Amid geo-political risks, RBI mulls domestic processing of transactions

The Reserve Bank of India (RBI) is contemplating mandating domestic processing of payment transactions in order to ring-fence the country’s domestic payment systems. This comes in light of the emerging geo-political risks, especially the Russia-Ukraine war.

In its Payments Vision Document released last week, the RBI said keeping in view the emerging geo-political risks, options would be explored to ring-fence domestic payment systems.

“After sanctions were imposed by the US on Russia due to its aggression against Ukraine, global card networks stopped processing transactions in Russia. Central banks globally have started making efforts to ring-fence their domestic payment systems. They are asking international card networks to connect to local national switches in their respective countries to process domestic transactions,” said Vishwas Patel, director of Infibeam Avenues and chairman of Payments Council of India.

“China has already implemented China Union Pay and so has Saudi Arabia with its MADA systems. And, even Oman, has the OmanNet central switch. It seems RBI is also taking a similar approach to ring-fence India’s payment systems. This can be seen from RBI’s vision document,” he said.

Mihir Gandhi, partner & leader, payments transformation, PwC, said, “What the RBI is trying to do is have more control over the transaction data. It has already said that the data needs to be stored in India. Now, it is contemplating mandating domestic processing of payment transactions.

What this will mean is that global payment systems operators in India — who now have a switch abroad — will have to create a switch in India. This will allow transactions to be processed in the country. Currently, the transaction goes out and comes back after switching.”

Currently, guidelines are in place for domestic storage of payments data. Many global payment system operators (PSOs) have faced RBI’s ire for failing to comply with the central bank’s norms on data storage.

RBI had imposed restrictions on Mastercard, American Express, and Diners Club last year. The restrictions on Mastercard and Diners Club were removed after they complied with the norms.

Currently, banks and non-bank PSOs are allowed to process payment transactions abroad subject to certain conditions.

The central bank had said, “There is no bar on processing of payment transactions outside India if so desired by the PSOs. However, the data will be stored only in India after the processing. The complete end-to-end transaction details should be part of the data.”

In case the processing is done abroad, the data should be deleted from the systems abroad and brought back to India not later than 24 hours from payment processing. It should be stored only in India, RBI said in the frequently asked questions section on storage of payment system data.

However, any subsequent activity such as settlement processing after payment processing, if done outside India, should also be undertaken on a near real-time basis.

In case of any other related processing activity, such as chargeback, the data can be accessed, at any time, from India where it is stored, RBI further said.

“The recent geopolitical crisis reveals that the banking and financial services industries are highly vulnerable to not only cyberattacks but also sanctions. It is therefore natural for the RBI to prioritise the safety of customer information. After all, the safety of finances is what preserves trust in the banking system,” said Rupesh Nambiar, chief financial officer (CFO), Global PayEX.

Last week, the RBI released its vision document for payment systems, wherein it outlined goals that it aims to achieve in the next few years. They are attempting regulations for bigtechs and fintechs in the payment space and guidelines on payments involving buy now pay later (BNPL) services. They also include introduction of the central bank digital currency (CBDC) and linking credit cards and credit components of banking products with Unified Payments Interface (UPI), among others.

RBI wants to ring-fence India’s domestic payment systems

Currently, there is no bar on processing of payment transactions outside India

RBI may mandate domestic processing of transactions, given the emerging geo-political risks

Central banks globally have started making efforts to ring-fence their domestic payment systems

Experts say RBI is trying to have more control over the transaction data

RBI also has guidelines in place for domestic storage of payments data