New players in the banking sector that can use technology in order to achieve financial inclusion in a cost effective manner. These banks are expected to reach customers mainly through their mobile phones rather than traditional bank branches.
It could be uneconomical for traditional banks to open branches in every village, so RBI is giving out differentiated licenses to Payment banks helps these small financial institutions to acquire customers at low costs and increase the financial inclusion.
Whom are they targeted at?
Rural markets, migrant laborers, low-income households and small businesses.
Inspired by the success story of M-Pesa:
Mobile phones could be an easiest way to reach masses as proved hugely in other developing countries like Kenya, where Vodafone’s M-Pesa has been very successful. Two out of three adults use M-Pesa in Kenya to store money, make purchases and transfer funds to friends and relatives.
Services offered by Payment banks:
- CASA accounts with limit of deposits up to Rs. 1 Lakh
- Issuance of debit cards usable on ATM networks of all banks.
- Transfers and remittances through a mobile phone
- Automatic payments of bills, and purchases in cashless, cheque less transactions through a phone
- Offer card acceptance mechanisms to third parties such as the ‘Apple Pay.’
- They can offer forex services at charges lower than banks.
Apart from the services mentioned above, Payment banks can also play a crucial role in implementing the government’s Direct Benefit Transfer Scheme (DBTS), where subsidies on healthcare, education and gas are paid directly to beneficiaries’ accounts.
Basic services not offered by Payment banks:
- Can’t offer loans
- Can’t issue credit cards
Which basically mean that these banks can’t earn revenue in the form of net interests which form a majority of a traditional bank’s income. This also means that Payment banks have to operate at really low operational costs for their business model to be viable.
- Payments banks have been mandated to hold 75% of their liabilities in SLR securities
- Maximum 25% of it at saving deposits and fixed term liabilities of other commercial banks
Since majority of their balances are held with G-Secs which will yield very low interests, payment banks will transfer these low interests to their customers.
Because of the many restrictions imposed by RBI it is clear that the only revenue streams available are fee income from remittances, merchant fees for digital payments. Whether this revenue model is viable is something that has to be seen. Since the poor would be charged fee on every transaction would they find these banks attractive? is a question that needs an answer.
SBI chairperson Arundhati Bhattacharya said, “Neither payments banks nor small finance banks seem to have as yet devised a business model that can be said as viable.”
Although 41 entities applied for a Payment bank license, RBI granted in-principle approvals to 11 entities for setting up payments banks (PBs) in August 2015.
Aditya Birla Nuvo Ltd, Airtel M Commerce Services Ltd, Cholamandalam Distribution Services Ltd, Department of Posts, Fino PayTech Ltd, National Securities Depository Ltd, Reliance Industries Ltd, Dilip Shantilal Shanghvi, Vijay Shekhar Sharma, Tech Mahindra Ltd, Vodafone m-pesa Ltd are the entities which received approvals to their applied licenses.
Out of these Tech Mahindra, Dilip Shangvi (Sun Pharmaceuticals) and Cholamandalam Investment are the ones who pulled out.
Players who could win the race:
Since it’s a low margin and high volume business, Raghuram Rajan feels that the payments bank would work well for those who already have a base of operations and many contact points. Mobile companies are probably in the best position to get the business model right because of their reach. Another entity that is expected to succeed is India Post Payments Bank (IPPB) which is being wooed by commercial banks, insurance firms and asset management firms for equity partnerships and other business alliances. IPPB has a network of at least 150,000 branches; close to 140,000 of them are in rural India. This is its great strength.