RIGHTS AND DUTIES OF A SYSTEM PROVIDERCentral

Section 23A of The Payment and Settlement Systems Act, 2007

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--
1. (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;
2. (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).]

Summary

The Reserve Bank can require certain payment systems to keep customer money in a separate bank account.
This money must be kept in a scheduled commercial bank.
The amount to be kept is a percentage of the total money collected from customers that is still outstanding.
These funds can only be used to pay for customer transactions or to repay customers.
Customers have the first right (a paramount charge) to this money if the system provider goes bankrupt.
This rule applies to payment systems that collect funds from customers to provide services.

Practical examples

1QuickPay is a mobile wallet company. The Reserve Bank orders it to keep 100 percent of all user balances in a dedicated account at National Bank. If QuickPay fails to pay its office rent, the landlord cannot touch the money in that dedicated account because it is reserved for users.

2On January 10, 2025, a payment company called SecureTrans goes into liquidation. Because of Section 23A, the 5 crore rupees held in its separate customer account are paid out to the 10,000 app users before any other banks or staff are paid.

FAQ

1. What is a designated payment system?

It is a payment system or a group of systems that the Reserve Bank specifically names because they collect money from customers to provide services.

2. Can a company use this separate account for its own business expenses?

No, the money can only be used to fulfill customer payment instructions or to refund customers.

3. What happens if the bank where the money is kept also fails?

The law states that the customers still have a first and paramount charge on that balance, even against the liquidator of that bank.

4. Who decides the exact percentage of funds that must be kept aside?

The Reserve Bank has the power to specify the percentage, and it can set different levels for different types of payment systems.

Test yourself

Q1.Under Section 23A of The Payment and Settlement Systems Act, 2007, where must a designated payment system provider deposit the required percentage of customer funds?

Q2.Under Section 23A of The Payment and Settlement Systems Act, 2007, what is the priority of customers regarding the balance in the protected account during insolvency?

Q3.If a company applies for authorisation under Section 5 of The Payment and Settlement Systems Act, 2007, how does Section 23A affect their duties?

Q4.Under Section 23A of The Payment and Settlement Systems Act, 2007, for what purpose can the protected funds be utilized?

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