How Payment Gateway Works
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As per the Payment and Settlement Act, 2007 (“Act”), such service provider will come under the definition of ‘system provider’ which means a person who operates an authorized payment system. The Act, vide its Section 5(1) mandates authorization by RBI for commencing or carrying on a payment system. An authorization from RBI for this purpose shall— (a) state the date on which it takes effect; (b) state the conditions subject to which the authorization shall be in force; (c) indicate the payment of fees, if any, to be paid for the authorization to be in force. Please note that this Act does not apply to stock exchanges or clearing corporations of stock exchange.
Process for making Application for Authorization
Regulation 3 of Payment and Settlement Systems Regulations, 2008 (“Regulation”), provides that an application for authorization can be made under sub-section (1) of Section 5 of the Act to the Bank for grant of authorization under sub-section (1) of section 7 of the Act. Such an application has to be made in Form-A annexed to the Regulation and addressed to the Chief General Manager of Department of Payment and Settlement Systems at Central Office of the Bank at Mumbai, or to such other office or officer of the Bank as may be specified by it in this behalf.
The application must be accompanied by a non-refundable fee of Rs.10,000/- in the form of cash or electronic funds transfer or cheque or payment order or demand draft drawn in favour of the Bank. In addition, the Bank may levy such amount as may be specified by it in the authorisation certificate, towards fees for authorization to be in force under clause (c) of sub-section (2) of Section 7 of the Act. If the RBI considers it necessary, the system provider may also have to furnish certain security for the proper conduct of the payment system under the provisions of this Act as may be directed by the RBI as one of the conditions for authorization.
Approval is Discretionary
Under Section 6 of this Act, before an authorization is issued under this Act, the Reserve Bank may make such inquiries as it may consider necessary for the purpose of satisfying itself about the genuineness of the particulars submitted by the applicant also to check the credentials of the participants.
Factors which are taken into account before issuing Authorization
Under Sec 7, if reserve bank is satisfied after the inquiry that the application is complete and it conforms to provisions of the Act, it may issue authorization for operating the payment system having regard to the following considerations, namely:
- The need for proposal payment system or the service proposed to be undertaken by it;
- The technical standards or the design of the proposed payment system;
- The terms and conditions of operation of the proposed payment system including any security procedure;
- The manner in which transfer of funds may be effected within the payment system;
- The procedure for netting of payment instructions effecting the payment obligations under the payment system;
- The financial status experience of management and integrity of the applicant;
- Interests of consumer, including the terms and conditions governing their relationship with payment providers, and
- Monetary and credit policies.
Timeline for Authorization
As per Section 4 of the Act, RBI is required to process the application for authorization as early as possible and maximum within six months from the date of filing of such application. However, please note that this is not a mandatory period.
Grant of Authorization
If the Bank is satisfied that the requirements under sub-section (1) of Section 7 of the Act are fulfilled, it may issue an Authorization Certificate in Form ‘B’ (as annexed to the Regulations) to the applicant to commence or carry on a payment system and specify the date on which the authorisation shall take effect, subject to fulfillment of conditions as may be imposed for grant of the authorization.
Term of the Authorization
An authorization, so obtained shall continue to be in force till the authorization is revoked.
Author: Vivek Verma
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 Section 2(q) of the Act
 Section 7(2) of the Act
 Reg. 4(3) of the Regulations
 S. 7(2)(d) of the Act read with Reg.4(4) of the Regulations
 Section 2(e) of the Act defines “netting” as the determination by the system provider of the amount of money or securities, due or payable or deliverable, as a result of setting off or adjusting, the payment obligations or delivery obligations among the system participants, including the claims and obligations arising out of the termination by the system provider, on the insolvency or dissolution or winding up of any system participant or such other circumstances as the system provider may specify in its rules or regulations or bye-laws (by whatever name called), of the transactions admitted for settlement at a future date so that only a net claim be demanded or a net obligation be owned
 Reg. 4(1) of the Regulations
 Reg. 4(2) of the Regulations
 S. 7(2)(e) of the Act