Laws regulating Digital Payment in India

Laws for Digital Payment in India: All You Need to Know

This article on ”Laws for Digital Payment in India” was written by Amruta Patil an intern at Legal Upanishad.


On 11th April in the year 2016, under the regime of Dr. Raghuram Rajan the then RBI governor, an alternative payment method was launched in India. This started India’s rise in the field of digitization of the financial sector of India. Since then it’s only gotten better. In the financial year, 2021-22 a total of 8193 crores of digital transactions have taken place until 20th March 2022. By the year 2026, the value of the digital payment will grow three-fold and reach the mark of one trillion. This shows the progress and development the Indian Economy has been making.

But what were the laws, rules, or policies which were formulated by the authorities that made the transition to digital payments easier?

The below article explains the laws concerning digital payment in India.


Any transaction which occurs using any digital device without any physical exchange of money and can occur either remotely or in person using electronic means is called digital payment.  The transaction that occurs through an electronic medium is not limited to inline banking, it also includes the ones done through UPIs.

Digital Payment in India-

Inception and Evolution

The journey of digital payment in India started in 1996 when ICICI Bank first introduced online banking services in the country, which was then followed by other privatized banks and the trend is now more ingrained and growing. Continuing with the spirit of growth that led to the launch of the Digital India Programme in 2015 which has the following aim-

  • The very first aim of the program is to build a digital infrastructure as a key infrastructure that is accessible to every citizen.
  • Ensuring digital literacy and the availability of resources across the country to empower the citizen.
  • To have governance and services on demand to make financial transactions electronically and paperless.

The Indian payment system is now also gearing up to introduce a ‘Faceless, Cashless and Paperless’ economy.

Types of popular methods for digital payment-

There are various kinds of methods through which digital payment is possible. They are banking cards, internet banking, USSD, UPI, BHIM app, and many more. A few have been elaborated below-

  1. Banking Cards- Debit and Credit cards were launched first by the ICICI bank. Back then it had a restricted audience. One of the very first ways to replace cash was these banking cards.
  2. USSD- Unstructured supplementary service data is a method in which the payment processing occurs by sending a message to the service provider to complete the transaction. This kind of system was used in areas that lack proper banking and internet facilities. An example is the service provider Bharati Airtel in which on dialing *120# you are connected to USSD service which then opens a new menu with options such as account details and others.
  3. UPI- Unified Payment Interface is one of the most popular digital payment methods which rose well since and during the demonetization in 2016. This is the fast method to complete a transaction as it only requires you to scan and pay which is completed in a few seconds. The year 2020 also has been the year various such platforms like PayTM, GPay, etc have been soaring high with new users joining.
  4. Internet Banking-  any financial transaction occurring through the use of the internet is called internet banking. In this kind, the user has an account with the bank that issues registered credentials upon entering which funds transfers can be done without going to the bank. It’s a convenient way to make payments through a secure portal. Internet banking allows various kinds of funds such as NEFT, RTGS, and IMPS which are reliable secure payment methods to transfer money.

Laws that are applicable for Digital Payment in India-

There are two pieces of legislation that primarily govern the laws regarding digital payment in India. They are –

Payment and Settlement System Act 2007 is one of the legislation which is regulated digital payment along with the Payment and Settlement System Regulations,2008. Following are a few features of the act-

  • The PSS act 2007 – is a principal law that governs the payment settlement and system in India which was designed by the RBI. The aim is to regulate and systematically organize the payment and settlement system in India.
  • Section 4 of the PSS act states, that RBI is the only authority that can commence the payment system in India.
  • The PSS acts state that all the payment entities or authorities desirous of setting up a payment system are required to apply for the same to the RBI. The participants are required to make an application for approval.
  • The PSS Regulations which aims are the constitution of the Board for Regulation and Supervision of Payment and Settlement Systems Regulations.
Laws for Digital Payment in India

The Role of RBI in regulating Laws for Digital Payment in India

The mission statement of RBI for payment and settlement system states that the endeavor would be “to ensure that all payment and settlement systems operating in the country are safe, secure, sound, efficient, accessible and authorised”.

The reserve bank of India plays a very crucial role in the regulation of digital payment methods. It sets the rules which are to be complied with to introduce the payment method. 

A Board for Payment and Settlement System is created by the RBI which supervises the payment and settlement system. A few functions of the committee are –

  • Policy formation relating to the regulation and supervision of all payments and settlements systems
  • Oversight of the standards of the existing and upcoming payment systems.
  • The PSS act also empowers the RBI to approve and reject the authorization granted payment system.


The evolving nature of the payment system especially after the demonetization and the pandemic has called for the remodeling of the existing payment and settlement laws. A few steps would help in better enactment of the law-

  • A new law subject to payment service should be enacted which should be able to regulate different payment activities.
  • Or a completely new act should be formed in place of the existing PSS Act 2007 which would be based on the structure which has evolved and continues to keep in mind a balanced approach to the safety of the consumers as adaptability to the existing and evolving  new payment and settlement methods


The inadvertent shift in the method of payment system with the advancement of technology has made India one of the fastest adopters of digital payment technology. While the pandemic has little contribution to accelerating this process but cannot be said to be the sole reason for this change. This change comes with its own set of positives and drawbacks as the regulations regarding the payment system have still a long road ahead with due modification to the policy-making and development these deficiencies can be easily taken care of.

With the decline in the cash transaction and both public and private businesses adopting digital payment systems, it would be fair to say that India is very close from being a Traditionally cash-driven economy to a paperless cashless economy.


  1. PBNS (2022, July 1) “The Rise of UPI empire as India leads Digital Payments”,merchant%20payments%20into%20one%20hood.
  2. CNBC(Contributor)(2021, Jun 24) “The evolution of India’s payment landscape and road ahead”
  3. Piyush Khaitan, Armaan Joshi (2022, May 18)” What is a Digital Payment and How does it Work?”,%2C%20debit%2C%20or%20prepaid%20card
  4. Reserve Bank of India (updated on 2016, August 04)
  5. Shehnaz Ahmed and Aryan Babele (2021, October 20)” Why India’s stagnated law for digital payments must be redesigned ”
  6. IBEF ( last updated on 2022, April )” Digital Payments and Their Impact on the Indian Economy”
  7. Ketki Jadhav (2022, Feb 04)” Digital Payments in India: Methods and Benefits”
  8. GKTODAY (2015, February 28)” Board for Payment and Settlement System”