The Payment and Settlement Systems Act, 2007

What it does

The Payment and Settlement Systems Act, 2007 (Act 51 of 2007) provides for the regulation and supervision of payment systems in India. A payment system is a system that enables payment to be effected between a payer and a beneficiary, involving clearing, payment or settlement service or all of them. Card networks, wallets and other prepaid instruments, the systems for electronic fund transfers and the clearing houses all fall within that description.

The Act makes the Reserve Bank of India the authority for these systems. No person may commence or operate a payment system except under an authorisation issued by the Bank, and the Bank may grant, refuse or revoke it. It may also prescribe the standards a system must meet, call for returns and documents, inspect, and issue directions. The Act gives legal protection to settlement as well, by providing for the finality of a settlement and for netting, so that a settlement in a designated system cannot be unwound because one of its participants has become insolvent.

Who it binds

The operators of payment systems, the participants in them, and the banks and other entities that issue payment instruments or provide the service. The Act also reaches system providers who are not banks. The Reserve Bank's directions under the Act bind those to whom they are addressed, who are described in each set of directions.

What has changed, and when

The Act dates from 2007. The significant changes since then have come less from amendments to the Act than from the directions and master directions the Reserve Bank has issued under it. These are revised often, and a payment product usually has to be built to the directions in force on the day.

The site's note on the two-factor rule for a domestic digital payment is an example. The authentication Directions are issued under section 18 read with section 10(2) of the Act. Paragraph 3 fixes the date of compliance, 1 April 2026, with one provision, on cross-border card payments, carrying 1 October 2026. The Directions repeal eight earlier circulars, so that the rule for a domestic digital payment now runs under a single set of Directions. One factor must be dynamic, and the issuer bears any loss on a payment that does not comply.

What turns on it in practice

The Act matters to a business at three points. The first is whether a product is a payment system at all. A business that collects and pays out money for others, or issues a stored value instrument, may need an authorisation, and operating without one is an offence under the Act. The second is the content of the directions that apply to an authorised entity, which decide the product design, the customer authentication, the handling of disputes and who bears loss.

The third is the allocation of loss. Where the directions say that the issuer bears a loss on a payment that does not comply with the authentication rule, the first question in a dispute over a failed payment is whether the payment complied. A technology or product team building a payment flow therefore has to treat the directions as design requirements, and a contract with a vendor, such as a gateway or an authentication provider, should address who answers if the flow fails the standard. These points come up in the banking and regulatory work of this practice, and the Act is the source of the power on which they rest.