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The Reserve Bank of India (RBI) has taken the first step towards regulating all payment and settlement service providers such as Mastercard, Visa, and First Data. This would also include various service providers of back-end support to banks for internet payments, credit card settlements and ATM transactions.

Until now, all service providers are registered as companies and their activities are only indirectly controlled by RBI. Now, each of these entities will have to get themselves registered with the central bank. The regulated entities would also include the Clearing Corporation of India (CCIL) and remittance companies such as Western Union Money Transfer.

RBI placed a draft copy of regulations on payment and settlement systems on on its website. The draft guidelines are open to public scrutiny and RBI will accept comments and suggestions from all stakeholders until May 15, 2008. This follows the approval of the Payments and Settlement Systems Act in December last year. The Act gives RBI explicit regulatory control on all payment and settlement systems in the country. The Act also defines a payment system and gives legal recognition to multilateral netting and settlement finality.

“The regulator’s involvement helps in growing the payment system and enables faster deployment. Moreover, this activity is directly related to economic growth,” said First Data Corporation country manager Amrish Rau. First Data provides back-office processing for banks and was originally a co-operative effort by banks to do transactions processing. It later became a ‘for-profit’ company providing services across the world.

RBI’s regulations are aimed not only at mainstream card settlement companies like Visa and Master, but also smaller payment providers like Itz Cash, which is an area that is completely unregulated at present. The regulations also aim to provide legal sanctity to the 1,095 cheque clearing houses across the country. So far, the concept of multilateral netting — the settlement mechanism used by companies and banks for multiple payments, amongst each other — was a contractual obligation; the regulations seek to legalise this procedure as well.

Further, the regulations also seek to provide a dispute mechanism for electronic payments. At present, there is no regulation to tackle bouncing of electronic payments, as there is for bouncing of cheques. CCIL, the large-value electronic payments solution provider which facilitates inter-bank overnight borrowing and collateralised borrowing transactions, and National Payment Corporation of India (NPCI), will also be brought under the regulations’ ambit.

For this, the central bank has set up the Board for Regulation and Supervision of Payment and Settlement Systems Regulations, which will be chaired by the RBI governor. The board will formulate policies for regulation and supervision of all payment systems in the country, including cross-border ones and lay down standards for both existing and future payment systems. It will also determine criteria for membership of the payment systems and has the power to reject or terminate a membership. Further, all payments system providers will have to provide RBI with copies of their audited balance sheets, yearly profit and loss accounts as well as a copy of the auditor’s report, within three months of the company’s account closing.

According to industry sources, the regulations are an attempt by the central bank to regulate all payment-solution providers in the country, especially the electronic ones which are currently unregulated. Officials from Visa and Master refused to comment on the guidelines.

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