The world of Payment Banks in India

My PayTM wallet account recently got converted to a PayTM Payment Bank account of its own, and the wallet balance will now start earning a decent interest as well. Welcome to the world of Payment Banks - a new model of banks conceptualised by the Reserve Bank of India (RBI).

Background

Payments banks is a new model of banks conceptualised by the Reserve Bank of India (RBI). A payments bank is like any other bank, but operating on a smaller scale without involving any credit risk. The idea is to provide financial services for small businesses, low income households, and migrant labour workforce in secured technology-driven environment - leading to financial inclusion and increased access to financial services across the society. 

How Payment Banks are expected to provide value addition

With payments banks, RBI seeks to increase the penetration level of financial services to the remote areas of the country. The introduction of these banks is expected to accelerate India’s transformation into a cashless economy. The expectation is that the payment banks will enable poorer citizens who transact only in cash to take their first step into formal banking. 

It could be uneconomical for traditional banks to open branches in every village but the mobile phones coverage is a promising low-cost platform for quickly taking basic banking services to every rural citizen. The innovation is also expected to accelerate India’s journey into a cashless economy. 

India’s domestic remittance market is estimated to be about ₹800-900 billion and growing. With money transfers made possible through mobile phones, a big chunk of it, especially that of the migrant labor, could shift to this new platform. Payment banks can also play a crucial role in implementing the government’s direct benefit transfer scheme, where subsidies on healthcare, education and gas are paid directly to beneficiaries’ accounts.

What Payment Banks can do?

1. These banks can accept a restricted deposit, which is currently limited to ₹1 lakh per customer and may be increased further.
2. Such banks can accept utility bills. 
3. They are allowed to pay interest on the deposited money.  For companies that have operated as mobile wallets (which are a type of Pre-Paid Instrument aka PPI), this is a big step forward as it raises the funds limit, and allows interest to be paid on the deposits, making it more attractive for users to store their money with a Paytm or m-Pesa.
4. Both current account and savings accounts can be operated by such banks
5. Payments banks can issue services like ATM cards, debit cards, net-banking and mobile-banking. The payment banks ATM or debit cards will also work on all banks' machines. 
6. Payment banks can be integrated with your savings bank accounts via IMPS and NEFT transfers and transfer money directly to bank accounts at nearly no cost being a part of the gateway that connects banks.
7. They can provide basic financial services like mutual funds, insurance products etc.
8. They can provide Forex cards to travelers, usable again as a debit or ATM card all over India.
9. They can offer Forex services at charges lower than banks.

What Payment Banks cannot do (vis-a-vis regular banks)?

1. It cannot form subsidiaries to undertake non-banking activities. 
2. The bank cannot undertake lending activities  - so the payment bank cannot provide you with any loans, credit cards etc. For these services, you need to connect with a traditional bank or a NBFC.
3. The payment banks are not allowed to invest the accumulated money in any place other than into government securities.
4. Payment banks can't accept NRI deposits, which makes sense considering the goal of financial inclusion.
5. No timed-deposits such as Fixed Deposits etc are allowed, since the objective of keeping the money with a Payment Bank is to become digital in your day to day transactions and transfer money via mobile.

Limit to Deposits

Initially, the deposits with the Payment Banks are capped at ₹100,000 per customer, but it may be raised by the RBI based on the performance of the bank. This might seem like a very low limit to most people reading this, but if you're typically outside the banking system, then it is a fairly comfortable amount. The real effect will come to remittances within the country, as it will become easier for people to send money home to smaller towns and villages while working in the city.

RBI Regulations for Payment Banks

1. The payments bank have to deposit 75 per cent of their money in Statutory Liquidity Ratio(SLR) eligible government securities, with maturity up to one year and hold maximum 25 per cent in fixed deposits with other scheduled commercial banks for operational purposes and liquidity management.
2. A minimum of 25% of the payment bank branches must be in the unbanked rural area - which is the ground reason for the existence of this stream of banking.
3. The bank must use the term "payments bank" in its name to differentiate it from other types of bank.
4. The bank should be fully networked from the beginning. 
5. Have a look at the full set of RBI guidelines for Payment Banks here.

Existing Payment Banks

As on date, there are only 3 payment banks which are active. Interestingly and logically, this business makes lot of sense to them since they already have a strong rural connect via their core businesses.

1. Airtel Payments Bank
2. PayTM Payment Bank
3. IndiaPost Payments Bank

Of these, Airtel gives the highest interest of 7.25% on your deposits. However, it would not be wise on your part to expect it to hold on to these rates for very long considering that interest rates are on downward trajectory. Also, while these banks are offering interest on savings account, they are also charging 0.65% on withdrawal amount above Rs 4,000. 

IndiaPost Payment Bank, on the other hand, is providing door step banking services by charging a nominal fee of Rs.15-35 per visit for amount below Rs.10,000.

Opportunities with Payment Banks

Sheer size of the market is attraction enough. India’s unbanked population stands at 233 million. As per the 2011 census, 833 million people stay in rural areas and a significant part of that population has little awareness of new-age banking services, even if they have the accounts. Another problem with a patriarchal society like India is the low participation of women (48% of the population or 586 million) in financial management and decisions. 

These challenges stem from complexity associated with banking and financial transactions. This is precisely the opportunity a payments bank should en-cash. It requires smart segmentation, both geographical and demographic, to offer tailor-made products for bottom-of-pyramid (BOP), rural, the unbanked and women.

Challenges with Payment Banks

On paper, the concept of payments bank kills two birds with one stone. Firstly, it gives an impetus to the financial inclusion initiative by widening the digital payment infrastructure. Secondly, it encourages the Fin-tech culture in the Indian banking landscape and indicates RBI is in tune with times, despite its legacy.

While both are desirable objectives, in reality, their long term viability is a challenge because of the fact that this is a high volume-low margin commoditized business, driven by convenience and pricing, with hardly any customer stickiness. There is immense restriction on fund deployment, no access to earning by lending, and over-competition - all of which are going to make this business a tough model to operate within narrow margins.

Summary

There is enough evidence that conventional banking is dying. Technology is reaching an inflection point to change banking paradigms. A payments bank license gives a vantage point to view these changes much better. Therefore, we feel that the idea of Payment Banks is just right. The start also has been decent. Long term viability will be a challenge. It is quite understandable that some players would get cold feet. Although, for those who decide to persist with the opportunity, there is light at the end of the tunnel.

Cheers

Manoj Arora

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