With the massive growth witnessed in India, in the digital payment ecosystem, there has arisen a need for having a framework for regulation for digital payments. To achieve the said objective, RBI notified the Framework for Self Regulatory Organisation (“SRO”) on 22 October 2020.

1. Self Regulatory Organization for Payment
System Operators

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3. Introduction
• With the massive growth witnessed in India, in the digital payment ecosystem, there has
arisen a need for having a framework for regulation for digital payments. To achieve the said
objective, RBI notified the Framework for Self Regulatory Organisation (“SRO”) on 22
October 2020.
• The rationale is that, as the payment ecosystem matures it becomes imperative for the
industry to establish its own standards in respect of system security, pricing practices,
customer protection measures and grievance redressal mechanisms. Further, self-regulation
would not only focus on issue of systematic importance but will also encourage better
compliance.
• The concept of Self-Regulatory organisation is not unknown and RBI had previously issued
framework for establishing SROs for NBFC-Microfinance institutions. This is also a well-
known practise adopted in Singapore where the Monetary Authority of Singapore had
formed a Payments Council comprising of 20 banks, payment service providers, businesses
and trade associations. The purpose of setting up payment council was to encourage
collaboration within the payment industry, promote collaboration and interoperability.

4. Characteristics of an SRO
An SRO is expected to have the following characteristics-
• Authority, derived from membership agreements, to set behavioral and professional
standards and enforce them on the members.
• Objective and well-defined processes to make rules and enforce them among members.
• Standardised procedures for handling conflicts and disputes, as well as methods to resolve
them through a transparent and consistent dispute resolution mechanism.
• Effective means of oversight over its members and ensuring that they adhere to the rules
and regulations of the industry as also mutually accepted ethical and professional
standards of behaviour; and
• Develop surveillance methods for effective monitoring.

5. Eligibility for recognition of an SRO by RBI
• The SRO shall be set-up as a not-for-profit company under the Companies Act, 2013.
• Only regulated payment system entities, viz, banks and non-bank PSOs can be members of an
SRO.
• The SRO shall be professionally managed with clear bye laws.
• The memorandum / bye laws of the SRO shall specify the criteria for admission of members
and the functions it will discharge. It shall also provide for the manner in which the Board of
Directors (governing body) would function.
• RBI may, if it deems necessary, require that the appointment of important positions in the Board
of Directors of the SRO be subject to its prior approval.
• The SRO shall be financially viable to carry on the activities handled or assigned to it. The fee
for membership of the SRO shall be reasonable and uniform across all members.

6. Grant of Recognition as an SRO
• A group / association of payment system operators (banks as well as non-banks)
shall apply to RBI seeking recognition as an SRO.
• RBI reserves the right to require the applicant to submit further information or
clarification as deemed necessary, before deciding on the grant of recognition as an
SRO.
• On finding the applicant suitable, RBI shall issue a “Letter of Recognition” as an
SRO.
• RBI, if in its considered opinion, concludes that the SRO is functioning in a manner
detrimental to the public interest, it may withdraw its recognition to an SRO after
giving due opportunity to the entity to further its views / comments.

7. Functions and Responsibilities
• Recognized SRO to serve as representative voice of its members for public discussions or interactions
with RBI
• It shall work towards establishing minimum standards, benchmarks and ethics
• It shall prompt the RBI about ay violation of provisions of Payments and Settlement Systems Act or any
other regulation/ guidelines by RBI
• It shall establish an uniform grievance redressal and dispute resolution framework across its members
• It shall conduct training programs and awareness programs for safe payment transactions and conduct
R&D in the field
• Carry out work assigned, examine proposals submitted and provide any data requested by the RBI.
• The recognized SRO shall be invited for periodical interactions with RBI, and shall reasonably be
expected to look at the larger picture of the segment / industry in offering its views / inputs / suggestions.
The SRO shall strive to address concerns beyond the interest of its membership, viz. to protect
customers, participants and other stakeholders in the ecosystem.

8. Observations
• Based on the framework it is seen that the functions which an SRO has been obligated to
perform are not only pertaining to market development function (such as establishing standards,
developing market ecosystem, etc.) but also functions that are purely regulatory in nature (such
as prescribing rules, enforcement of rules and penal actions). This also raises some concerns
pertaining to the issue of conflict of interest where the SRO will have to look into regulatory
functions as well as the market development functions and may further lead to inefficiency.
• There is ambiguity surrounding the fit and proper criteria required to be satisfied by the board of
directors.
• An area of concern is the requirement of maintaining of surveillance over the members. It might
be difficult for SRO to maintain surveillance over the individual members. Perhaps, RBI must
limit SROs role to only extend expertise for assistance.

9. Observations
• Another problem which can be foreseen from this framework is the cost of
administration. The framework stipulates that the membership fee shall be uniform
for all members and the SRO shall be financially viable to carry on the activities.
There is uncertainty as to whether charging of uniform fee would cause problem of
conflict of interest as not all players will be similarly placed in the market.
• Further, the framework only applies to regulated entities which are banks and non-
bank payment system operators. For the consultative process to operate
effectively, it is highly recommended to include non-regulated players as well.

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