The RBI has released a new framework governing the outsourcing of activities by non-bank payment system operators. In this update we summarize the salient features of this framework and its implications.

On 3 August 2021, the Reserve Bank of India (RBI) issued the 'Framework for Outsourcing of Payment and Settlement-related Activities by Payment System Operators' (Framework), under the Payment and Settlement Systems Act, 2007 (PSSA). The Framework regulates certain outsourcing activities by non-bank payment system operators (PSOs). While certain banks are also authorised to act as PSOs, the Framework only applies to non-bank PSOs since banks and non-banking financial companies are already subject to similar requirements in relation to the outsourcing of their financial service activities.

A 'payment system' is a system that enables clearing, payment or settlement (or all of them) between a payer and a beneficiary and includes systems enabling operations relating to credit, debit and smart cards, money transfer and other similar activities but does not include a stock exchange. Examples of such payment systems include digital wallets like PayTm and Mobikwik, card payments networks like MasterCard and American Express, Unified Payments Interface (UPI) etc.

The term 'outsourcing' is defined as the use of a third party to perform activities on a continuing basis, including short term arrangements, that would normally be undertaken by the PSO itself. Therefore, apart from the vendor, the Framework also applies to agents, consultants and their representatives, as well as sub-contractors engaged by the vendor, whether or not located in India. Such outsourcing is very common in the financial services sector.

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