So that no one is left out
Lately, ‘payment banks’ have been a lot in the news. What exactly are these ‘banks’ and are they going to be any different from the regular banks? Who are their primary target customers? What is their future likely to be in the banking system? Will they be allowed to stay independent (unlike in the case of Bharatiya Mahila Bank, which is rumoured to be headed for a merger with State Bank of India after only a couple of years of existence)? This article is an attempt to find some clues and answers.
For the first time in the history of India’s banking sector, Reserve Bank of India (RBI) is giving out differentiated licenses for specific activities. The country’s central banking institution expects payment banks to target India’s migrant labourers, low-income households and small businesses, offering savings accounts and remittance services with a low transaction cost. It is hoping that these 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: against this backdrop, mobile phones for wide coverage are a promising low-cost platform for quickly taking basic banking services to every citizen. The innovation is also expected to accelerate India’s journey into a cashless economy.
-About 40 per cent–50 per cent of India’s 1.2 billion-strong population are eligible to open a bank account but are still unbanked, according to KPMG.
-In all, 390 million of the country’s approximately 937 mobile subscribers are from rural areas, according to Telecom Regulatory Authority of India (TRAI). A majority of them do not hold a bank account.
-A CRISIL report projects that the current Rs 80,000 crore to Rs 90,000 crore domestic-remittances market will grow at 11 per cent to 13 per cent CAGR in the next few years, based on an assessment of remittances to the low-income migrant population. This segment is expected to be among the early users of payment banks. Transactions done through mobile wallets have also tripled over the last two years to Rs 2,750 crore, according to this report. The reason is that it is cost-effective and easily accessible. It is used largely by urban people to remit money to family and relatives living in rural India.
-Payment banks can play a crucial role in implementing the government’s Direct Benefit Transfer (DBT) scheme, where subsidies for healthcare, education and gas are paid directly to beneficiaries’ accounts.
-Financial inclusion is most likely to be achieved when banks find it to be a scalable and viable business.
How Are They Going to Be Profitable?
As of now, payment banks are not allowed to extend credit. The fact, though, is that banks earn their income from lending or extending financial credit for a wide range of activities. We also know that banks pay us interest amounts for keeping our money with them. So, when payment of deposit interest is expenditure for banks, how will they survive without making profit? They will also have to incur expenses on recruitment and deployment of staff, rent for branch premises, maintenance charges for water and electricity, setting up computer hardware/software, and so on. Let’s look at the available options.
a) Volume of banking transactions and charges on services provided: A lot will depend upon the volume of business. The expectation is that a high number of people will sign up and use payment banks primarily to keep a savings account. These banks are expected to be aggressive in opening bank accounts of hitherto-ignored sections of people in small urban areas and towns as well as places where bank branches are yet to penetrate. They may also offer quick money transfers. These services are chargeable and will be the mainstay of their income. A small fee of one per cent to two per cent on a large volume can be lucrative on normal cash transfers.
Depending on volume also means that the model should focus on being cost-effective and technologyenabled. The customer acquisition and servicing cost structures of payments banks may not follow those of a traditional bank.
b) Income from investments in government securities: The revenue model will also depend on returns on investment in government securities.
c) Extended services through mobile/Internet banking: Payment banks floated by telecom companies are expected to come up with innovative schemes of mobile banking through mobile apps that can be extended to their own subscribers. They may also expand the scope of Internet banking to include multiple money-transfer systems, bills payment and other transfers. There may be a small surcharge payable for such services, which are presently outside the scope of RBI control. It is to be noted that overall profitability of payment banks will be determined by the extent to which they are able to promote and incentivise adoption and usage of mobile channels to customer segments.
Impact on Customers
“They (payment banks) will change the way people think, change the way they keep the money, where they keep their money, the way they pay,” India’s Finance Minister Arun Jaitley has predicted.
There is no doubt that payment banks will alter the way transactions are carried out. While there are divergent views on how things will pan out, at the moment the potential for innovating and reaching out has put the spotlight firmly on this new way of banking.
a) Competition with existing banks While payment banks are unlikely to be big disruptors in the near term, they may make things just a tad difficult for existing banks. Let’s not forget that the penetration of telcos is far greater than that of banks. This in itself presents a great opportunity. Payment banks will essentially rely on technology to reach payment services to all customers, using mobiles as the vehicle of banking. Existing banks must build digital platforms to be able to retain customers and their savings. Else, their growth may stagnate. They will also have to relook at the way they offer services and the cost at which they offer these services. There may be aggressive marketing by payment banks, by way of reducing cost of service while offering higher interest rates (through schemes like unfixed saving deposit).
b) Availability of new products and services
Besides offering basic deposits and remittance services, payment banks are likely to introduce new products and services in response to changing market trends and demands. There may be innovative
schemes attracting deposit; debit cards/credit cards can become thematic or product-specific; expansion of service can be related to one’s profession or studies; and so on.
c) Expand mobile/Internet platforms
While banking transactions are expected to become more electronic-based, the challenge will be to familiarise the larger Indian population of first-time users with the world of technologyenabled banking services. Mobile companies functioning as payment banks can harness their existing infrastructure and capabilities to link up their subscriber base to the banking services they are offering. Eventually, mobile banking will create the conditions for cashless banking. The mobile phone will then perform the same role as credit and debit cards, cutting out the need for too many cash payments.
Whatever the view or the point, the journey towards financial inclusion has begun and it is expected that the lessons picked up along each step will feed into the next stage. In September, RBI granted 10 entities in-principle licenses to open socalled small finance banks, in another definite move towards expanding access to financial services in rural and semi-urban areas. These banks will offer basic banking services, accepting deposits and lending to unserved and underserved sections including small business units, small and marginal farmers, micro and small industries, and entities in the unorganised sector. Thus, unlike in the case of payment banks, the small finance banks will be allowed to lend. In fact, eight out of the 10 entities granted the inprinciple approval, which is valid for 18 months, are microfinance institutions. So, these banks will now be able to provide secured and legal loans to small and medium enterprises and small businesses, bringing them under the ambit of the financial system.