Payment and Settlement Systems Act, 2007

The Payment and Settlement Systems Act, 2007 (PSS Act) is the main law that controls how money moves electronically in India. It covers systems like UPI, cards, NEFT, RTGS, mobile wallets and ATM networks. It says that no one can run such a payment system without permission from the Reserve Bank of India (RBI). It also makes the RBI the regulator and supervisor of all these systems.

Why does India need such a law?

When you pay by UPI, money leaves your bank and reaches the shop's bank within seconds. Many players handle that money on the way: banks, apps, card networks and clearing houses. If any of them fails or cheats, people lose money and trust in digital payments breaks. Think of it like traffic rules for roads. Without a licence system and rules, anyone could run a "payment road" carelessly. The PSS Act sets the licence and the rules.

Where did it come from?

Before 2007, there was no single law for payment systems. The RBI supervised them using its general powers, which was legally weak. Parliament passed the PSS Act in 2007 (Act 51 of 2007). It came into force on 12 August 2008. The Act has been changed several times since:

• 2015 amendment (in force from 1 June 2015): brought "trade repositories" (bodies that record details of financial contracts) under RBI regulation.
• 2019 changes (through the Finance (No. 2) Act, 2019): added Section 10A, which stops banks and payment system providers from charging fees on certain government-notified digital payment modes. This created the "zero MDR" rule.
• 2025: a new Payments Regulatory Board (PRB) replaced the old Board for Regulation and Supervision of Payment and Settlement Systems (BPSS).

How does it work?

The Act works in a simple chain:

1. Section 4: Nobody (except the RBI) can start or run a payment system without RBI authorisation.
2. The RBI checks the applicant's capital, technology, safety and management, and then gives a certificate of authorisation. NPCI, card networks like Visa and Mastercard, and prepaid wallet companies all work under such authorisation.
3. The RBI can set standards, ask for information, inspect, give directions and cancel the authorisation if rules are broken.
4. Running a payment system without authorisation is an offence. The RBI can also impose money penalties for breaking rules.

The Payments Regulatory Board

The Act creates a board inside the RBI to regulate payment systems. Since 2025 it is called the Payments Regulatory Board. It has six members:

• The RBI Governor, as chairperson
• The RBI Deputy Governor in charge of payment systems
• One RBI officer nominated by the RBI's Central Board
• Three persons nominated by the central government

The idea for a more independent payments board came from the Ratan Watal Committee (2016) on digital payments.

The zero-MDR rule

Two laws work together here:

• Section 269SU of the Income-tax Act, 1961 (added in 2019) says every business with turnover above ₹50 crore must offer customers the "prescribed" electronic payment modes.
• Section 10A of the PSS Act says banks and payment system providers cannot charge the payer or the receiver for using those prescribed modes.

The Central Board of Direct Taxes notified these modes on 30 December 2019: RuPay debit cards, BHIM-UPI and BHIM-UPI QR code. From 1 January 2020, these payments had zero MDR. Since then, the government has paid an incentive to banks to cover their cost, for example ₹1,500 crore for 2024-25, for small-value UPI merchant payments up to ₹2,000.

Commonly confused concepts

• PSS Act, 2007 vs Banking Regulation Act, 1949: The Banking Regulation Act controls banks as businesses (licences, capital, loans). The PSS Act controls payment systems, the "pipes" through which money moves.
• Payment system vs payment system participant: A payment system is the network itself (like UPI, run by NPCI). Participants are banks and apps that use it. NPCI needs authorisation under the PSS Act; individual banks join the system under NPCI's rules.
• MDR vs convenience fee vs interchange: MDR is the total fee a merchant pays its bank. Interchange is the part of that fee passed to the customer's bank. A convenience fee is an extra charge some sellers add on the customer, separate from MDR.
• Payments Regulatory Board vs Board for Financial Supervision: The PRB looks after payment systems. The Board for Financial Supervision (BFS) supervises banks and NBFCs.

Issues, criticism and the way forward

• Who pays for free payments? Running UPI costs money (servers, fraud checks, customer support). Zero MDR means banks and apps earn nothing from merchant payments, and depend on government incentives. Critics say this is not sustainable as volumes grow.
• Independence of the regulator: The Watal Committee wanted a regulator more separate from the RBI. The 2025 PRB still sits inside the RBI and is chaired by the Governor, so some experts feel the reform fell short. Others argue the RBI's experience makes it the best place for the board.
• Fraud and consumer protection: Digital frauds have grown with digital payments. Experts suggest stronger rules on refunds, quick complaint handling and clear liability.
• Way forward: A balanced charge on large merchants, while keeping small payments free, is one option discussed. Clear and stable rules help banks and fintech companies plan investments.

Concepts to Know

• Settlement: The final step where money actually moves between banks after a payment is approved.
• Clearing: Checking and calculating who owes how much to whom before settlement happens.
• Turnover: The total value of sales a business makes in a year.
• Fintech: Short for financial technology: companies that use apps and software to give financial services.