THE ROLE OF PAYMENT SERVICE PROVIDERS IN BANKING TRANSACTION

This Article is written by Shubhangi Nayak of Career College of Law, Bhopal an Intern Under Legal Vidhiya

ABSTRACT

This article explores the important role of Payment Service Providers (PSPs) in today’s banking system in India. It explains how PSPs help people and businesses to make digital payments safely and easily. The paper explores the different types of PSPs, the rules they must follow, and how the Reserve Bank of India keeps them in check. It highlights how PSPs use technology to prevent fraud and make payments faster. In the end, it shows how PSPs are helping to make banking more accessible, secure, and modern.

KEYWORDS

Payment Service Providers (PSPs), Banking Transactions, Digital Payments, RBI Regulation, Payment Systems Act, Payment Gateways, Financial Technology, Regulatory Framework, Data Security, Cross-Border Remittance.

INTRODUCTION

Payment Service Providers (PSPs) is one of the stakeholder in banking transaction. It is the 3^rd party service provider that access electronic payments. PSPs serve as intermediaries between the parties. These are non-banking companies authorized by the RBI to offer payment services. They provide many services like risk management services, currency exchange, digital wallets, fraud protection and many more. It helps to process payments seamlessly. It allows to accept payment using debit and credit cards and accept various currencies. The main purpose of a PSPs is to enable seamless, efficient and serve transactions between consumer and merchant globally.

DEFINITION OF PAYMENT SERVICE PROVIDERS

PSPs are not defined under a single statute but they are governed and recognized under the following-

Section 2(1)(i) of The Payment and Settlement Systems Act, 2007 defines payment system as a system that helps to send money from one person to another. It handles checking, processing, and finalizing of payment. It doesn’t include systems used for buying and selling shares on the stock market.[1]

Based on this, PSPs are entities authorized by the RBI to operate a payment system, which includes Payment gateways, Payment aggregators, Prepaid Payment Instrument (PPI) issuers, Mobile wallets, UPI apps, Money remitters.

CLASSIFICATION OF PAYMENT SERVICE PROVIDERS

The Reserve Bank of India classifies these entities based on the nature of services they offer, such as-

Payment gateways are provided by PSPs serves the technology that connect business’s website to the system that handles payments and makes payments details secure among the customer, the business, and the bank.

Payment Aggregators help businesses to collect different types of payments like credit cards, debit cards, UPI, or wallets, all in one place from customers online. Razorpay, PayU and Cashfree are some examples of this.

Prepaid Payment Instruments (PPI) issuers are companies that create and manage digital wallets or prepaid cards. They let you add money in advance and use it to make payments. Companies like Paytm, PhonePe, and Amazon Pay issue wallets where you can load money and use it to pay for things online or in stores.

Money Transfer Operators/ Remittance Services provide domestic and international money transfer services, without having a bank account.

Cross-border Money Transfer Operators help people send or receive money internationally, usually for the various purposes regulated under The Foreign Exchange Management Act, 1999, RBI’s Money Transfer Service Scheme and The Prevention of Money Laundering Act, 2002.

REGULATORY FRAMEWORK GOVERNING PAYMENT SERVICE PROVIDERS IN INDIA

PSPs are operate under a structured legal and regulatory environment that ensures security, transparency, and efficiency in the digital payment ecosystem. The RBI serves as the main governing authority for PSPs in India. Some statutes governing PSPs are:

The Payment and Settlement Systems Act (PSS), 2007 is the foundational law regulating payment systems in India. It grants the RBI authority to regulate and supervise payment systems. The Act make it compulsory for PSPs to get permission from the RBI to function legally. This act also ensures proper functioning, consumer protection and systemic safety.[2]

RBI Guidelines and Circulars on Payment Aggregators and Payment Gateways (2020) are established under the PSS Act. These guidelines requires non-bank payment aggregators to obtain RBI authorization. It also mandates to have KYC, data storage norms and grievance redressal systems.[3]

RBI Guidelines and Circulars on Master Directions on Prepaid Payment Instruments (PPIs)  (2021) defines types wallets – closed, semi-closed, open. They prescribes eligibility, capital requirements, KYC norms and usage limits.[4]

Foreign Exchange Management Act (FEMA), 1999 governs cross-border transactions and foreign remittances by PSPs. PSPs involved in international transfers must comply with this act and associated rules like the Money Transfer Service Scheme. [5]

Prevention of Money Laundering Act (PMLA), 2002 states that PSPs must comply with anti-money laundering norms. This Act requires reporting of suspicious transactions and maintaining transaction records.[6]

Information Technology Act, 2000 and IT Rules, 2011 are applicable to digital payments and data protection. These mandates PSPs to follow reasonable security practices and safeguard user data.[7]

ROLE OF PAYMENT SERVICE PROVIDERS IN BANKING TRANSACTION

Payment Service Providers play a vital role in banking transactions by enabling, streamlining, and securing digital money transfers between consumers, businesses, and banks.

PSPs act as intermediaries between the payer and the payee, ensuring that the payment is initiated, processed, and settled securely and efficiently.

PSPs enhance the access to banking and financial services, particularly for the people who do not have a bank account, by offering simplified payment solutions without the need of traditional bank account.

PSPs support innovation and financial technology which enables faster, safer and more user-friendly banking experiences. This include biometric authentication, AI fraud detection and seamless app-based interface.

PSPs are required by law to follow rules set by the RBI under the Payment and Settlement Systems Act, 2007. They must confirm that payments are processed safely, protect users’ personal data, verify customer identities to prevent fraud and money laundering, and address customer complaints quickly and effectively. These rules help to keep the digital payment system secure and trustworthy for everyone.

PSPs support both domestic and cross-border fund transfers, making them essential in global trade.

PSPs use strong security measures like encryption, two-factor authentication, and real-time monitoring of transactions to prevent fraud and ensure safety. These steps help protect user’s money and build trust between customers and banks.

BENEFITS OF USING PAYMENT SERVICE PROVIDERS

PSPs let businesses accept different types of payments like cards, net banking, and wallets through one simple system, making it easier for customers to pay.

They use strong security tools like secure sockets layer encryption to keep payment data safe and build customer trust.

PSPs prevents fraud by checking card details and tracking transactions in real-time to catch anything suspicious.

They allow businesses to accept payments in different currencies, which is helpful for companies selling to customers in other countries.

Businesses get monthly or real-time reports showing how their payments are doing, which helps them make better decisions.

PSPs help businesses to open accounts faster by working directly with partner banks, saving time and effort.

PSPs provide flexible payment options which helps businesses keep up with customer trends.

They offer clear transaction reports that make it easy for businesses to match payments and keep track of their money.

PAYMENT SERVICE PROVIDER’S RESPONSIBILITY IN UNAUTHORISED TRANSACTIONS

If a PSP doesn’t follow rules under the Payment and Settlement Systems Act, the RBI has the power to cancel its authorization. In cases where an unauthorized transaction takes place, the PSP can be held responsible for the loss especially if it didn’t follow proper security steps or failed to meet RBI’s guidelines.[8]

ROLE OF RBI IN REGULATING PAYMENT SERVICE PROVIDERS

The RBI plays a central regulatory role in overseeing the operations and governance of PSPs.

It grants the licenses to operate as PSPs.

It conducts audits and inspections to ensure that PSPs remain compliant with prescribed regulatory standards.

It provides guidelines and directives to maintain the integrity of the payment systems.

The RBI also encourages the formation of Self-Regulatory Organizations (SROs) to promote industry best practices.

CONCLUSION

Payment Service Providers play a key role in today’s digital banking by making payments easy, fast, and secure. They help to connect customers, businesses, and banks while also promoting financial access. With RBI’s supervision and legal frameworks like PSS Act, FEMA, and PMLA, the PSPs are guided to work safely and fairly. As digital payments continue to grow, PSPs will remain important in shaping a modern and reliable financial system in India.

---

[1] Payment and Settlement Systems Act, no. 51 0f 2007, § 2(1)(i), Acts of Parliament, 2007(India)

[2] Supra note 1, § 4

[3] Reserve Bank of India, Guidelines on Regulation of Payment Aggregators and Payment Gateways, RBI/DPSS/2020-21/63 (Mar.17,2020)

[4] Reserve Bank of India, Master Direction on Issuance and Operation of Prepaid Payment Instruments, RBI/DPSS/2021-22/82 (Aug.27, 2021)

[5] Foreign Exchange Management Act, No. 42 Of 1999, Acts of Parliament, 1999

(India)

[6] Prevention of Money Laundering Act, No. 15 of 2003, Acts of Parliament, 2003 (India)

[7] Information Technology Act, No. 21 of 2000 ; IT Rules, 2011, G.S.R. 313(E)

[8] Supra note 1, § 5

Disclaimer: The materials provided herein are intended solely for informational purposes. Accessing or using the site or the materials does not establish an attorney-client relationship. The information presented on this site is not to be construed as legal or professional advice, and it should not be relied upon for such purposes or used as a substitute for advice from a licensed attorney in your state. Additionally, the viewpoint presented by the author is personal.