Payment systems as financial infrastructure

Detail

1. Financial infrastructure: the big picture

• Financial infrastructure is "a network of banks, payment systems, stock markets, and other financial institutions" (Class 7, Banks and the Magic of Finance).
• It helps people, businesses and the government make transactions and manage money.

• It supports physical infrastructure. Roads and railways move goods. Financial infrastructure moves the money that pays for those goods.

• Payment systems are one part of this network. They are the "pipes" through which money moves from one account to another.

• How money changed over time (Class 7, From Barter to Money; Class 10, Money and Credit):
• Barter, then coins and currency notes
• Paper instruments: cheques and demand drafts
• Cards and net banking
• Mobile and real-time payments: IMPS, then UPI (2016)

2. What a payment system is

• Payment system: a mechanism for the clearing and settlement of financial transactions. It lets individuals, businesses and organisations transfer funds to each other (Class 7).
• Legal definition: under the PSS Act 2007, a payment system is a system that "enables payment to be effected between a payer and a beneficiary, involving clearing, payment or settlement service". The definition covers credit and debit card operations and money transfers. It excludes stock exchanges [2].
• Clearing means exchanging and checking payment instructions: who owes whom, and how much.
• Settlement means the final transfer of funds between accounts. After settlement, the payment cannot be reversed.
• Settlement finality (legal rule): a settlement, whether gross or net, becomes final and irrevocable (it cannot be taken back) as soon as the amount payable is determined [2].
• Why it matters: if a bank fails in the middle of the day, payments that are already settled cannot be undone. This stops one bank's failure from spreading to others.

3. Digital payments

• Digital payments are payments made electronically instead of in cash.
• Examples: internet or mobile banking transfers, debit or credit cards at POS (point-of-sale) machines, wallets, and UPI QR codes.
• Why the government promoted them: "to reduce the requirement of cash for transactions and also control corruption" (Class 10, teacher note).

• Class 12 Money and Banking links this push to demonetisation (November 2016) and financial inclusion (bringing poor and rural people into the formal banking system).

• Positive confirmation: RTGS, NEFT, IMPS and UPI send a message to the sender once the money reaches the receiver's account [3]. Cash and cheques do not do this.

4. Ways to classify payment systems

Basis	Type A	Type B
Medium	Paper (cheque, draft)	Electronic (NEFT, UPI, cards)
Size and user	Retail: many small payments (UPI, IMPS)	Large-value: few big payments (RTGS)
Settlement method	Gross: each payment settled on its own	Deferred net: payments are pooled and only the net difference is settled
Timing	Real-time (RTGS, UPI, IMPS)	Batch (NEFT, cheque clearing)

• Gross settlement: each transaction is settled one by one, "without bunching or netting with any other transaction" [3].
• Real-time settlement: there is no waiting period [3].
• RTGS (Real Time Gross Settlement) is both real-time and gross. It has run 24x7 since December 2020. This makes India one of the few countries in the world that runs RTGS round the clock [3].
• Netting is legally recognised under the PSS Act. The Act also lets a system share losses among its participants ("loss allocation") if the system's rules allow it [2].
• Worked example: gross vs deferred net settlement
• Bank A must pay Bank B ₹100 crore. Bank B must pay Bank A ₹70 crore.
• Gross: two separate transfers of ₹100 crore and ₹70 crore. A total of ₹170 crore moves.
• Net: ₹100 − ₹70 = ₹30 crore. Only A pays B this amount.
• Trade-off: netting needs much less money, but banks carry risk until the batch settles. Gross settlement is safer, but banks must hold more money (liquidity) during the day.

5. Who governs payment systems: RBI as regulator

• Payment and Settlement Systems (PSS) Act 2007
• Presidential assent: 20 December 2007. In force: 12 August 2008 [2].
• Authorisation rule: nobody except the RBI can run a payment system without RBI authorisation. All operators, domestic or foreign, must apply under Section 5 [2].

• Penalties: running a system without authorisation, ignoring RBI orders or giving false information are offences. They can lead to fines and imprisonment [2].

• Regulations made under the Act [2]:

• Payment and Settlement Systems Regulations, 2008 (in force 12 August 2008)

• Payments Regulatory Board (PRB) Regulations, 2025 (in force 20 May 2025). These cover how the PRB is formed, its meetings and quorum, and its sub-committees.

• The regulating board

• RBI has regulated payment systems through its Board for Regulation and Supervision of Payment and Settlement Systems (BPSS). The BPSS authorises payment systems, sets membership criteria and decides whether members can join, stay or be removed. It met every quarter and reported every year to the RBI Central Board [3].

• Update: a Payments Regulatory Board (PRB) is now set up under the 2025 Regulations [2]. (NCERT scaffold: BPSS.) In answers, write "PRB (earlier BPSS)".

• Oversight: the RBI's Department of Payment and Settlement Systems (DPSS) keeps all systems "safe, secure, sound, efficient, accessible and authorised". It does this in three ways [4]:

• monitoring existing and planned systems
• assessing them
• pushing for changes where needed

6. Who operates payment systems: RBI and NPCI

• RBI as operator. The RBI does not only make rules. It also runs the two main large rails:
• RTGS: large-value, real-time, gross settlement
• NEFT (National Electronic Funds Transfer): settles payments in batches using deferred net settlement

• Class 7 notes that the RBI "maintains accounts of other banks and facilitates exchange of funds between them". Final settlement takes place in banks' accounts with the RBI. This is why RBI money is the safest way to settle.

• National Payments Corporation of India (NPCI)

• Set up in 2008 as a not-for-profit company.
• Promoted by banks, at the initiative of the RBI and the Indian Banks' Association (IBA).
• Retail rails it runs:
  • NFS: the shared ATM network
  • IMPS: instant 24x7 transfers
  • RuPay: India's own card network
  • NACH: bulk payments such as salaries, subsidies and EMIs
  • AePS: Aadhaar-enabled payments at micro-ATMs
  • UPI and BHIM
  • NETC FASTag: toll payments

• Subsidiaries:

  • NPCI Bharat BillPay Ltd (NBBL): runs Bharat BillPay
  • NPCI International Payments Ltd (NIPL): takes UPI and RuPay abroad

• Scale of UPI (latest official data)

• Total digital payment transactions in India crossed 18,000 crore in 2024-25 [6].
• UPI handled 16.99 billion transactions worth over ₹23.48 lakh crore in January 2025 [7].
• UPI makes up about 85% of all digital transactions in India. It powers nearly 50% of the world's real-time digital payments [8].
• An IMF report (June 2025) found that UPI had about 49% of global real-time payment volume in 2024. This makes it the largest real-time payment system in the world [9].
• P2M (person-to-merchant) payments were 62.35% of UPI volume in FY 2024-25 (till January 2025). P2P (person-to-person) payments were 37.65%. About 86% of P2M payments were worth ₹500 or less [10].
• The Cabinet approved a ₹1,500 crore incentive scheme for low-value BHIM-UPI P2M transactions (2024-25) [10]. This pays banks to process small merchant payments that earn no fee.

7. Policy markers

• Payment-data localisation (April 2018): all payment data of Indian users must be stored only in India.
• Why: so the RBI can supervise the data and keep it secure.

• Criticism: it raises compliance costs for foreign card networks and payment firms.

• Payments Vision 2025 (released 2022): the RBI's roadmap. Its five themes are:

• integrity
• inclusion
• innovation
• institutionalisation

• internationalisation

• RBI Digital Payments Index (DPI)

• What it is: a composite index that measures how far digital payments have spread and deepened across India. It uses parameters such as payment enablers, payment infrastructure (demand side and supply side), payment performance and consumer centricity.
• Base: March 2018 = 100. It is computed every half year [5].
• Latest data: 493.22 in March 2025, up from 465.33 in September 2024 [5]. (NCERT scaffold: "around 490".) The rise came mainly from growth in payment infrastructure (supply-side factors) and payment performance [5].
• Worked example (index number)
  • Growth since base = (Current index ÷ Base index − 1) × 100
  • (493.22 ÷ 100 − 1) × 100 = 393.22%. So digital payment depth in March 2025 was about 4.9 times the March 2018 level.
  • Half-year growth = (493.22 − 465.33) ÷ 465.33 × 100 ≈ 6.0%

Prelims Hooks

• Payment system = clearing + settlement. Clearing means checking who owes whom. Settlement means the final, irreversible transfer of funds.
• PSS Act 2007: assent on 20 December 2007, in force from 12 August 2008. No one except the RBI may run a payment system without authorisation (Section 5) [2].
• Trap: the PSS Act's definition of a payment system excludes stock exchanges but includes card operations [2].
• Settlement finality: under the PSS Act, both gross and net settlements are final and irrevocable [2].
• RTGS is real-time and gross, runs 24x7 since December 2020, and is operated by the RBI, not NPCI [3].
• NEFT uses batch / deferred net settlement. UPI and IMPS work in real time.
• NPCI (2008): a not-for-profit company promoted by banks at the initiative of the RBI and IBA. It runs UPI, IMPS, RuPay, NFS, NACH, AePS, NETC FASTag and BBPS (through NBBL).
• Board change: the Payments Regulatory Board (PRB) Regulations, 2025 have been in force since 20 May 2025 (earlier body: BPSS) [2].
• RBI-DPI: base March 2018 = 100, computed every half year. It stood at 493.22 in March 2025 [5].
• UPI: about 85% of India's digital transactions. The IMF (June 2025) found it had about 49% of global real-time payment volume in 2024 [8][9].

Mains Points

• Payment systems are public infrastructure, like roads.
• When payment rails are shared and cheap to use, entry barriers fall for small merchants and fintech firms.

• The UPI model (a public rail with private apps on top) became the world's largest real-time payment system [9]. It is a form of Digital Public Infrastructure (DPI) that India now promotes abroad through NIPL.

• The RBI is both regulator and operator. This brings benefits and risks.

• Benefits: settlement in central bank money is the safest possible. 24x7 RTGS shows the RBI can lead innovation [3].

• Risks: a possible conflict of interest when the RBI also regulates private rails. Also concentration risk: UPI's roughly 85% share means one outage hurts the whole economy [8].

• Inclusion vs viability

• Zero-MDR (MDR = merchant discount rate, the fee a merchant pays on each digital payment) makes UPI free for users.
• But it forces the government to pay banks subsidies, such as the ₹1,500 crore P2M incentive [10].

• The question is who will pay for the infrastructure over the long run.

• Sovereignty vs openness

• Data localisation (2018) and RuPay give India strategic control over its payment data and card network.
• But they raise compliance costs for foreign firms and cause friction in trade talks.
• Payments Vision 2025's goal of internationalisation tries to balance these two aims.