Payment and Settlement Systems Act: Section 23A – Protection of funds collected from customers

1[23A.–Protection of funds collected from customers. (1) The Reserve Bank may, in public interest or in the interest of the customers of designated payment systems or to prevent the affairs of such designated payment system from being conducted in a manner prejudicial to the interests of its customers, require system provider of such payment system to–

(a) deposit and keep deposited in a separate account or accounts held in a scheduled commercial bank; or

(b) maintain liquid assets in such manner and form as it may specify from time to time,

of an amount equal to such percentage of the amounts collected by the system provider of designated payment system from its customers and remaining outstanding, as may be specified by the Reserve Bank from time to time:

Provided that the Reserve Bank may specify different percentages and the manner and forms for different categories of designated payment systems.

(2) The balance held in the account or accounts, referred to in sub-section (1), shall not be utilised for any purpose other than for discharging the liabilities arising on account of the usage of the payment service by the customers or for repaying to the customers or for such other purpose as may be specified by the Reserve Bank from time to time.

(3) Notwithstanding anything contained in the Banking Regulation Act, 1949 (10 of 1949), or the Companies Act, 1956 (1 of 1956) or the Companies Act, 2013 (18 of 2013) 2[or the Insolvency and Bankruptcy Code, 2016] or any other law for the time being in force, the persons entitled to receive payment under sub-section (2) shall have a first and paramount charge on the balance held in that account and the liquidator or receiver or assignee (by whatever name called) of the system provider of the designated payment system or the scheduled commercial bank concerned, whether appointed as provisional or otherwise, shall not utilise the said balances for any other purposes until all such persons are paid in full or adequate provision is made therefor.

Explanation.–For the purposes of this section, the expressions–

(a) “designated payment system” shall mean a payment system or a class of payment system, as may be specified by the Reserve Bank from time to time, engaged in collection of funds from their customers for rendering payment service;

(b) “scheduled commercial bank” shall mean a “banking company”, “corresponding new bank”, “State Bank of India” and “subsidiary bank” as defined in section 5 of the Banking Regulation Act, 1949 (10 of 1949) and included in the Second Schedule to the Reserve Bank of India Act, 1934 (2 of 1934).]

1. Ins. by Act 18 of 2015, s. 4 (w.e.f. 1-6-2015).

2. Ins. by Act 31 of 2016, s. 253 and the Ninth Schedule (w.e.f. 15-11-2016).

Simplified Explanation

Section 23A of the Payment and Settlement Systems Act, 2007 is designed to safeguard funds collected from customers by system providers of designated payment systems. This section primarily addresses the protection of customer funds and ensures that these funds are appropriately handled to prevent misuse and to provide security for customers in case of financial instability or liquidation of the system provider.

Key Provisions of Section 23A:

1. Reserve Bank’s Power to Require Protection Measures (Subsection 1):
   • Reserve Bank’s Authority: The Reserve Bank of India (RBI) is empowered to require a system provider of a designated payment system to protect funds collected from its customers.
   • Protective Measures: The RBI can mandate the system provider to take one of the following actions to safeguard these funds:
     • Deposit in Separate Accounts: The system provider must deposit customer funds into a separate account or accounts in a scheduled commercial bank.
     • Maintain Liquid Assets: Alternatively, the RBI can require the system provider to maintain liquid assets in a specific form or manner to ensure the protection of customer funds.
   • Percentage of Funds to Be Protected: The RBI will specify the percentage of the amounts collected from customers that need to be protected, and this percentage may vary for different categories of designated payment systems.
2. Usage Restrictions on Customer Funds (Subsection 2):
   • The balance held in the separate account(s) or the liquid assets maintained by the system provider cannot be used for any purpose other than:
     • Discharging Liabilities: This includes liabilities arising from the use of the payment service by customers.
     • Repayment to Customers: The funds can also be used to repay customers.
     • Other Purposes as Specified by RBI: The RBI may specify other permissible uses for the funds.
   • The purpose of this provision is to ensure that the funds collected from customers are used only to fulfill the obligations of the system provider to those customers, and not for any other purpose.
3. Priority of Claims on Customer Funds (Subsection 3):
   • First and Paramount Charge: Customers who are entitled to receive payments under subsection (2) (e.g., those who have funds held in the protected accounts) will have a first and paramount charge on the balance held in the separate account or liquid assets.
   • Protection in Insolvency or Liquidation: In the event that the system provider becomes insolvent, or a liquidator, receiver, or assignee is appointed (whether provisional or otherwise), the balance in the separate account will not be used for any purpose other than satisfying the claims of the customers.
   • Protection from Other Claims: Even if there is an ongoing insolvency or liquidation process, the funds will be protected from other creditors until the customers’ claims are fully paid or adequate provision is made for those claims.
4. Definitions (Explanation):
   • Designated Payment System: Refers to a payment system, or a specific class of payment systems, which is involved in the collection of funds from customers to provide payment services. These systems are specified by the Reserve Bank.
   • Scheduled Commercial Bank: This term refers to a banking company, State Bank of India, and other banks included in the Second Schedule of the Reserve Bank of India Act, 1934.

Implications for System Providers:

1. Obligation to Protect Customer Funds: System providers are required to comply with the RBI’s directions regarding the safeguarding of funds. This includes setting aside a certain percentage of funds in a separate account or maintaining liquid assets as directed by the RBI.
2. Transparency and Accountability: System providers must ensure that the funds collected from customers are properly segregated and protected, and cannot be diverted for other purposes. They will need to maintain transparency regarding these funds and comply with RBI regulations.
3. Insolvency or Liquidation Protection: If the system provider faces insolvency or liquidation, customers’ funds will be protected from other creditors. This gives customers priority in claims over their funds, enhancing the stability and trust in the payment system.
4. RBI Oversight: The RBI has significant regulatory powers to ensure that customer funds are protected in the event of a system provider’s financial difficulties. The provision ensures that the RBI can intervene and direct the system provider on how to manage customer funds in a secure manner.

Purpose of Section 23A:

• Customer Protection: The primary objective of Section 23A is to ensure that customer funds are protected and managed securely by system providers. It minimizes the risk of customers losing funds in case of financial difficulties faced by the payment system provider.
• Regulatory Oversight: It enhances the role of the Reserve Bank in protecting the interests of customers using payment systems. This is crucial in maintaining confidence in electronic payment systems, especially as such systems are increasingly used for large volumes of transactions.
• Financial Stability: The section provides safeguards against misuse of customer funds and ensures that in the event of insolvency, customers are given priority in the distribution of remaining funds.

In Summary:

Section 23A of the Payment and Settlement Systems Act is aimed at ensuring the protection of customer funds held by system providers in designated payment systems. It mandates that system providers maintain these funds in separate accounts or in liquid assets and use them solely for fulfilling liabilities to customers. In cases of insolvency or liquidation, the section guarantees that customer claims take priority over other creditors. The Reserve Bank is empowered to regulate and oversee these protections, helping to secure customer interests and ensure the stability of the payment system.