Emerging Trends in Payment Systems and Challenges-
Inaugural address by Dr K. C. Chakrabarty, Deputy Governor, RBI at Banknet’s 7th Annual Conference on Payment Systems at Mumbai on Jan 19, 2011

Fraud

23. Frauds in an non-electronic payment system were mainly related to tampering of cheques (Fake/printed cheques and material alterations) or presentation of fraudulent cheques. These were detectable on close examination at the drawee/drawer bank level. However, in an electronic payment scenario, funds are disbursed on genuine authentications stolen by the fraudsters. The establishment of liability in such cases has become challenging. Identification and prevention of such frauds requires investment in risk management processes. The risk management process should have built in logic to alert customers or reach out to customers in case of suspected transactions. I believe that it would be unfair to dismiss instances of frauds in a technology driven scenario as customer carelessness/compromise. Banks have to recognize that investment in technology has to take into account customer education for change over to the new system. Further, the efforts must be made to put in place checks and balances to prevent such frauds. Customers have to be made aware of the importance of following certain best practices in a technology driven scenario and an attempt must be made to put the onus of proving the carelessness/compromise on the banks rather than the less savvy customers. The system must also move towards a zero customer liability principle wherever feasible. This alone can result in increased customer confidence in such technology driven systems. Otherwise, the acceptance and adoption are bound to be low.

24. Another challenge that has to be highlighted is the growing complexity of payment products and their impact. The internet and mobile channels are emerging as the most important channels for commerce. In sync with this, payment products are being developed to facilitate transactions on these channels. These include customization of existing products and development of new products. The developments in this field internationally pose a challenge for regulators. The ‘World Wide Web’ offers options for development of ‘World Wide payment systems’. Many payment service providers already operate in this domain. Many of these operators, who are licensed to operate by regulators of their country of incorporation, solicit customers from across the globe. They do not seek to comply with the legal/regulatory requirements of the countries covered. Instead, in many such cases the responsibility of compliance to the local legal/regulatory requirements are bestowed on the customers who sign-up for such services from these countries, through the ‘Terms and Conditions’ for online signing-up for such services. These operators do not have any obligations towards the local regulatory/legal authorities, pose challenges from KYC/AML/CFT angle. Further, they also do not fall within the gamut of the local customer redressal measures. We have also initiated action against some such operators. We have been monitoring the activities of few such operators and would take appropriate action in due course.

25. The payment card network has been one of the major revolutions in the payment world. The International network put in place by these multinational organizations have transformed the payment and settlements arrangements for travel and commerce. However, the development of these networks has been based on the standard, rules and regulations of few developed countries. Further, the legal requirements on the country of operation are also not fully taken into consideration. Our experience shows that the product development procedures in these organizations do not take into consideration the rules and regulations of most countries while promoting new products globally. In this context, unlike other countries, these entities are legally authorized service providers in India. The authorization granted makes it mandatory for them to comply with all the legal/regulatory requirements of this country. However, we have come across instances where these local requirements were repeatedly violated due to poor internal controls in these organizations. For instance, we had come across instances where some entities have been leveraging the card network to extend payment and money transfer services across border domestic residents, without consideration of the local legal/regulatory requirements. Their modus operandi include shipping prepaid cards denominated in foreign currency into the country, and facilitating the funding of these cards from other prepaid cards or any other international payments channel. Another instance is the proliferation of non-bank payment gateway service providers. These entities based across the globe acquire merchants in any country. Domestic transactions are masked as foreign currency transactions and settled through overseas acquiring banks.

26. The card payment network has become a conduit for facilitation of initial funding and customer verification for internet based payment service providers stated earlier. It would be appropriate that card companies and the member banks take note of these developments and initiate appropriate and timely action so as to guard themselves against any reputational risk. We are continuously monitoring the developments and will take strong action against such violations.

27. This does not mean that Reserve Bank is averse to innovations in payment systems/products. We have an open mind towards all innovations. Innovations within the existing legal/regulatory framework are easier to access and authorize; innovations which require modifications to these would require further debate and above all the enabling legal mandate. However, all payment system providers would have to be approved under the payment system act to operate in the country. In this regard, we need to note that USA, a country which permitted free development of such products, has also started discussions on licensing and regulation of products.

Conclusion

28. The evolving payment systems scenario offers new challenges and opportunities to all segments of this industry. To leverage on the opportunities provided by new products, the system providers/banks need to ensure that the challenges are adequately addressed. It also has to be ensured that the products cover all segments of the population and provide an incentive to adopt these products. The regulatory process would support all orderly development of new systems and processes, within the legal mandate. I hope this Conference will deliberate on all these issues especially how the aam aadmi can be provided cost-effective, safe, speedier and hassle free payment and settlement products and solutions. The challenge before all the stakeholders including banks and non-bank players, IT vendors, other service providers, etc. is how to introduce such a next generation payment and settlement system and solutions that is needed to take the country into the 21st century .

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Nearly 100 banks & IT Cos participated at Banknet’s 7th Annual Conference on Payment Systems at Mumbai on Jan 19, 2011.. Now in its 7th year, Banknet's Annual Conference on Payment Systems is the largest payments event in India and has gone from strength to strength. It has on average attracted around 300 senior executives from around the globe. ...Click Here

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