & Mobile Number - DBT is done
2. LPG Subsidy & PM Kisan Yojana
3. JAM is based upon Aadhaar Payments Bridge

Offline Digital Payment
1. Offline Payment is any payment done w/o use of Internet & Telecom Communication
2. Examples Are
  1. NFC - Near Field Communication
    
    Implements G Pay - Tap & Pay Feature
    
    16 Digit Debit Card Number & 3 Digits CVV Number
    
    By Entering this Detail, the Mobile can act as Debit Card
  2. Metro Card
  3. Sound Based Technology - UPI 123 Pay
UPI 123 Pay
- Mind Map
- Introduction
  1. UPI Doesn't Work on Feature Phones
  2. UPI 123 Works on Feature Phones
- In UPI 123 he can make payment by 4 Methods
  - Call Toll Free Number / IVR ( Interactive Voice Response System)
  - Missed Call Approach
  - Using Apps on Feature Phones
    
    NPCI has asked Mobile Manufacturers to create Partnership with PhonePe/GPay Companies by means of Pre Loaded Apps
  - Sound Technology
    
    Transfer of Data is done through Sound Waves
QR Card
1. QR - Quick Response
2. Issued By - India Post Payment Bank (IPPB)
  
  It is a Type of Differentiated Bank
3. It is kind of a Debit Card
4. Can it be used in ATMs ? - No Because QR cant be ready by machines

RBI’s Centralised Processing System (CPS)
1. E Kuber is not a Part of It
2. It comprises of only RTGS & NEFT
3. Story of Access
  1. Earlier only Banks could access this
  2. PPI (Prepaid Issuers) had No Access to CPS
    
    Examples of PPI → Amazon, Flipkar, Ola, Uber, Zomato Wallet
  3. Earlier PPI had no Access to CPS i.e it could not use RTGS and NEFT
  4. In 2020 PPI has been given a kind of direct access to CPS
4. By Access to PPI it means
  1. PPI can use directly RTGS & NEFT
  2. Can Load Money on Wallet by means of RTGS & NEFT
5. Benefit of this Access to PPI is
  1. Saving of Commission via Banks
  2. Greater Efficiency in Transaction
6. What are White Label ATMs (WLAs)?
  
  Ans: ATMs set up, owned and operated by non-banks are called WLAs. Non-bank ATM operators are authorised under the Payment & Settlement Systems Act, 2007 by the Reserve Bank of India (RBI).
Types of Payment System in India
1. RTGS - Real Time Gross Settlement
  
  High Value Settlement System
2. NEFT - National Electronic Fund Transfer
3. IMPS - Immediate Payment Settlement
  
  Every 30 Min Slot Payment Settlement Occurs
Types of ATM
1. Full Form of ATM is Automated Teller Machine
- Features Needed for ATM
  1. Installed
  2. Maintenance
  3. Connectivity
  4. Regulating Cash
1. Based on (Who is Doing What)Types of Activities. There are Three Types of ATMS in India
  - Summary
  - Types of ATM according to RBI are
    1. Bank Owned ATM’s
    2. Brown Label ATM’s
    3. White Label ATM’s
      - Introduction
        
        Indi Cash by Tata & Money Spot
        
        They can be Identified as they have their own Logo
        
        Benefits for a Non Banking Entity
        
        Commission from Bank Whose Swiping has been Done

💡 Interchange Fee Paid for ATM & Interchange Fees as a Part of MDR is Different but called by the Same Name

Concept of MDR
- Introduction of MDR
  1. MDR is Merchant Discount Rate
  2. Fee Paid by Merchant in Accepting Payment by Means of Debit, Credit, QR Code either Physical or Digital Payment
  3. Fee Varies Depending Upon
    1. Mode of Payment - Credit, Debit, QR, UPI
    2. Categories of Merchants - Small, Medium, Large
  4. Ranges from 0.3% to 0.85%
  5. Process
- MDR Summary and Mind Map
Concept of Interchange Fee for ATM
1. It is the Fee Paid by the Bank to the White Label ATM Operator
2. If ICICI Bank Card is Swiped in Indi Cash Machine then
  
  ICICI will pay some money to Tata
3. It is not based on Value of Transaction but on the No of Transactions.
4. Earlier this fee was Rs 15, Now it is Rs 17
5. Interchange Fee is a Part of MDR which gets paid to the Card Issuer
Concept of Interchange Fee as a Part of MDR
Summary of Both Types of Interchange Fees

Why are we Promoting RuPay & UPI (Allied Current Affairs)
1. Because it is Indigenous Payment System
2. Mastercard & Visa are Foreign - We should not be dependent on them
3. We could learn from India
4. To Facilitate RuPay and UPI - Govt Amended Payment & Settlement Act
  
  This Amendment Calls for “Zero MDR Charges on Payment Made through UPI & RuPay Card”
5. Issue with Merchant Not Paying MDR is
  1. Loss to NPCI as it made both UPI & RuPay → They Have Less Money to Upgrade Infrastructure.
    
    Hence, Because of that there's a Lot of Payment Cancellation
  2. Its Loss to Bank as well. Hence, Banks were Issuing more of Mastercard and Visa
6. Hence, to Resolve this Problem. Govt came up with a New Scheme in Jan 2020
  
  The Loss Incurred by Customer, Merchant Bank and Payment System Operator will be compensated by Govt
Discussion Paper on Charges in Payment System by RBI

Project Nexus
1. Related to making UPI as International Phenomenon
2. Recently Nepal & Bhutan have started using UPI. Hence it has recently became Regional
3. Other Countries Payment System Like UPI are
  1. Singapore - PayNow
  2. Thailand - PromptPay
4. BIS - Bank of International Settlements has started Project Nexus to Link Payment Systems of Different Countries
5. Issues
  1. Charges for Transferring Money
  2. Different Platforms on which it has been made
  3. How to convert money
6. Prelims Project Nexus
  1. What is it
  2. Who is Developing It
SWIFT Platform
- Swift Mind Map
- Background
  
  Current Development is that due to Ukraine War, US & EU has banned Russia from Using SWIFT Platforms for Both Import and Export
- Global Alternatives to SWIFT Platform
- To Understand SWIFT - Understand its Full Form
  1. SWIFT: Society for Worldwide Interbank Financial Telecommunication
  2. Financial Telecommunication
    
    SWIFT is not a Payment Platform, It's a Messaging Platform
    
    A Safe & Secure Communication
  3. Interbank
    
    Interbank Transfers at a International Level between Two Different Countries
  4. Society
    1. Co Operative Society is Owned By
      1. G 10 - Grouping of Most Developed Nation
        
        The member countries are Belgium, Canada, France, Germany, Italy, Japan, the Netherlands, Sweden, Switzerland, the United Kingdom, and the United States with Switzerland playing a minor role
      2. ECB - European Central Bank
      3. National Bank of Belgium
    2. Regulated by EU - European Union
- Importance
  1. It has a Monopoly wrt International Payment in the World
VOSTRO & NOSTRO Account
1. How to Remember Nostro & Vostro
2. Mind Map
3. How Does SWIFT Platform Works by means of an Example
  
  Nostro - Our
  
  Vostro - Your
  
  How to Remember : Our Comes First & Your Comes Later ; Nostro Comes First & Vostro Comes Later
4. A Summary
5. How is Money Transferred

International Trade Settlement in Rupees

Why Countries Do Not Use their Own Currency for International payments but rather use a third Currency
1. Problem with Making Payment in Rupees (Currency of the Country)
  1. In Sri Lanka they cannot use Import Goods from Other Countries
  2. They can't convert it in Rupees as the Exchange Price would hamper their Profit
    
    Conversion Cost will be added Expense to them
2. Hence, comes the Concept of Vehicle Currency
  
  Big 4 Currency Are : USD, GBP, EUR, YEN
3. Characteristics of Money is
  1. Its Medium of Exchange
  2. Store of Value
  3. Unit of Account
4. Internationalisation of Rupee Includes Two Things - Rupee should have these three characteristics
  1. Rupee as Medium of Exchange - Rupee should be used to make payments for International Trade
  2. Rupee as Store of Value - Like we keep our Forex Reserves in Big 4 Currencies, in the same way other currencies should keep forex reserves in Rupees
  3. Rupee as Unit of Account - Countries should link their currencies to Rupees
    
    Gulf Countries have adapted Fixed Exchange Rate System - Here They have linked the value of their currency to Dollar
    
    Here, there is no concept of dynamic change value
  4. Why So ?
    1. Exchange Rate Fluctuation
    2. Huge Export, More Dollar Inflow, Local Currency Appreciate,
  5. Only Two Countries have linked their currency to Indian Rupees - Nepal & Bhutan
5. Why Rupee Should Become International ?
  1. It can help us in Saving out Scarce Resources
  2. It can help in reducing International Cross Border Exchange Rate - Will Check Volatility
  3. Strategic Partners of India are Russia and Iran
6. Why Should we Expose Ourselves like US Fed Bank Policies by Internationalising Rupees
7. Present Trade Settlement System for India Internationally
  
  Until 2022, we do not have any official data as to which currencies are used for payment of India External Trade from Govt or RBI
  
  But as per IMF Data of 2014
Characteristics of International Currency
Rupee Ruble Exchange Mechanism

Problem of Surplus Money of Russia's Account in India - RBI Suggested to Invest in G Secs

Messaging is Done through Trade Invoice, used as Proof for Transport Communication

RBI’s Digital Payment Index

It is Measured by RBI to measure the Penetration of Digital Payment Index

Who Measures Digital Payment Index : RBI