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Electronic Payment System: Types, Advantages, Disadvantages and Regulatory Bodies

Last Updated : 16 Feb, 2024
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An Electronic Payment System is defined as a mode of payment over an electronic network, such as the Internet. The Indian economy has developed at a rapid pace since the growth of e-commerce, electronic payments, and digital payments have gone a long way. Electronic payments have been rising since the implementation of demonetization and will continue to do so with the current government ensuring that these types of payments are promoted.

Geeky Takeaways:

  • Electronic Payment System allows customers to pay for goods and services electronically without the use of cheques or cash.
  • Businesses need a strong and secure electronic payment system in online dealings.
  • Electronic Payment System is regulated in India by the RBI.
  • The system is safe, speedy, and cost-effective in comparison with paper-based payment systems.

Types of Electronic Payment System

What is an Electronic Payment System?

Electronic Payment System allows people to make online payments for their purchases of goods and services without the physical transfer of cash and cheques, irrespective of time and location. The key components of this payment system are the payers and payees, financial institutions, electronic devices, communication networks, payment gateways, and mobile payment apps. As the global economy continues to evolve, the dependency on physical modes of payment is gradually giving way to digital alternatives that offer speed, convenience, and efficiency. These systems facilitate a diverse range of financial activities, from online purchases and bill payments to person-to-person transfers.

Types of Electronic Payment System

India, being the fastest-growing economy and a developing nation, has witnessed significant growth in various types of Electronic Payment Systems, driven by technological advancements and efforts to promote a cashless economy. The prominent types of Electronic Payment Systems in India range from the Unified Payments Interface (UPI) to Debit and Credit cards. Listed below are the types of Electronic Payment Systems:

1. Unified Payments Interface (UPI):

UPI has become a widely adopted and popular electronic payment system in India. It enables users to link multiple bank accounts to a single mobile application, allowing seamless and instant fund transfers between individuals and merchants.

2. Mobile Wallets:

Mobile Wallet services like Paytm, PhonePe, and Google Pay have gained widespread acceptance. Users can load money into these digital wallets and use the balance for various transactions, including mobile recharge, bill payments, and online shopping.

3. Debit and Credit Cards:

Debit and Credit card usage is prevalent in India, with various banks issuing these cards for electronic transactions. Cards are commonly used for Point-of-Sale (POS) transactions, online purchases, and cash withdrawals from ATMs.

4. Immediate Payment Service (IMPS):

IMPS enables instant interbank electronic fund transfers through mobile phones, internet banking, or ATMs. It is particularly useful for peer-to-peer transactions and small-value payments.

5. National Electronic Funds Transfer (NEFT):

NEFT is a nationwide electronic payment system that facilitates one-to-one funds transfer between bank accounts. It operates on a deferred settlement basis and is widely used for both individual and corporate transactions.

6. Real-Time Gross Settlement (RTGS):

RTGS is another electronic fund transfer system that allows real-time settlement of large-value transactions. It is typically used for high-value interbank transfers.

7. Prepaid Instruments:

Prepaid Instruments, including prepaid cards and gift cards, provide users with a convenient way to make electronic payments with a pre-loaded amount.

Advantages of Electronic Payment System

  • 24/7 Accessibility: Electronic Payments can be made at any time, providing round-the-clock access to financial transactions.
  • Global Accessibility: Users can make payments and transfer funds globally without being restricted by geographical boundaries.
  • Instant Transactions: Electronic Payments are processed quickly, allowing for near-instantaneous transfer of funds between accounts.
  • Faster Settlement: Compared to traditional payment methods, electronic transactions often result in faster settlement times.
  • Record-Keeping and Tracking: Electronic Payment Systems facilitate easy record-keeping for both businesses and individuals.
  • Encryption and Authentication: Electronic Payment Systems employ robust encryption and authentication protocols to secure transactions and protect sensitive information.

Disadvantages of Electronic Payment System

  • Security Concerns: Electronic Payment Systems are susceptible to security breaches, including hacking, phishing, and identity theft.
  • Technical Issues: Electronic Payment Systems rely on technology, and technical glitches or system failures can disrupt transactions.
  • Fraud Risk: Despite security measures, Electronic Payment Systems are not immune to fraud. Unauthorized transactions, stolen credentials, or fraudulent activities can occur, leading to financial losses for individuals and businesses.
  • Privacy Concerns: Users may be concerned about the collection and storage of personal information by electronic payment providers.
  • Transaction Fees: Some electronic payment systems impose transaction fees, which can add up over time.

Regulatory Bodies Governing Electronic Payment System in India

  • The Regulatory Framework for the Electronic Payment System in India is governed by the Reserve Bank of India and other relevant authorities. The Reserve Bank of India has the authority to oversee and regulate payment and settlement systems.
  • The Payment and Settlement Systems Act, 2007 provides the legal framework for the regulation and supervision of payment systems in India.
  • The National Payments Corporation of India (NPCI) issues guidelines for the UPI. The Information Technology Act, 2000, provides a legal framework for electronic transactions and addresses issues related to electronic governance.
  • The Securities and Exchange Board of India (SEBI) regulates securities and capital markets, and it also regulates electronic payments where security transactions are involved.
  • The Ministry of Finance, through its various departments, provides overarching policy direction and guidance related to the financial sector, including Electronic Payment Systems.
  • The Department of Telecommunication oversees the Telecommunications sector, and its regulations impact mobile-based electronic payment services. Mobile network operators and telecom service providers are subject to the regulations set by the DoT.
  • The Insurance Regulatory and Development Authority of India (IRDAI) regulates the insurance sector in India. In the context of electronic payments, it may have oversight over the insurance-related transactions conducted through digital payment systems.

Regulations Relating to Electronic Payment System

1. Reserve Bank of India (RBI)

The RBI plays a central role in regulating EPS in India through various guidelines and frameworks:

  • Payment and Settlement Systems Act, 2007: This legislation provides the legal foundation for the regulation and oversight of payment systems in India. It empowers the RBI to supervise and regulate the functioning of EPS to maintain financial stability and consumer protection.
  • Guidelines on Prepaid Payment Instruments (PPIs): The RBI issues guidelines that govern the issuance and operation of prepaid payment instruments, including digital wallets and prepaid cards. These guidelines outline parameters, such as issuance limits, reload limits, and Know Your Customer (KYC) requirements.
  • Unified Payments Interface (UPI): The RBI regulates UPI, a real-time payment system, through guidelines that cover transaction limits, security protocols, and dispute resolution mechanisms. UPI has emerged as a popular channel for peer-to-peer and merchant transactions.

2. National Payments Corporation of India (NPCI)

  • Operational Guidelines: NPCI develops and enforces operational guidelines for payment systems it manages, including UPI, Immediate Payment Service (IMPS), and Bharat Bill Payment System (BBPS). These guidelines ensure standardized and secure operations.
  • Security and Risk Mitigation Measures: NPCI implements security measures and risk mitigation strategies to safeguard electronic transactions. These measures include encryption standards, two-factor authentication, and continuous monitoring for potentially fraudulent activities.

3. Other Regulatory Bodies

Several other regulatory bodies also have a role in governing EPS

  • Securities and Exchange Board of India (SEBI): SEBI, while primarily focused on securities market regulations, may have implications for EPS, especially in areas related to digital wallets and financial instruments.
  • Insurance Regulatory and Development Authority of India (IRDAI): IRDAI oversees the insurance sector, and regulations related to EPS in insurance transactions may fall under its purview.
  • Consumer Protection Regulations: Consumer protection regulations, focusing on transparency, disclosure, and dispute resolution, impact EPS to safeguard user interests.
  • Data Protection and Privacy Laws: The introduction of data protection laws, such as the Personal Data Protection Bill, addresses concerns related to the handling and protection of user data within EPS. These regulations collectively form a robust framework, ensuring the secure and efficient functioning of electronic payment systems in India. It’s important to stay updated on any amendments or new regulations introduced by these regulatory bodies.


In conclusion, the Electronic Payment System refers to a mode of payment which does not include physical cash or cheques but rather includes Debit Card, UPI, etc. Regulated by the RBI, NPCI, and other regulatory authorities possess various legal issues but hold advantages too. The recent announcement of the linkage of fast digital payment systems of the central bank of India and Singapore, Unified Payments Interface (UPI) and Pay. Now, closely aligns with the G20 financial inclusion priorities of driving faster, cheaper and more transparent cross-border payments and shows that the future is in electronic payment systems.

Frequently Asked Questions (FAQs)

1. What is UPI, and how does it work in the context of Electronic Payments in India?


UPI or Unified Payments Interface, is a real-time payment system facilitating interbank transactions. It allows users to link multiple bank accounts to a single mobile application, enabling seamless fund transfers and payments. UPI transactions are initiated through mobile apps, providing a user-friendly and efficient way to conduct digital transactions.

2. What measures are in place to ensure the security of Electronic Payment Systems in India?


The Reserve Bank of India (RBI) implements robust security measures for electronic payment systems. These include guidelines on encryption standards, two-factor authentication for transactions, and continuous monitoring to detect and prevent fraudulent activities. Additionally, financial institutions are mandated to comply with strict security protocols to safeguard user information and transactions.

3. How does the KYC process work for Mobile Wallets and Digital Payment platforms?


Know Your Customer (KYC) norms are enforced to verify the identity of users engaging in electronic transactions. For mobile wallets and digital payment platforms, users are required to provide specific identification documents to complete the KYC process. This ensures regulatory compliance and enhances the security of electronic payment services.

4. What role does NPCI play in the Electronic Payment Landscape of India?


The National Payments Corporation of India (NPCI) is a pivotal institution that operates and manages various retail payment systems in the country. NPCI oversees systems like UPI, IMPS, and NACH, contributing to the development and maintenance of efficient, secure, and interoperable electronic payment platforms.

5. How are Prepaid Payment Instruments regulated, and what types of transactions do they cover?


Prepaid Payment Instruments, such as mobile wallets and prepaid cards, are regulated by the RBI. The guidelines encompass aspects like issuance limits, reload limits and KYC requirements. These instruments facilitate a range of transactions, including mobile recharges, bill payments, and online purchases, providing users with a convenient and cashless payment experience.

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