Payment and Settlement Systems Act, 2007

With the expansion of electronic payments and financial innovation in the 2000s, a separate legal framework became necessary, leading to the enactment of the Payment and Settlement Systems Act, 2007 (effective from 2008).

The Act empowers the RBI to regulate and supervise all payment systems in India, covering large-value systems like RTGS as well as retail systems such as card networks, NEFT, UPI, and mobile wallets. Its core objective is to ensure that payment and settlement systems are safe, secure, efficient, accessible, and capable of managing settlement and systemic risks.

Key Objectives

The PSS Act, 2007 has a few primary objectives:

• To designate the RBI as the authority for regulation and supervision of payment and settlement systems in India.
• To ensure all payment systems operate in an organized manner, with proper authorization and oversight, thereby safeguarding the stability of the financial system.
• To boost electronic and digital payments by instilling public confidence (through legal backing for payment finality and RBI’s supervisory role).
• To mitigate systemic risk: since payment systems connect many banks and institutions, a failure in one could spread; the Act gives RBI tools to prevent and manage such scenarios.

Authorization of Payment Systems

A key provision of the Act is that no person or entity may commence or operate a payment system without prior authorization from the RBI under Section 4.

A “payment system” is broadly defined to include any system enabling payments between a payer and a beneficiary through clearing, payment, or settlement, covering platforms such as NEFT, RTGS, UPI, card networks, ATM networks, prepaid wallets, and clearing houses.

Entities seeking to operate such systems must obtain RBI authorization by meeting requirements relating to technology, capital adequacy, security, and governance, upon which RBI may issue a Certificate of Authorization with conditions.

Operating a payment system without authorization is an offense punishable with fines and imprisonment, underscoring RBI’s central gatekeeping role.

Regulatory and Supervisory Powers of RBI

The Act gives RBI broad powers to regulate payment systems in operation. RBI may prescribe standards on aspects such as processing timelines, fund transfer mechanisms, security requirements, and transaction formats, including measures like two-factor authentication and card security norms.

It can issue binding directions to payment system operators and participants to ensure efficient functioning and systemic stability, call for information, and inspect their infrastructure, equipment, and procedures.

RBI may also suspend or revoke authorization if a payment system operates against public interest or threatens system stability. To exercise these powers, the Act provided for the Board for Regulation and Supervision of Payment and Settlement Systems within RBI, chaired by the RBI Governor.

Settlement Finality (Legal Certainty)

A key concept introduced by the Act is the principle of settlement finality. Once a transaction is settled in a designated payment system, the settlement is final and irrevocable, even if a participant later becomes insolvent.

This prevents reversal of completed payments and avoids contagion or chain reactions in the event of a bank failure. Section 23 expressly provides that after netting or settlement, no subsequent legal claim can unwind the transaction, giving participants legal certainty and confidence, especially for high-value systems such as RTGS.

Consumer Protection and Efficiency

While the Act is focused on systems, it indirectly benefits customers:

• It enhances security and reliability – RBI’s oversight means systems must invest in robust technology and fraud prevention. This reduces failures and fraud incidents, protecting users.
• It promotes interoperability – RBI often uses its powers to ensure different systems work seamlessly (e.g., UPI allows interoperability between banks and wallet players; ATM networks are interconnected). The Act’s framework pushes providers toward cooperation for the overall efficiency of payments.
• Disputes or fraud in payment systems can be addressed through rules set under the Act (for instance, RBI has issued guidelines for limited liability of customers in unauthorized electronic banking transactions, and those guidelines derive strength from its powers over payment systems).
• Penalties for Violations: The Act prescribes penalties for operating without authorization or for non-compliance with RBI directions. These penalties (which may be fines up to a certain amount per day of default, etc.) act as a deterrent to malpractice and thereby protect the end-users.

Examples of Payment Systems under the Act:

All major clearing and settlement arrangements in India function under RBI authorization per this Act:

• RTGS (Real Time Gross Settlement) – for high-value instantaneous settlements (operated by RBI).
• NEFT (National Electronic Funds Transfer) – nationwide batch-wise electronic fund transfers.
• UPI (Unified Payments Interface) – instant mobile payments platform (operated by NPCI under RBI authorization).
• ECS/NACH – electronic clearing for bulk payments like salaries, bill payments.
• Card Networks – e.g., RuPay (NPCI), Visa, MasterCard – networks connecting ATMs/POS/e-commerce.
• Forex Clearing, Government Securities Clearing – (though some of these are regulated in tandem with other laws/SEBI for capital markets).
• Cheque Truncation System (CTS) – an image-based cheque clearing system now used across India under the Act’s framework.

Recent Developments

The payments landscape is dynamic. RBI, using this Act, has:

• Introduced new types of entities like Payment Banks and Small Finance Banks (though these are banks under BR Act, their operations heavily involve payment services).
• Encouraged innovation like contactless payments, while also tightening security (e.g., tokenization of card data, mandated by RBI to enhance security).
• Set up the Payments Infrastructure Development Fund to expand digital payments into rural areas, again under its developmental role given by the Act.
• Proposed a Payments Regulatory Board (in a 2019 amendment) to further streamline payment regulation, though RBI retains control.

Payments Infrastructure Development Fund (PIDF)

The Payments Infrastructure Development Fund (PIDF) is an RBI initiative launched in January 2021 to expand digital payment acceptance infrastructure, particularly in Tier-3 to Tier-6 cities, the Northeast, and special regions such as J&K and Ladakh.

It subsidizes the cost of deploying payment acceptance devices—such as PoS terminals, QR codes, soundboxes, and Aadhaar-enabled biometric devices—for merchants, thereby reducing costs for acquiring banks and non-banks and improving consumer access. Funded by the RBI, authorized card networks (Visa, Mastercard, RuPay, Amex), and card-issuing banks, the PIDF aims to add millions of payment touchpoints annually, including coverage for street vendors through schemes like PM SVANidhi.

The fund is overseen by an Advisory Council chaired by an RBI Deputy Governor and has been extended beyond its initial term, with enhanced subsidies of up to 90% for identified focus areas since late 2023.

Payment Regulatory Board

The Payments Regulatory Board (PRB) is a statutory body constituted under the Reserve Bank of India to regulate and supervise India’s rapidly expanding digital payments ecosystem.

Established through amendments to the Payment and Settlement Systems Act, 2007, effective May 2025, it replaces the earlier BPSS to provide more specialized and focused oversight.

Chaired by the RBI Governor, the six-member Board includes RBI Deputy Governors, Central Government nominees, and industry experts. The PRB regulates payment system participants such as UPI operators, prepaid payment instruments, payment aggregators, wallets, and payment banks, with the objective of ensuring safety, efficiency, innovation, consumer protection, and systemic stability.

The Department of Payment and Settlement Systems now reports directly to the PRB, which held its first meeting in January 2026 to set strategic direction for India’s digital payments landscape.