Scope and opportunities of Payment Banks in India
Payments banks is an Indian new model of banks conceptualized by the Reserve Bank of India (RBI). These banks can accept a restricted deposit, which is currently limited to ₹100,000 per customer and may be increased further. These banks cannot issue loans and credit cards. Both current account and savings accounts can be operated by such banks. Payments banks can issue ATM cards or debit cards and provide online or mobile banking. Bharti Airtel set up India’s first payments bank. On 23 September 2013, Committee on Comprehensive Financial Services for Small Businesses and Low Income Households, headed by Nachiket Mor, was formed by the RBI. On 7 January 2014, the Nachiket Mor committee submitted its final report. Among its various recommendations, it recommended the formation of a new category of bank called payments bank. On 17 July 2014, the RBI released the draft guidelines for payment banks, seeking comments for interested entities and the general public. On 27 November, RBI released the final guidelines for payment banks.
Advantages of Payment Banks:-
▪ Reach: Traditional banks due to their structures and business priorities they may be unable to cater to certain segments and geographies. But Payment Banks can reach every corner of the country due to its technology oriented services.
▪ Volume: Payments banks largely deal with low value, high volume transactions like they can accept deposits of only up to Rs 1 lakh. So this low value transactions will be very helpful to migrant workers and particularly women workers
▪ Complement: Payments banks themselves cannot offer certain services to customers, they can always partner with traditional banks for providing loans and selling investment products. Payments banks, therefore, complement traditional banks, rather than compete with them.
▪ Willingness: In payment banks, customers are willing to pay for the services they don’t have access to otherwise. Payments banks have a chance to reach out to them with these products at reasonable prices
▪ Interest Rates: The interest rate for a commercial bank is between 3.5 and 6 per cent. Payment banks are offering a really good deal in the case of interest rate with the highest being a 7.25%.
▪ Zero balance account: Payment banks offer a zero balance account or a no minimum balance account without any extra or hidden charge, unlike a commercial bank who levy charges if the customer doesn’t hold a minimum balance in their account.
Challenges faced by Payment Banks (PBs):-
▪ Blanket ban: PBs face a blanket ban on any type of lending. Besides apart from the requirement of maintaining cash reserve ratio (CRR)/ statutory liquidity ratio (SLR) 75% on their demand liabilities.
▪ PBs faces a cap on keeping deposits with commercial banks at 25% of their current and time deposits. This reduces the business of PBs to that of fixed spread business.
▪ Liability: PBs cannot accept deposits higher than 1,00,000 lakh. Besides capital requirement is quite steep at 15% capital to Risk Weighted Assets ratio. This led to return on equity for PBs comes out less than 5%.
▪ Regulations: the higher disclosure norms that oblige them to share their business plan with the regulator could prove to be somewhat tricky when the business model of technology intensive companies itself could be biggest source of their competitive strength.
Other regulatory burdens:-
▪ A minimum of 25% physical access points in rural areas
▪ Subsidiary structure like non-banking finance companies are not permitted
▪ Non-resident Indian deposits not permitted
Patient capital: Even though they are allowed to raise deposits, this may not be sufficient for PBs to fund their expansion. And with cutthroat competition, acquiring customers will be a substantial challenge-as will maximizing revenue per customer.
▪ No-frill accounts: Experience from Jan DhanYojna has shown that many such no-frill accounts have remained dormant, thus affecting the viability of the banks
Measures to improve the performance of Payment Banks:
▪ Arrangement with the universal bank to automatically transfer funds in account exceeding RS 1lakh
▪ Access to Aadhaar-based know your customer (KYC), as manual KYC is at least three times in terms of cost to e-KYC
▪ RBI should allow PBs to tie up with third-party services to cross sell products, as margins are small, so economies of scale is very important.
▪ The Reserve Bank of India (RBI) has suggested payments banks that have been granted the inprinciple licence to ensure there is sharing of infrastructure among banks. So RBI should take measure to share infrastructure among banks and Payment Banks.
Payments banks will do almost all the work that is currently being done by commercial banks, but the payments banks will work under certain restrictions like;
o As the commercial banks, the payment banks will also accept the money of the people as a deposit but the limit is fixed, which means the payments banks can accept deposits up to a maximum of Rs. 1 lakh from a customer.
o Payments banks; will be entitled to issue ATM or debit cards to their customers but cannot issue a credit card.
o Payments banks; will be authorised to open both savings and current accounts of their customers.
o Payments banks cannot provide loans or lending services to customers.
o Payments banks cannot accept deposits from the Non-Resident Indians (NRIs). It means; the people of Indian origin who have settled abroad cannot deposit their money in the payment banks.
o Payments banks will be allowed to make personal payments and receive remittances from the cross border on the current accounts.
o Payments banks will have to deposit the amount in the form of a Cash Reserve Ratio (CRR) with RBI as other commercial banks do.
o Payments Banks will have to invest a minimum of 75% of its demand deposits in government treasury/securities bills with maturity up to one year and hold a maximum of 25 %in currents and fixed deposits with other commercial banks for operational purposes.
o Payment banks can provide the Facility of utility bill payments to its customers and the general public.
o Payments banks can not open subsidiaries to undertake Non-Banking Financial Services activities.
o Payments bank; with approval from RBI, can work as a partner with other commercial banks and also can sell mutual funds, pension products, and insurance products.
o Payments banks must use the word “Payments Bank” in their names to look different from other banks.
o Payments banks will be allowed to provide internet banking and mobile banking facility to their customers.
o Payments banks can become a business representative of any other bank, but it will have to comply with the guidelines of the Reserve Bank of India.
o The payments banks can accept remittances to be sent to or receive remittances from multiple banks through payment mechanism approved by RBI, such as RTGS / NEFT / IMPS.
Payments Banks Playing To Their Strengths:-
As Indian payments banks fail to find their revenue dreams, most of them are trying to leverage their core strengths to reach the market. For instance, each operator in the ecosystem is servicing different financial products. Some have enabled PoS transactions or got into FasTAG partnerships or focussed on utility payments in rural areas. But these are only a few scattered solutions and not well-orchestrated, long-term strategies.
Take, for instance, India Post PB (IPPB). Based on its massive presence in 650 districts and among 3.5 crore customers, the IPPB has set up a full suite of banking services and strong linkages with all interoperable payment and settlement systems. It is now focussing on pan-India G2C (government-to-citizen) payments, especially rural DBT (direct benefit transfer) disbursements under the Pradhan Mantri Garib Kalyan Yojana.
Unlike other payments banks, IPPB does not use PoS devices or issue debit cards. Its local agents – postmen, postwomen or BCs, initiate transactions by taking a customer’s biometrics and Aadhaar number which are stored in a QR card. Unlike debit cards which need personal identification numbers (PINs) for payment initiation, QR cards use the QR code to scan and pay. In spite of these benefits, the bureaucratic weight has held IPPB back from utilising its full potential and taking digital payments to remote regions, say industry experts.
In contrast, Fino PB has utilised its massive BC network to reach out to people. “We cannot sell Mercedes to a customer who wants a Maruti,” says Rishi Gupta, managing director and chief executive officer of Fino.“The focus has been on distribution in a way that could compete with our telecom peers, and we did it without any fanfare,” he says, explaining the BC-first approach that Fino has taken to expand its market presence.
Most fintech experts concur, saying both IndiaPost and Fino have demonstrated the best use cases in the current PB ecosystem.
Both Fino PB and IPPB have enabled an Aadhaar-enabled payment system (AePS) for maximum convenience. Airtel PB has also set up a cardless cash withdrawal system called Instant Money Transfer (IMT), which can be used via its mobile app. Apart from this recent e-PoS initiative, its AePS can be used to transact at micro-ATMs manned by BCs. During the Q3 earnings call of Bharti Airtel, the company indicated new initiatives for the PB business, which would be rolled out soon. With a network of more than 10 lakh retailers, Airtel PB has the most extensive merchant reach in the country.
Paytm, on the other hand, has several payment solutions in its portfolio. For the PB business, the company has roped in a number of big-ticket partnerships, including tie-ups with major auto manufacturers for FASTags under the National Electronic Toll Collection programme. But a large number of products across its ecosystem often dilute Paytm’s PB performance.
The advent of payments banks together with the growth of the Internet promoted the digitization of the payment process with the provision of various online payment methods like electronic cash, debit cards, credit cards, contactless payment, mobile wallets, etc. Besides, the services provided by payments banks are gaining popularity day-by-day and are showing a transition by advancing towards a propitious future of speculative prospects in conjunction with the technological innovations. The organizations through payment banks are able to share the experience by giving the consumers various options like cash back, product/service comparison, payment preferences, etc.
The first thing that payments banks will add to the industry is competition.
The second important impact, since payments banks are set up by players from different industries, they can bring in their own customers to the banking sector.
● Another point is that consumers would be free to open both savings bank accounts and current bank accounts with payment banks. With this, payment banks are likely to attract both retail as well as business customers. Consider the India Post Payments Bank. This payments bank is looking to offer door-step banking. The bank will charge a nominal fee of up to Rs. 35 for this. This facility will be available for transactions that are less than Rs. 10,000. Facilities such as this are likely to help financial inclusion to a large extent. Payments banks have the ability to change the face of rural India in the coming years. Today many people not have a bank account that in includes millions of people in our country. It will help people of rural areas where they don’t have access to bank connectivity. Now they can use their account through their mobile phones.