2017: India's Era Of Payment Banking

The year 2014-15 is known to be the year of financial inclusion with Jan Dhan Yojana, 2016 marked some historic policy changes such as the GST (Goods and Service Tax) and Demonetization much recently, and finally 2017 would be the era of payment banking.

Revolutionizing the Financial Sector
It’s a long due experiment that logically follows after an economy embraces digital payments widely. The Reserve Bank of India gave out licenses to 11 entities in mid-2015 (three backed out and only eight remain in the fray now) to launch payment banks in the country.

The concept seems to be finally inching closer to reality, since the first player Airtel launched its payments bank last week. It rolled out its pilot services in Rajasthan. With over 10,000 saving accounts opened within two days of it going live, a majority of customers living in the semi-urban and rural areas have been benefited.

Several other license-holders are accelerating their preparations for the launch of their ambitious payments banks—a financial ecosystem that is said to redefine banking and push for India’s journey into a cashless economy. As according to the rules laid down by the RBI, the in-principal licensees would have 18 months starting from August 2015 to set up fully functional payment banks with their respective business models and the deadline is close, February 2017.

The next in line will be Paytm which will roll out in early January next year, with a budget of nearly Rs. 350-500 crore. “Our goal is to: 1. Digitize cash and 2. Provide access to small-income households,” says Shinjini Kumar, CEO-designate, Paytm Payments Bank.

The eight licensees will be competing with a similar public entity called the India Post Payments Bank (IPPB). Approved by the Union cabinet, it will function as a public limited company under the department of posts. With a 100% government equity and a total corpus amount of Rs.800 crore (Divison- Rs.400 crore equity and Rs.400 crore grant). India Post will have an unrivalled network of more than 150,000 branches, of which almost 140,000 are in India’s rural hinterland. Its 650 branches will be linked to 1.54 lakh post offices.

Ambit of Payment Banks
These new set of banks will accept demand deposits up to a maximum of Rs. 100,000 per customer; can issue ATM/debit cards, provide payment and remittance services through various channels, be the business correspondent (distributor) of another bank and can distribute financial products such as mutual funds and insurance products in a non-risk sharing basis. However, they differ from the traditional banks in one way and that is they cannot provide loans or issue credit cards.

The prime objective behind introducing these new banks with limited scope of operations is to further financial inclusion, as articulated by RBI in its Guidelines issued in November 2014.

In a discussion paper on “Banking Structure in India: The Way Forward” released exactly two years back—in August 2013—RBI had clearly envisaged the need for niche banking in India. Concluding that differentiated licensing could be a desirable step in this direction. However, it’s very important to discuss the pros and cons of the new financial regime.

Listing pros first,
1) Banking the Un-banked: the deposit services would allow people to join the mainstream and have a savings bank account


2) Mobile Connectivity: 8 popular banks would have gigantic reach over the masses and allow them to transact digitally with ease.

Cons now,
1) It’s Not a Lending Market: The primary way the payment banks will generate revenue is not by earning interest like the traditional banks, it will be through commission charges or by interest offered by G-secs (7.5%) lower than market rates.

2) Restricted Product Space: Without credit services, the payment banks cannot generate the multiplier effect and this impedes the financial liquidity of the economy.

Concerns & Challenges
After a lot of scrutiny and examination, RBI finally gave ‘in-principle’ licences to 11 entities to launch payments banks on August 19, 2015 but by May 2016, three applicants—Tech Mahindra, Cholamandalam Finance and Dilip Shanghvi-IDFC Bank-Telenor JV—dropped out, leaving only eight in the fray: India Post, Airtel Payments Bank, Reliance Industries, Paytm Payments Bank, Aditya Birla Nuvo, Vodafone M-Pesa, Fino PayTech and National Securities Depository.

Further, the RBI was to consider granting full licenses under Section 22 of the Banking Regulation Act, 1949 and this is for the first time in the history of India’s banking industry that the RBI has given out differentiated licenses for specific activities. The move is seen as a major step in pushing financial inclusion in the country and the expectations with India’s payment banks are huge. It’s majorly to serve India’s migrant labourers, low-income households and small businesses, offering savings accounts and remittance services with a low transaction cost.

But why then are some firms shying away from their plans?

It is true that since payments banks won’t be able to disburse loans, their net interest income will be limited. So, it seems that without traditional banking economics, the road for payment banking players is not too attractive.

As some licensees delved deeper, they found that the economics didn’t make much sense for them or that there were other priorities they wanted to pursue. Secondly, competition is also not a point to worry about. The real challenge is to drive the behavioral change to access digital transactions after the KYC process.

With 97% cash transactions in the economy and with a fast-growing population of smartphone and data users, shaping behavior and reducing their dependence on cash is the real competition.

Despite the tall claims, targeting rural or low-income geographies, data availability and Aadhaar penetration are not seamless. If they have the same requirements as large banks and can’t play to our digital connect with the consumer through the mobile, it would truly tough to achieve a different level of scale.