Payments and System Settlement Act 2007- Settlement of disputes and dishonor of electronic payments.

In continuation to my previous post posted on 17th February 2013, which aims at providing the insights of Payments, their clearing and settlement in India, in this post, I am giving the insights on how the settlements and disputes like dishonor of electronic payments shall be handled. The PSS Act of 2007 has been intelligently framed to address all kinds of disputes possible in case of electronic payments. The act has also laid down clear and strict guidelines for all the parties involved in a payment life cycle. 

To start with, I would like to detail some terms that will I have used as they have been used in PSS Act 2007.

System Participant:

It refers to any person or organization that has initiated the payment or is a beneficiary of the payment initiated. To illustrate, merchants accepting online or card payments, both end parties in case of NEFT or RTGS shall be treated as system participants.

System Providers:

All the parties and agencies that cater the payments services shall be treated as System providers. This shall involve all the banks catering electronic payments services, card issuing agencies like Visa or Master cards, RBI itself, all payment processing service providers like pay pal.

I would also like to address a question; does the PSS Act 2007 deal with netting and settlement finality? To answer, the PSS Act 2007 defines “netting” and legally recognizes settlement finality. It states that a settlement, whether gross or net, will be final and irrevocable as soon as the money, securities, foreign exchange or derivatives or other transactions payable as a result of such settlement is determined, whether or not such money, securities or foreign exchange or other transactions is actually paid. In case a system participant is declared insolvent, or is dissolved or is wound up, no other law can affect any settlement which has become final and irrevocable and the right of the system provider to appropriate the collateral contributed by the system participants towards settlement or other obligations.

This Act also legally recognizes the loss allocation among system participants and payment system, where the rules provide for this mechanism.

The PSS Act, 2007 lays down the duties of the system provider. The system provider is required to operate the payment system in accordance with the provisions of the Act and the Regulations, the terms and conditions of authorization and the directions given by the Reserve Bank from time to time. The system provider is also required to act in accordance with the contract governing the relationship among the system participants and the rules and regulations which deal with the operation of the payment system.  

The Act requires the system provider to disclose the terms and conditions including the charges, limitations of liability etc., under the payment system to the system participants. The Act also requires the system provider to provide copies of all the rules and regulations governing the operation of the payment system and other relevant documents to the system participants. The system provider is required to keep the documents and its contents, provided to it by the system participants, as confidential and is prohibited from disclosing the same, except in accordance with the provisions of law.

Under the PSS Act, 2007, dishonor of an electronic fund transfer instruction due to insufficiency of funds in the account etc., is an offence punishable with imprisonment or with fine or both, similar to the dishonor of a cheque under the Negotiable Instruments Act 1881. Subject to complying with the procedures laid down under the PSS Act, 2007, criminal prosecution of defaulter can be initiated in such cases.

The Act lays down an elaborate mechanism for settlement of disputes between system participants in a payment system, between system participant and system provider and between system providers. The Act requires the system provider to make provision in its rules or regulations for creation of a panel to decide disputes between system participants. Where any system participant is dissatisfied with the decision of the panel, or where disputes arises between system participant and system provider or between system providers, such disputes are required to be referred to the Reserve Bank for adjudication, whose decision shall be final and binding on the parties.  

In cases where the Reserve Bank, in its capacity either as a system participant or system provider, is itself a party to the dispute, then there is a provision for referring such cases to the Central Government  for adjudication. 

To conclude the post, I would like to introduce the readers with a new kind of crime that is gaining ground in electronic payments. RBI is continuously receiving complaints of fraud and illegal payment systems in the market. We need to understand that any payment system that is not authorized by RBI under the PSS Act 2007, no prosecution of defaulter can be initiated. However, to avoid such illegal systems, under the PSS Act, 2007, 

• Operating a payment system without authorization
• Failure to comply with the terms of authorization
• Failure to produce statements
• Returns information or documents or providing false statement or information
• Disclosing prohibited information like balances, credit limits and contact details
• Non-compliance of directions of Reserve Bank violations of any of the provisions of the Act, Regulations, order, directions etc.

They all are offences punishable for which Reserve Bank can initiate criminal prosecution. Reserve Bank is also empowered to impose fine for certain contraventions under the Act. 

I hope that readers will definitely gain confidence in new advanced electronic payment systems as they are secure, fast and innovative. In my next post, I will introduce the innovations that are taking birth across the globe in Payments and Banking.

Thanks

H. Sanguri

Payments& Settlements in India

In India, The PSS Act, 2007 received the assent of the President on 20th December 2007 and it came into force with effect from 12th August 2008. PSS stands for Payment and Settlements Systems Act. 

Reserve Bank Of India is the sole proprietor of all the payments systems running in India. We have two types of payments settlements in India. One is gross settlement i.e. RTGS and all other netting settlements like NEFT, card payments etc. A payment cycle involves broadly the below mentioned steps:

a) Payment Initiation

 The party to pay money has to initiate a payment which can be done through a payment instrument like a cheque, demand draft, banker's note, debit card swipe, online payment etc.

b) Payment Clearance

The party given the responsibility to authorize the payment initiated has to clear the that payment in terms of amount available, credentials of payment issuer etc. There are two different modes of clearance, one for paper based instruments and other for electronic instruments. For paper based instruments like cheque, instrument needs to available physically in a local clearing house. Once, that clearing house clears the payment, it is due for settlement. However, modes like demand draft are kind of pre cleared instruments ready to get settled. Today, any institutions allows the feasibility of stop payments in case of paper based instruments after clearing but before settlement of payment. 

The other mode i.e. electronic is much different in terms of getting cleared. They do not need to be present in any physical mode in any clearing house. Instead, once they gets initiated, they gets auto cleared based on the availability of funds in issuer's account. However, financial institutions still have discretion to stop an electronic payment post auto clearance based on grounds like government intervention or if it is a case of fraud or money laundering. Examples of such instruments are card payments, online money transfers and online shopping payments.

c) Payment Settlement

This is the final step in any payment life cycle that involves actual fund transfer from payee account to beneficiary account. Settlement is done on two ways, one is real time gross settlement that do the fund transfer at the time payment gets cleared. The second one is netting which involves accumulation of all payments cleared in a certain interval and finally netting the amount and doing the actual fund transfer after that interval is over. Example of netting settlements are NEFT, card payments etc.

In India, there there are banks national and private who have been vested with power to initiate and clear payments instructions on authorization from their customers. However, settlement can only be done by Reserv Bank of India. Therefore, it is mandatory for all the banks to maintain two sets of accounts one credit and other debit in RBI if they are doing any payments facilitation in India.

The PSS Act, 2007 provides for the regulation and supervision of payment systems in India and designates the Reserve Bank of India (Reserve Bank) as the authority for that purpose and all related matters. 

 The Act also provides the legal basis for “netting” and “settlement finality”. This is of great importance, as in India, other than the Real Time Gross Settlement (RTGS) system all other payment systems function on a net settlement basis.

Please find below some payments related financial terms laid down by RBI for reference:

“Payment obligation” is defined as what is owed by one participant in a payment system to another such participant which results from clearing or settlement or payment instructions relating to funds, securities or foreign exchange or derivatives or other transactions.

 “Payment Instruction” is defined as any instrument, authorization or order in any form, including by electronic means, to effect a payment  by a person to a participant in a payment system or from one participant in such a system to another participant in that system. The payment instruction can be communicated either manually i.e. through   an instrument  like a cheque ,draft , payment order etc or through electronic means, so that a payment can be made by either a person to the participant in such a system or between two participants.

“Settlement” means the settlement of payment instructions received and these include settlement of securities, foreign exchange or derivatives or other transactions. Settlement can take place either on a net basis or on a gross basis.

"Payment System" is system that enables payment to be effected between a payer and a beneficiary, involving clearing, payment or settlement service or all of them, but does not include a stock exchange. It is further stated by way of an explanation that a “payment system” includes the systems enabling credit card operations, debit card operations, smart card operations, money transfer operations or similar operations.All systems (except stock exchanges and clearing corporations set up under stock exchanges) carrying out either clearing or settlement or payment operations or all of them are regarded as payment systems. All entities operating such systems will be known as system providers. Also all entities operating money transfer systems or card payment systems or similar systems fall within the definition of a system provider. To decide whether a particular entity operates the payment system, it must perform either the clearing or settlement or payment function or all of them.

It states that a settlement, whether gross or net, will be final and irrevocable as soon as the money, securities, foreign exchange or derivatives or other transactions payable as a result of such settlement is determined,  whether or not such money, securities or foreign exchange or other transactions is actually paid. In case a system participant is declared insolvent, or is dissolved or is wound up, no other law can affect any settlement which has become final and irrevocable and the right of the system provider  to appropriate the collateral's contributed by the system participants towards settlement or other obligations.

PSS Act 2007 also legally recognizes the loss allocation among system participants and payment system, where the rules provide for this mechanism.

In my next blog, I will introduce the roles and responsibilities laid down for payment systems to operate in India and the penalties in case of dishonor of payments instructed.