Inclusion, E-Payments and The Payments and Settlement Systems Bill

INCLUSION, E-PAYMENTS AND THE PAYMENTS AND SETTLEMENT
SYSTEMS BILL
Introduction and Background
This note investigates the emerging and proposed

regime governing the new electronic payment
systems (such as smart cards, multipurpose prepaid
cards, mobile-purse, e-wallet, etc). It recognizes that
such payment mechanisms are likely to emerge as a
major tool in ensuring the accessibility of the large
un-banked masses to the financial system. It also
recognizes that the emerging interaction and
communication technologies such as the Internet will
only require greater and greater use of such
systems. In such an environment the proposed
Payments and Systems Bill achieves special
significance. What vision does it lay out for this
sector? Can it be strengthened? These issues are
covered in this note. In the process it points out the
importance of the legislature laying out a broad
vision that can then act as a constant guide to the
regulator (the RBI) to ensure growth, equity,
accessibility over and above maintaining financial
stability. Last, this paper suggests specific points
that should be included in the proposed bill.
A1. Electronic Payment Modes
The currently prevalent electronic payment systems

can be categorised as (i) Stored Value Cards (SVCs),
(ii) Smart Cards, and (iii) credit card systems, (v)
debit cards and (iv) network money. In addition there
are many other variants that may be envisaged
Laveesh Bhandari: Payments & Systems Bill, 2007 1
currently, but are not yet popular such as mobile-
purse, e-wallet etc.
SVCs and “smart cards” are debit cards but where

the amount stored is not in a linked bank account,
instead the prepaid amount is ‘inscribed’ on the card.
The purchaser prepays the issuer, who issues a card
with the relevant amount stored, and the amount is
electronically recorded on the SVC. As the user
charges her purchases on the card, the stored value
progressively declines. Smart cards are another
mechanism that are gaining popularity. These cards
contain programmable microchips, which can be set
to identify the total value of the card (in the case of
"pre-paid" cards), or the amount of funds on deposit
in the user's associated bank or virtual cash account.
E-money or network money also represents a stored
value that is pre-paid by the user however the
difference with SVC is that the value is stored on
devices attached to the Internet such as computers
instead of a plastic card.
Credit card systems are primarily credit instruments.

Bank account Debit Cards are linked to the users’
bank account, and are another mode by which the
bank account holder can transact. IN that sense they
are a substitute to checks.
As mentioned there are other modes as well. These

include electronic cheques, mobile based payments,
etc. Moreover, many other possibilities, as yet un-
envisaged may come up in the future. The critical
difference has to do with the following issues:

• Prepaid versus post-paid: Whether the user pays
the full value before or after usage
• Location of value storage: Whether the value is
stored on the instrument (magnetic
strip/chip/etc) or a distantly located
computer/server.
Within the above possibilities are a range of other

options. These include:
• Amount stored – high or low: Typically most
card/chip options are low value storage.
Computer or mobile-based storage systems can
be much higher.
• Acceptability – the payment can be made to a
(a) single or a limited set of service/goods
providers (closed loop), (b) to a multiple set of
service/goods providers (open loop).
Indeed it is difficult to list out all the various

technological options. But within the above set of
possibilities what is most important for financial
inclusion of the un-banked and service provision
including e-governance initiatives are pre-paid
systems that are based on cards or chips. These are
critical as these tend to be the lowest cost options for
low value transactions and hence there scalability is
most likely. Here it should be noted that the cost of
delivery becomes quite an issue. Current scales
being what they are the smart card approach is quite
costly for low value transactions. Other cost addition
factors include extent of user verification before
cards are issued, electronic squaring of accounts etc.

A2. This Paper
The paper proceeds as follows. First, it puts in

context the importance of e-payments. For this
purpose it reviews the range of experiments and
initiatives in the private and public sectors in
ensuring the success of the rural Internet kiosks. The
objective is to lay out the criticality of the bill, and
why the legislature needs to think through the
various ramifications of the bill. Second the paper
reviews the current bill, and finds that it is currently
not laying out a general direction for the regulator to
follow. Third, it presents certain principles that a
Payments Systems regime needs to incorporate to
ensure inclusive growth and financial stability.
Including the Un-serviced through Rural Kiosks
About 71% of India lives in its villages and though

the per capita income at Rs. 21,479 is less than half
the per capita urban income of Rs. 49,790, the nation
cannot afford to let growth pass by more than 800
million Indians. With balanced and inclusive growth
as the vision for the 11th Plan, the government has
been instrumental in formulating strategies that will
transform the countryside under the National E-
governance Plan.
While the main focus of the NeGP is to link the

government to the common man, it proposes to set
up one hundred thousand Common Service Centers
(CSCs) - one CSC for every six villages in India that
will provide world class IT and connectivity at the last
mile. CSCs are positioned as the retail extension
hubs of rural India. Private corporate firms have
already been quick to realise that though the
significant constraints of access to infrastructure,
markets and information make rural India a
formidable marketing challenge, it is a challenge that
yields high returns through volume. It is the lack of
opportunities that prevents low incomes from being
converted into purchasing power. The shampoo and
detergent sachets that introduced ‘luxury’ items into
villages have proved that innovation in marketing
and product positioning enables even the poor to
become credible consumers.
The method of creating linkages of markets and

information was established by the famous ITC e-
choupals in 2000. Though the initiative has been
replicated by other organisations, there has been
limited impact of rural kiosks and in 2006 there were
reportedly 15,000 kiosks spread all over India. One
of the main stumbling blocks for the scalability of this
model has been the issue of sustainability. Unless
sufficient revenues are generated through the kiosks,
entrepreneurs cannot be attracted to these schemes.
With the roll out of the one hundred thousand CSCs,
a new model has been proposed, partnership
between the government and the public. While this
may seem more viable in the long run, it will still
need to be supported by provision of sufficient
number of revenue generating services.
With India on a high growth path, it is increasingly

important to bring rural India into the fold and while
CSCs form a vital link in the strategy, it is crucial to

look into the future and expand the opportunities
available to assure sustainability at the unit level.
India will be investing Rs. 26,000 crore through its
NeGP; but putting in the necessary infrastructure is
merely the first step. Community participation is vital
to ensure that the programme achieves its desired
objectives. With the focus of the paper on the need
to ensure community participation in the kiosks, two
possibilities that show potential for the future are the
mobile phones and cash cards. Both have gained
popularity abroad and recently in India as an
instrument to access financial services for all those
consumers who are not a part of the banking system.
This section puts forth the point that without

good, cheap, and flexible e-payment systems
the CSC initiative will fail and so will most
other private initiatives.
B1. The Telecentre and Common Service

Centres
There are many different models currently being

experimented on the rural kiosks front. Needless to
say the rural kiosk or telecentre approach has been
the focus of much debate and discussion. Though
highly successful models are currently rare, different
learnings have already occurred.1 These
experiments span a range of activities including
education, e-governance, entertainment, etc. We
review some of those experiences in the Appendix.
1
For an excellent review of these issues and experiments see, Nirvikar Singh,
“Information Technology and Rural Development in India” mimeo, University of
California, Santa Cruz.

The objective is to provide to the reader an
appreciation of the richness of the experimentation
that is occurring both within and outside the
government. While some or many of these
endeavours may not eventually be sustainable, their
learnings will show us the way for the future.
There are a range of private initiatives being

experimented upon such as:
• E Governance – The example of Drishtee
• Agriculture Information Delivery – The example
of ITC e-choupals
• Entertainment – The example of Aksh
• Health and Agriculture Diagnosis – The example
of n-Logue
• Education – The example of TARAhaat
The experience of most of these initiatives has been

that there is great potential, but sustainability
remains a big question. And for this reason various
revenue streams are being envisaged and
experimented with. But an economically sustainable
model is yet to emerge. More importantly even a
successful subsidy model is yet to emerge in areas
where there can be public-private partnerships. The
critical elements have to do with (i) ability to provide
low cost services (ii) ability to create a low
transaction cost payment system, (iii) ability to
access credible information on usage of services for
non-insiders, and the ability to (iv) create strong
partnerships both vertically and horizontally. It is well
known that a necessary pre-condition for these

abilities is a low cost electronic payment system.
These issues are also important from the
government’s own initiative – this is discussed next.
The Common Service Centres
As mentioned before, the Common Services Centres

Scheme is a part of the ambitious National e-
Governance Plan (NeGP) with a total budget outlay of
Rs. 22,600 Cr.2 It is a 3-pillar model that
incorporates:
• Enabling e-Government Services through State
Data Centres (SDC)
• Connecting the State Government offices up to
Block level through the State Wide Area Network
(SWAN)
• Offering a network of access points for e-
Government services at the doorstep of the
citizen through the Common Services Centres
(CSCs)
The CSCs or rural kiosks are the last mile delivery

mode of the scheme. About a 100,000 Common
Services Centers have been envisaged in Rural India
and another 10,000 in urban India. Each CSC will
service a cluster of 6 villages. Given an average
population size of 1500 per village about 8,000
persons will be serviced through each CSC. Clearly
the potential serviceable population is high enough
to ensure economic feasibility. Provided, or course,
that adequate and appropriate services are available.
2
The IL&FS has been appointed as the Program Management Agency for a period of three years to support
the Department of IT, Government of India to facilitate the Scheme rollout.

The Service Center Agency (SCA) will build, own and
operate the CSCs in a financially sustainable manner;
this will require it to (i) set up the CSC locations with
the necessary IT infrastructure and branding; (ii)
identify, select and train the kiosk operators; (iii)
undertake content and services partnerships; (iv) set
up back-end data center and a centralized CSC
portal; (v) operate and monitor the CSC business,
especially the revenue support mechanism (Source:
IL&FS documents).
As per the ILFS, the range of services envisaged is

quite comprehensive. E-governance is
supplemented by a range of potential services that
can be classified as G2C, B2B, and B2C:
• E-Government Services –G2C

o Land Records
o Birth/Death Certificates
o Grievances
o Form downloads and submissions
o Bill payments –water, electricity, telecom, etc.
o Licenses, permits, subsidies
o Property Tax and Registration
o Buss pass, Railway tickets, Passport, etc.
• Business to Consumer Services –B2C
o IT services (Printing, Scanning, DTP, web
surfing, etc.)
o Agri-business services (consulting, testing,
information, procurement, etc.)
o Telecom Services (PCO, Post-paid/pre-paid
connections, mobile phone sales)

o Commercial Services (Matrimonial, Astrology,
Bio-data, etc.)
o Retail Sales & Referrals (FMCG, Consumer
Goods, etc.)
o Education Services (IT, English Speaking, etc.)
o Health (Tele-medicine)
o Commerce (Online shopping, airline tickets,
etc.)
• Business to Business –B2B/G2B
o Market Research
o BPO Services
o Advertising, Branding and Promotions
This is of course more of a wish list related to the

various possibilities. But between the various
mission statements, and possible range of services
that are being envisaged, one element of the CSC is
very clear even at this pre-inception stage – A strong
emphasis on the revenue model. At the scales it is
being envisaged the very success of the CSC model
hinges on a profitable revenue stream to the kiosk
operator. Smooth and low cost revenue
collection mechanisms therefore will be
necessary for the economic feasibility of the
proposed structure.
The figures below (sourced from IL&FS) illustrate the

complexity of transactional relationships between the
various stakeholders. Central Government, State
Governments and their various departments,
(potentially) Local Governments, the kiosk operators,
the service providers, the infrastructure suppliers,
the content providers, etc. The model depends upon
two-way flow of information and would need to have

the flexibility for a two-way flow of money. That is,
information would flow from information/service
providers through the infrastructure providers to the
consumer; the consumer may in turn provide
information that then may flow to other consumers,
service providers or government departments.
Similarly the consumer would pay for some of these
services; but some of these relationships also involve
subsidies to flow to the consumer.
The traditional hierarchical organization structure

that most of us are familiar with is not being
envisaged in the CSC model. Indeed it should not be.
The CSC organization will be a network, where terms
such as upstream and downstream, supplier and
buyer, up and down the value chain, will not apply.
The suppliers will also be buyers, the rural consumer
may also be the information provider, the seller may
also provide subsidies.
A cash based system would be too costly for many

reasons. One, the typical transaction would be a low
value transaction. Two, it would need to be low
transaction cost if the various entities involved are
profitable. Three, it would be spread over a very
wide geographical area. Four a range of transactions
would occur from each kiosk. Cash based systems
have the following problem – the physical collection
and depositing of cash would need to be combined
with account keeping, ensuring books are in order,
proper audits, etc.

B2. The importance of electronic payment
systems for Internet kiosks
As is apparent from the above, the SCA will not only

need to invest, it will need to ensure revenue
generation and also build and oversee the revenue
support mechanism. In a sense therefore the SCA is
an aggregator of content and services and also an
aggregator of demand. This aggregation on the
demand and supply side will enable it to benefit from
the necessary scale and scope economies.

The critical aspect to bring a vast range of services
would of course require it to be able to monitor the
transactions being undertaken from the kiosks. And
cash based transactions will be quite costly, if not
impossible, to monitor at the scales envisaged.
But monitoring is necessary for two reasons.

The first is of course to ensure minimal
leakages. But that is the less important
benefit. The more important one has to do
with the necessity of coming up with credible
information on transactions that it can share
with its upstream partners. This information
will need to be third party verifiable if
partnerships with content and service
providers are to be built and sustained.
Another aspect that is critical to the model is the

wide bouquet of services that are being envisaged.
The SCA will need to tie up with many different
content providers. In fact the wider the range of
services available the greater is the likelihood of
success. A model where a service/content provider
does not tie up with the SCA, but where the SCA gets
a share/fee if a transaction occurs through its CSC,
will have an even higher likelihood of success. Such
issues are discussed in greater detail in later
sections.
In other words, sooner or later, it will become

essential for the SCA to introduce electronic
payment mechanisms, and base all its
commercial services on this mode of payment.
These will be required simply because there
will be no other method by which payments

can be monitored and verified with the
necessary detailed information on service
provision on such a complex set of operations.
Not just the government backed CSCs. Even

the private initiatives or the other public
private partnerships will require to be based
on e-payment systems. This is because there
are multiplicities of service providers. These
providers will need a verifiable log of services
provides, prices charged, payments and
received. Verifiability is important here as
partnerships and collaborations cannot be
based purely on trust, they have to be backed
by credible information. And here as well e-
payments score over all others.
A summary note
This section seeks to underscore three critical

elements in the success of delivering on e-inclusion,
e-governance, and the delivery of public services
either through solely private efforts or by way of
public private partnerships (PPPs).
• The variety of possibilities that are currently

being experimented
• The search for a yet to evolve financially
sustainable model
• The importance of electronic payments
• The importance of third party verification

It is therefore clear that electronic payments are the
only way; however the specific characteristics of a
payment mechanism that will facilitate India’s
objectives of inclusive and equitable growth and
universal delivery of public services are as of now
unknown. As a consequence whatever be the
institutional/regulatory mechanism that is set up,
would need to be based on the following principles.
• Low cost entry of new parties

• Availability of various options
• Flexibility
The payment and systems bill needs to be studied in

this context.
C. Payments and Settlement Systems Bill
The proposed PAYMENTS AND SETTLEMENTS Bill

seeks to enable the RBI to comprehensively monitor
and regulate the various payment systems in
operation. As per the ‘Statement of Objects and
Reasons’ of the proposed bill, ‘…the payment and
settlement systems serve as a backbone of financial
system of a country.’ The Bill recognizes that there
are a range of systems both electronic and non-
electronic that are operation and the lack of
comprehensive legislation in the past needs to be
remedied.
Some of the payment systems currently in operation

include:
1. Manual paper based clearing

2. Real Time Gross Settlement (RTGS) System for
facilitating non cash mode of payments
3. MICR Clearing,
4. Electronic Funds Transfer Systems (including the
Electronic Clearing Services),
5. Card Based Payment Systems,
6. Government Securities Clearing,
7. Forex Clearing, etc.
As per the objectives laid out in the bill, it was

considered necessary to enact “a specific legislation
which would empower the Reserve Bank of India to
act as the designated authority with the following
powers and functions, namely:
a) To regulate and oversee the various payment
and settlement systems in the country including
those operated by non-banks like CCIL, card
companies, other payment system providers and
the proposed umbrella organization for retail
payments;
b)Lay down the procedure for authorization of
payment systems as well as revocation of
authorization;
c) To lay down operational and technical standards
for various payment systems;
d)To call for information and furnish returns and
documents from the service providers;
e) To issue directions and guidelines to system
providers;
f) To audit and inspect the systems and premises
of the system providers;
g)To lay down the duties of the system providers;
h) To levy fines and impose penalties for not
providing information or documents or
wrongfully disclosing information, etc.; and

i) To make regulations for carrying out the
provisions of the proposed legislation.”
In other words, the bill does not provide any direction

or vision but is an empowering one. It will enable the
RBI to set up a comprehensive regime that would
bring together various types of ‘payment systems’
under a single regulatory framework. But what
should be the overall vision of such payment
systems, who should it include, what should be
provided greater weight – competition, innovation,
and growth of coverage, or financial security? These
issues are missing from the law.
This is brought out quite clearly “The Bill, inter alia,

seeks to provide for the following matters, namely,…
to designate the Reserve Bank of India as the
designated authority for the regulation and
supervision of payment systems in India for their
smooth operations…”
As such it is difficult to critique the bill, it does not

get into any specifics except empowering the RBI to
do so. Therefore to better understand the status we
need to better understand what directions the RBI
has been taking. We briefly review four documents.
The first are the 10 core principles put out by the
Bureau of International Settlements. The second is
the RBI's vision document on payment systems. The
third is one related only indirectly – on electronic
funds transfer. And the fourth is the report of the
Cama working group by the RBI on E-payments.
The Committee on Payment and Settlement Systems

(CPSS), of the Bank for International Settlements

(BIS) published 10 core principles for systemically
important payment systems. Moreover, with IOSCO,
the (International Organization for Securities
Regulators), it has put forth a set of
recommendations for securities settlement systems
and one for central counter parties. Together, these
form a body of standards, codes and best practices
that are form the basis of financial architecture
worldwide. The Core Principles for Systemically
Important Payment Systems, published in January
2001 (henceforth BIS, 2001) are not specific
blueprints but suggestions of what the key
characteristics should be.
Box: Ten Core Principles
The following ten principles were published by the

Committee on Payment and Settlement Systems
(CPSS) of the BIS in January 001. These principles still
provide the benchmark by which high value payment
systems are judged:
1. The system should have a well-founded legal
basis under all relevant jurisdictions.
2. The system’s rules and procedures should
enable participants to have a clear understanding
of the system’s impact on each of the financial
risks they incur through participation in it.
3. The system should have clearly defined
procedures for the management of credit risks and
liquidity risks, which specify the respective
responsibilities of the system operator and the
participants and which provide appropriate
incentives to manage and contain those risks.

4. The system should provide prompt final
settlement on the day of value, preferably during
the day and at a minimum at the end of the day.
5. A system, in which multilateral netting takes
place should, at a minimum, is capable of ensuring
the timely completion of daily settlements in the
event of an inability to settle by the participant
with the largest single settlement obligation.
6. Assets used for settlement should preferably be
a claim on the central bank; where other assets
are used, they should carry little or no credit risk
and little or no liquidity risk.
7. The system should ensure a high degree of
security and operational reliability and should have
contingency arrangements for timely completion of
daily processing.
8. The system should provide a means of making
payments, which is practical for its users and
efficient for the economy.
9. The system should have objective and publicly
disclosed criteria for participation, which permit
fair and open access.
10. The system’s governance arrangements
should be effective, accountable and transparent.
* Systems should seek to exceed the minima
included in these two core principles.
The BIS 10 core principles are important as they form

the basis of much of the future regulations and
procedures governing the financial sector. There is
nothing in the principles that one could argue
against. Indeed the key requirement for the success
is a part of the core principles as well (see number 8)
“The system should provide a means of making

payments which is practical for its users and efficient
for the economy.” There are two important issues
that need to be addressed related to this point.
The first is applicability. By design of its framers, the

principles are limited to high value payment systems.
There is a reason for limiting this applicability, and
that is recognition that there are significant costs of
regulations. A related issue is that of what is
systemically important. If a payment system is not a
large enough component of the financial framework
of an economy, then it cannot be considered to be
systemically important, and therefore the regulatory
oversight would need to be on the basis of
proportionality. A complementary note on how these
principles need to be implemented (see section 2.4
of BIS, 2001) is quite explicit on this.
“Payment systems consume substantial resources.

Accordingly, it is important that the designers and
operators of payment systems are conscious of the
resource costs of their systems and the charges they
will need to pass on to users if resources are to be
used efficiently. Cost constraints are likely to require
choices to be made about a system’s design, which
will have an impact on the system’s functionality and
safety. The functionality required will vary from one
system to another according to the demands of
participants and users. Systemically important
payment systems must always achieve a high level
of safety appropriate to their potential for triggering
or transmitting systemic risk. Little, however, would
be gained if a payment system were designed with
such extensive safety features that it became so
difficult, slow or costly to use that no one was

prepared to do so. System operators should keep
their choices under review, as financial markets and
the local economy develop and as technological and
economic advances improve the range of solutions
available.”
In other words, regulatory oversight should not be at

the cost of growth of electronic payments. And
payment systems such as pre-paid cards
discussed above should not be included under
its aegis as they are not systemically important
in this nascent stage of their development in
India.
As per the RBI document (Payment Systems in India

– Vision 2005-08) published in 2005, the objective of
any payment systems regime is the ‘establishment
of safe, secure, sound and efficient payment and
settlement systems’. It recognizes that the primary
goal of a national payment system is to enable the
circulation of money. The document also states that
public policy objectives are to protect the rights of
users of payment systems, enhance efficiency and
competition, and ensuring a safe, secure and sound
payments system. This can be achieved through
four tenets:
• Safety will relate to addressing risk, so as to

make the systems risk free or with minimal risk
• Security will address the issues relating to
confidence, with specific reference to the users
of these systems
• Soundness will be aimed at ensuring that the
systems are built on strong edifices and that
they stand the test of time

• Efficiency will represent the measures aimed at
efficiencies in terms of costs so as to provide
optimal and cost effective solutions.
These action points reveal an RBI that is quite

forward looking in its interest to expand the usage of
newer forms of payment mechanisms. However the
report only mentions smart cards. Other forms of
card based e-payment mechanisms such as stored
value cards; prepaid cards etc are not covered. In
other words, some recognition of the importance of
newer modes exists, but no sense of RBI’s internal
thinking is available.
In the report of the RBI “Study Group on Migration

from Paper Based Funds Movement to Electronic
Funds Transfer” three of the action points of the
group emphasize the importance of keeping costs of
electronic modes low and encouraging them vis-à-vis
paper modes. Apart from this aspect there is no
mention of importance of prepaid and stored value
cards and other types of e-payments.
The Report of the Working Group on Electronic

Money, 2002, differentiated between the following
types of pre-paid stored value cards
1. Single purpose: where the issuer and the
acceptor are identical. That is, it is designed to
facilitate only one type of transaction such as
store-specific cards, telephone calls, etc.
2. Closed system or limited purpose: where a
limited set of very well defined points within well
defined locations may accept the card such as in
university campuses.

3. Multi-purpose card: Also sometimes referred to
as open-loop cards. These are cards that are
accepted by several vendors. Credit cards, debit
cards, stored value cards are some examples.
These are also the cards that typically are the
most used over the Internet.
The working group recognizes that the risks are

limited where single or limited purpose cards are
concerned, and concentrates a large part of its
recommendations on multi-purpose e-money. It
states the following: “multipurpose e-money may be
permitted to be issued only against payment of full
value of central Bank money, or against credit, only
by the banks…”
The group’s key concerns are the possibility of

monetary policy becoming less sensitive to Central
bank action, if such payment forms become
prevalent. By placing these instruments solely in the
hands of the Banks it felt that RBI would be better
able to monitor as well as implement its monetary
policy objectives. The group goes on to state various
reasons for its preference for Banks, these include:
a) Implication of e-money on accelerating velocity
of money
b)Impact on access by the RBI to the latest
monetary statistics
c) Option to impose reserve requirement on e-
money
d)Concerns on e-money being issued as credit and
also technical security.
This is a highly flawed set of arguments. First, there

is no reason why putting e-money only in the ambit

of banks will help reduce money velocity, and there
is no evidence that lower money velocity will help
either the country’s growth or equity objectives or
the safety of its financial system. Second, the fact
that e-money is used electronically also implies that
there will be more information generated and will be
better accessible for the regulating entity to monitor.
(Paper money is always worse at generating
information for the regulator than e-money.)
Further, non-banking entities can generate the same
information as banking entities. Third, reserve
requirements will only increase costs and by
extension the range of services available to the
consumers. Fourth, if e-money cannot be issued on
credit then all the more reason why e-money should
not be limited to banks. A whole range of entities
should be allowed to issue them.
But the banker dominated group was quite

categorical “non-banks should not be permitted to
issue multipurpose e-money… unless other non-bank
issuers also confirm to certain prudential norms”.
This author prefers the latter route than prevent non-
banks. That is, have certain norms and make them
open to whoever can fulfil these norms. Note that
banks have been rather unsuccessful at reaching the
underprivileged and rural hinterlands.
In other words, the key direction taken by the

working group was that preservation of financial
stability should not be compromised and it
associated the non-banks’ e-money to be more likely
to compromise the integrity of the financial system.
However, as long as certain prudential norms are
being followed, integrity of the financial system and

financial stability can be met even with non-bank
entry into e-payments.
A summary discussion
In short, the RBI itself has not revealed much on its

position on e-payments and especially those related
to multipurpose prepaid stored value systems. This
suggests that the RBI has yet to develop a position
on this matter. The BIS is quite unambiguous in its
recommendations – as long as the payment system
is not important enough, keep regulatory oversight
to the minimal, and increase it as the system
becomes more important. In other words, the BIS
supports the principle of proportionality.
The proposed Payment Settlement Bill is silent on

many important issues. It leaves such issues to the
RBI to deal with, but itself provides no direction or
grand vision towards e-payments. On its part as
well, the RBI’s grand vision on payment systems also
does not include any specific mention on such
prepaid and stored value systems. The RBI and
other monetary authorities will tend to follow the BIS’
10 core principles. However those core
principles also do not apply to the low value
prepaid stored value cards - Another reason why
they should not be included under the proposed bill.
Two other issues need to be addressed that are not

mentioned in the above documents. The first is
related to security issues and the second money
laundering.

Security: Many law breakers have been arrested on
the basis of tracking made possible by following their
payments trail. It has been sometimes argued that
e-payments would not enable this as easily as was
possible through the paper payments trail. To the
contrary, e-payments make it possible to track
certain cards on a real time basis and may even
better facilitate security agencies in their tasks.
Here, we might be tempted to put in Know Your
Consumer (KYC) systems. However the KYC systems
tend to be costly. Identification, documentation,
verification, physical and electronic storage, all have
significant costs. Industry estimates of these costs
range in between Rs. 100 to 200 per card. This is too
high a cost if our primary target is the
underprivileged and un-banked segment of the
population.
Money laundering: Since these cards can be

purchased at various points and then used to
purchase, many believe that such systems will make
it easier to use and even launder illegal money. This
is perhaps one of the more fallacious arguments
against e-payments. Such cards are typically low
value. Money laundering however typically is on a
very large scale. Large purchases of pre-paid cards
would be a very impractical method of laundering
money. There are far more quite well known,
efficient, and low cost methods through which money
can be laundered.

C. Proposed Character of Multipurpose Stored
Value E-payment System3
We suggest certain principles and specific

characteristics of regulation essential for our
objectives of growth and equity. They incorporate
the overall objectives of the desired bill, and how
they should be put in place. They include efficiency,
economy, innovation, competition and management
responsibility.
Efficiency and economy are self-explanatory and

need not be elaborated, in that transaction costs of
the system should not be inordinately high. The
principle of proportionality essentially ensures that
unnecessarily stringent regulations are not put in
place relative to the size of the benefits. This is
important as in the initial stages the benefits are
unlikely to be high and therefore overly stringent
regulations will impede growth. Of course, as the
market size gets larger, regulatory oversight can be
increased.
Innovation in this space is essential for it to

succeed. Already many consider smart cards to have
been a failure in countries such as Sweden. The
experience in USA of prepaid cards has been one of
high costs. In India as well, the experiments are still
going on and no unqualified success example has yet
been put forward. As a consequence, system
3
See “The regulation of electronic money issuers”, Financial Services Authority, UK,
consultation Paper 117, December 2001. Also see “A Summary of the Roundtable
Discussion on Stored Value Cards and Other Prepaid Products” The Federal Reserve
Board, New York (Undated).

providers will need to experiment before an India
relevant model is derived.
Competition is always essential for efficiencies to

be sustained. Competition needs to come in both
from incumbents as well as new entrants. At the
same time efficiency should not be compromised and
therefore appropriate regulatory oversight would be
required on that front. Last, recognizing that the
senior management is responsible for its action will
enable to the regulator to not put in too many pre-
emptive rules.
We end this monograph with two sets of

recommendations. The first are the proposed
additions to the Payments and Systems Bill. This
merely requires the government to set a broad vision
for the RBI. The second are broad directions for the
RBI to build its future regulatory oversight upon.
Recommendations for the Parliament:

Changes to the proposed Payments and
Settlement Systems Bill
The preamble to the Bill should be changed to

include the following.
Coverage
To provide for the regulation and supervision of

systemically important payment systems in India and
to designate the reserve Bank of India as the
authority for that purpose and for matters connected
therewith or incidental thereto.

Explanation: The underlined term systemically
important needs to be added to the preamble; this is
essential as that ensures that regulation does not
stifle the growth of systems that are currently not
systemically important. This would make the bill in
line with internationally accepted norms of regulation
not being at the cost of growth of new transaction
technologies.
Vision
Motivation: India has a large segment of its

population that is currently deprived of accessing
banks. This un-banked population earns, spends and
saves in large numbers. It’s per household earning,
spending, or saving capacities however tends to be
quite low. Despite intensive efforts a large part of
this population remains un-banked. This un-banked
population remains in urban as well as rural areas
and has been deprived of many of the services. As
e-governance and other efforts of the government
accelerate, we need to bring such groups rapidly into
the banking fold. However, it is well known that this
would be difficult if not impossible for many reasons,
three of the most important being – high levels of
illiteracy and lack of access to the banking system;
problem of access specially in the rural hinterland,
and high cost of servicing remotely located
customers. Moreover Internet and other electronic
modes of interaction are rapidly becoming more and
more important as a source of information on
professional as well as personal fronts. It is the
governments desire to ensure that such or
other payments systems are able to empower
the masses in a short enough period of time.

For this purpose the regulator would aim at
ensuring greatest spread through low
transaction costs, higher safety and security.
Explanation: The government will thus ensure that

there is a national consensus on bringing in new
technologies that can fill the current gap in financial
sector penetration among the most underprivileged.
Broad Directions
The regulator will seek to achieve the following:

• Empower the masses to be able to use
electronic payments
• Ensure safety and security
• Promote efficiency
It will do so by following the principles of:

a) Efficiency and Economy
b)Proportionality
• Restrictions imposed on firms and markets
should be in proportion to the expected benefits
for consumers and the industry.
• Avoid unnecessarily distorting, entry barriers or
impeding competition
c) Innovation
• Facilitate innovation, for example by avoiding
unreasonable barriers to entry for banks and
non-banks or restrictions on existing market
participants
• Facilitating launch of new financial products and
services.

d)Competition
• Facilitate entry of all who can offer services
• Ensure entry along with security and efficiency.
Explanation: The above additions set the main vision

for the RBI without changing the basic character of
the current bill. This will also build into the bill
directions for the regulator.
Beyond the above the regulator should also attempt

to build a framework for the future. The broad
directions are suggested below.
Proposed directions for the RBI - Aimed at

facilitating progress of the e-payments
sector
Topic Specifics Notes

Definition E-money: Allows for all types of
monetary value systems, based on
stored on an cards or other means
electronic device and removes single
and accepted as a purpose cards from
means of the ambit of such
payments by third regulation
parties
Inclusion E-money includes Various new forms
a range of modes are going to emerge
and media, that are currently
specifically difficult to predict;
including but not the definition should
limited to value be inclusive.

being carried in
various types of The regulatory
electronic devices framework needs to
including smart be technology
cards, magnetic neutral
strip based media,
etc.; Can be used
to purchase
products and
services,
redeemed for
cash, and whose
value can be
updated;
Issuer Both banks and A level playing field
non-banks are between banks and
allowed to issue; non-banks needs to
certain norms, be established and
reporting and this needs to be
information explicitly
criteria etc. Also recognized.
small issuers
should be
encouraged to
enter.
Risk Payment system Build in monitoring
mitigation to build in the processes of the
(tech.) following risks and same in the
associated costs: regulatory
unauthorized framework.
creation, transfer
or redemption; Concerns of risks
incorrect many times get
attribution of translated into
funds, etc. limiting activity.
Better reporting and
associated
monitoring
mechanism can
eliminate many of
these concerns.
Use of The payment from This is the key
deposits the consumer to concern for allowing
the issuer will non-banks. By
need to be ensuring better
protected. There protection of the
are many ways of users non-bank entry
doing so including will be made easier
adequacy norms, in this field.
restrictions on
usage of deposits
received, etc.
Granting Credit providing Currently MFIs are
of credit entities governed allowed to provide
by stricter norms. micro-credit facilities
by RBI. Lower norms
for systems not
based on credit.
Authorizat Only granted to This procedure needs

ion (Entry) those who meet to be as smooth and
the following as open as is
criteria related to possible. It should
explicit: explicitly be
Legal status and recognized that
identity, pre- small issuers’ entry
specified should be facilitated
threshold and not barred in the
conditions, interest of financial
stability concerns.
Supervisio The laws should The regulator should
n allow for be able to
supervision crosscheck various
including ability of informational claims
the regulator to made by the issuers
examine all in case it so desires.
transactions of the
issuer; all
transactions also
need to be
maintained in
clearly laid out
uniformly
implemented
database and data
warehousing
systems.
Enforceme Enforcement A balance would
nt powers should need to be ensured
rest with between two forces –
regulator, which the need to provide
would include adequate powers to
cancellation of the regulator. And
permissions, fines the need to maintain
and censures, some third party
prohibition of oversight over the
activities and regulator as well.
individuals,
initiation of court
proceedings etc.
In case of non-
compliance of the
regulator's orders
or in case of some
disagreement
between the
regulator and the
issuers some
arbitration/resoluti
on mechanism
would be built in.
Prudential Corporate With cleanly laid out

Requirem structure: a formal systems of
ents structure of the commands and
entity undertaking associated
this activity responsibilities
should be
essential
Capital A minimum initial The minimum initial
capital capital amount
requirement is should not be too
one such option. high; this would
Scales dependent ensure that scales
upon the amount are not necessarily
of initial capital high and at the same
could be another time unprepared
possibility that entities are
would enable both prevented from
small and large entering.
players to enter.

Asset- Non-bank issuers
liability must have
managem investments of an
ent amount not less
To ensure both
than outstanding
stability and
e-money liabilities
confidence in the
Liquidity Issuers must have
system
sufficiently liquid
assets; such
norms can be
easily specified.
Safety and Recognize that By ensuring that
Security low value cards databases can be
are not viable shared with the
money laundering regulator real time
options, as other monitoring of
methods are criminal activities as
much easier and well as money
less costly. laundering is
possible.
User None for low value Recognize that e-
Identificati cards, as this will money is a substitute
on increase costs of for cash.
delivery and
therefore reduce Moreover, user
spread. identification one of
the primary factors
why the poor are
kept out of the
banking sector.
Large seasonal
migrant labour, poor
urban migrants are
only some examples
D. Summary Conclusion
The proposed Payments and Settlements Bill is a

document that is difficult to critique as it merely
places the overall payment and settlements regime
in India within the ambit of the RBI’s powers. The
RBI itself has not yet explicitly laid out its position on
the various options that are likely to be available.
But what is clear is that there is a great need for a
framework to be developed. The proposed Payments
and Settlements Bill needs to explicitly lay out a
vision that the RBI can then build upon. The first is
related to the government’s vision of e-payment and
what it seeks to achieve. We suggest some specific
additions to the bill that do not change the basic
character of the bill.
Where the regulator is concerned, this paper

therefore calls for building a framework that
explicitly states what the regulatory system that
oversees the consumer e-payment systems should
be like. It suggests certain important characteristics
that ensure:
(a) Stability
(b) Innovation, entry and competition
(c) Entry of small players into e-
payment services
(d) Secure and safe e-payment system

We are therefore able to answer some important
questions that are not addressed adequately by the
proposed bill. These issues will need to be decided
by the regulator
1. Whether prepaid cards fit into the definition of

System Providers is not clear; but as that
flexibility of defining such providers has been
given to the RBI in the proposed bill it will only
become clear what route the RBI will take later.
2. Should this segment that is at such a nascent
stage be regulated? Regulation will impose
costs with little immediate benefits at this point
and therefore some may prefer regulation to be
delayed. However, if regulations ensure entry
with safety and security, they will only
accelerate the spread of the e-payments system.
This should be a critical element for developing a
legal framework for emerging transaction
technologies.
3. Who should provide such services and who
should not? The question of entry is important,
as undue regulation will prevent entry and
therefore competition from the non-bank sector.
Here it is essential that all segments, not just the
Bank sector, should be able to provide such
payment system services. Moreover explicit
mention should be made on facilitating the entry
of small players.
4. How should issues of safety and security be
addressed? Fears such as money laundering or
use in illegal cross border trade are quite
unfounded as there are other much easier
means to undertake these tasks. However, as
long as basic monitoring and reporting systems

are being followed, these can be directly
addressed. With electronic payments it would
be easier to trace as well as well as identify both
activities as well as persons indulging in such
activities.
IN conclusion, the current bill should be updated to

include broad principles that should be followed by
the regulatory entity. The government needs to
specifically mention the broad vision that will then
translate into broad principles related to entry,
competition, innovation, equity and growth. The
reason is the regulator may be interested in
maintaining security and stability and may not give
enough weight to the fact that a growing and
inclusionary economy needs many different types of
providers to meet the demands of the different types
of potential users. The poor and rural users, the un-
banked population, small groups, payment over the
Internet, etc. all need to be facilitated and coverage
growth needs to be accelerated. This broad vision is
currently missing and needs to be incorporated to
act as a guide and constant reminder and beacon for
the RBI.
***
Appendix
Some examples of the various private initiatives in

the Telecentre space
E Governance – The example of Drishtee

This model involves the setting up of kiosks primarily
in rural areas that provide a range of services that
include agriculture and related information,
complementing e-governance initiatives, etc.
Transactions include obtaining, filling out and
submitting government forms. The kiosk service
suppliers’ fee for this is then set at about 10 percent
of the estimated transaction cost, also taking into
account ability/willingness-to-pay considerations.
The benefits, apart from greater accessibility, include

savings from reduced travel and time costs. There
may also be benefits in terms of improving the
effectiveness of transactions (e.g., if a complaint
through this channel s more likely to be addressed),
but these are harder to quantify.
The centres also provide other services such as

matching buyers and sellers, or providing horoscopes
or matrimonial advertising. Additional services
require partners who can provide software,
maintenance, content or other components of the
complete service. Education is also included in
Drishtee’s offerings, though kiosk owners have often
used the presence of a computer and peripherals to
offer computer training, as well as other offline
services such as printing and games. The benefits in
these examples are reductions in transaction costs
for existing transactions, improved quality of
successful matches, and potentially most significant,
completion of activities (e.g., training, entertainment,
and communications) that would otherwise not take
place because of high transaction costs.

Currently the model is predominantly based on cash
payments where the kiosk provider charges the user,
and has synchronous agreements with the service
providers. The transactions costs tend to be high in
such models. These issues are discussed later.
Agriculture Information Delivery – The example of

ITC e-choupals
ITC has set up a large number of telecentres under

the name o ITC e-choupals. These are currently
focussed on specific agri-commodities though they
are designed to scale up to cover a range of
activities to benefit the farmer. Take for instance
soy-choupals in MP designed to facilitate soyabean
transaction between the farmer and ITC. Soy-
choupals are used as registry points for procurement
of soybeans. Though procurement occurs at factories
and warehouse hubs, initial logging in is done
through the soy-choupal. The choupal also provides
price information from local mandis, as well as global
price information on soybeans and derivative
products.
The initial benefits include a significant reduction in

transaction costs, from 8 percent of the transaction
in such agro-transactions, to approximately 2
percent. Though some of these benefits may be at
the expense of traditional intermediaries at mandis
(arhatiyas), there are great efficiency gains,
including clearer quality guidelines and
measurement, greater timeliness and reduced waits,
quicker payments, and reduced uncertainties for the
farmer.

The organization has been able to expand its range
of services by tying up with organizations like
Agriwatch that provide a range of agricultural
information to farmers including mandi prices.
Agriwatch is developing a large-scale Internet portal
for farmers, and Drishtee’s role is that of providing
last-mile access to this rich information base,
through its kiosks.
Entertainment – The example of Aksh
The Aksh services model, the revenue model, and

pricing structures are currently similar to those of the
Drishtee model. With one major difference. Aksh had
initially partnered with Drishtee for the development
and maintenance of kiosks that would act as
distribution points for cable TV access, as well as
Internet kiosks. The importance of cable TV
revenues, points towards the importance of
entertainment options - that kiosks can provide a
range of entertainment services in addition to utility
services such as agriculture-related information or e-
governance.
Cable TV is only one entertainment possibility. With

the expected increase in availability of digitised
audio, video, gaming, and social networking options,
entertainment options have a large role to play in
rural India. Moreover, since delivery costs of
conventional modes are quite high the telecentre
approach may lead to significant savings in delivery
costs and therefore greater scalability.

Health and Agriculture Diagnosis – The example of n-
Logue
The n-Logue model is rather different in that it

charges the kiosk operator for connectivity; further n-
Logue has progressed well beyond being simply a
connectivity provider, to delivering a range of
services that can be adapted to different connectivity
technologies. close links with IIT Chennai have given
n-Logue access to a range of software innovations for
delivery and implementation of various applications
in the fields of education, health and agriculture. For
example, web cams have been used for remote
diagnostics for diseases of people, animals and
plants. A considerable amount of local language
software has been created.
In other words, audio-visual communications can

enable a far richer set f services than is currently
envisaged. Te ability to provide diagnosis services
can dramatically reduce health care accessibility
issues across rural India. IN this case as well, low
transaction costs payment mechanisms are crucial.
Again these issues are discussed later.
Education – The example of TARAhaat
These kiosks were very much along the lines of those

implemented by Drishtee and n-Logue, with a mix of
e-governance services, market price information, and
so on. TARAhaat’s long-range plans include a
comprehensive portal for rural information services

and perhaps most important – education. It has an
educational content partner, called TARAgyan. In
association with various partners, TARAgyan is
developing local language content and software.
Basic IT education is an important part of
TARAgyan’s actual and potential offerings, but it is
not the exclusive focus. In fact, there has been a
substantial diversification into developing materials
Box: A Study of Kiosks, Inclusiveness and
for English language instruction, rural marketing,
Sustainability
personality development, and so on.
Thus, while we find that roughly 5% of the population in
It is not clear which aspects of the various education
the villages studied have used the kiosk this 5% was
offerings will eventually become the most successful,
clearly not selected “at random” from the village
but clearly, educational services are quite expensive
population as a whole; some selection biases drove
to provide especially in the hinterlands. Electronic
kiosk use. In particular, we find these diffusion biases
media make it less costly and reduce the fixed cost
along dimensions of gender (more males than females),
element in that idiosyncratic infrastructure need not
age (users are usually younger than 30), caste
be created.
(scheduled caste members are less likely to use the
facilities save in those villages where the facility is
located in an SC area), … educational attainment (with
There are of course many different models and range
few illiterate users), and income (users are richer as
of services that various organizations are
measured by standard surrogate indicators).
experimenting with. The combination of services
that will evolve as the basic service delivery model of
We found that of the 77 kiosks that were established in
telecentres across rural India will be determined in
the region by June 2004, 29 of the 35 kiosks run by self-
due course. Moreover, it is likely that depending
employed entrepreneurs had closed down….The main
upon the location the combination of services will
reasons behind the closure of the kiosks being run by
also differ across kiosks. But what is clear is that
self-employed entrepreneurs were lack of long-term
some set of economically feasible models will evolve
financial viability and lack of adequate operational and
within the private sector. If the government’s
technical support by … the internet service provider
actions also play out as envisaged the possibilities
and organization responsible for coordinating with other
are even larger.
entities for delivery of services. The lack of long-term
financial viability was mainly due to the inability of the
kiosks to diffuse widely within their communities and
attract more users. As pointed out in this study, the
kiosks continued to attract users mainly from 45the
Laveesh Bhandari: Payments & Systems Bill, 2007
relatively higher socio-economic strata within their
communities and failed to upgrade … to make it more

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INCLUSION, E-PAYMENTS AND THE PAYMENTS AND SETTLEMENT

Introduction and Background

This note investigates the emerging and proposed

A1. Electronic Payment Modes

The currently prevalent electronic payment systems

SVCs and “smart cards” are debit cards but where

Credit card systems are primarily credit instruments.

As mentioned there are other modes as well. These

Laveesh Bhandari: Payments & Systems Bill, 2007 2

Within the above possibilities are a range of other

Indeed it is difficult to list out all the various

Laveesh Bhandari: Payments & Systems Bill, 2007 3

The paper proceeds as follows. First, it puts in

Including the Un-serviced through Rural Kiosks

About 71% of India lives in its villages and though

While the main focus of the NeGP is to link the

The method of creating linkages of markets and

With India on a high growth path, it is increasingly

Laveesh Bhandari: Payments & Systems Bill, 2007 5

This section puts forth the point that without

B1. The Telecentre and Common Service

There are many different models currently being

Laveesh Bhandari: Payments & Systems Bill, 2007 6

There are a range of private initiatives being

The experience of most of these initiatives has been

Laveesh Bhandari: Payments & Systems Bill, 2007 7

The Common Service Centres

As mentioned before, the Common Services Centres

The CSCs or rural kiosks are the last mile delivery

Laveesh Bhandari: Payments & Systems Bill, 2007 8

As per the ILFS, the range of services envisaged is

• E-Government Services –G2C

Laveesh Bhandari: Payments & Systems Bill, 2007 9

This is of course more of a wish list related to the

The figures below (sourced from IL&FS) illustrate the

Laveesh Bhandari: Payments & Systems Bill, 2007 10

The traditional hierarchical organization structure

A cash based system would be too costly for many

Laveesh Bhandari: Payments & Systems Bill, 2007 11

As is apparent from the above, the SCA will not only

Laveesh Bhandari: Payments & Systems Bill, 2007 13

But monitoring is necessary for two reasons.

Another aspect that is critical to the model is the

In other words, sooner or later, it will become

Laveesh Bhandari: Payments & Systems Bill, 2007 14

Not just the government backed CSCs. Even

This section seeks to underscore three critical

• The variety of possibilities that are currently

Laveesh Bhandari: Payments & Systems Bill, 2007 15

• Low cost entry of new parties

The payment and systems bill needs to be studied in

C. Payments and Settlement Systems Bill

The proposed PAYMENTS AND SETTLEMENTS Bill

Some of the payment systems currently in operation

Laveesh Bhandari: Payments & Systems Bill, 2007 16

As per the objectives laid out in the bill, it was

Laveesh Bhandari: Payments & Systems Bill, 2007 17

In other words, the bill does not provide any direction

This is brought out quite clearly “The Bill, inter alia,

As such it is difficult to critique the bill, it does not

The Committee on Payment and Settlement Systems

Laveesh Bhandari: Payments & Systems Bill, 2007 18