The pay­ments banks revo­lu­tion

The Pak Banker - - OPINION - Su­mita Kale

WITH the Re­serve Bank of In­dia (RBI)'s in-prin­ci­ple ap­proval to 11 pay­ments banks, In­dia has taken one big step for­ward on the road laid out seven years ago. In "A Hun­dred Small Steps", the Raghu­ram Ra­jan Com­mit­tee on Fi­nan­cial Sec­tor Re­forms had made strong rec­om­men­da­tions to change the in­ter­face be­tween the fi­nan­cial sec­tor and the poor, stat­ing, "the most im­por­tant shift in par­a­digm is to al­ter the em­pha­sis some­what from the large-bank-led, public-sec­tor-dom­i­nated, man­date-rid­den, branch-ex­pan­sion-fo­cused strat­egy for in­clu­sion". Among other pro­pos­als, the re­port had rec­om­mended en­try of more pri­vate de­posit­tak­ing small banks and use of tech­nol­ogy, par­tic­u­larly mo­bile phones, to re­duce costs. While the par­a­digm shift might have sounded quite rev­o­lu­tion­ary when it was set out, quite a few of its rec­om­men­da­tions have ma­te­ri­al­ized, chang­ing the in­clu­sion land­scape. How­ever, even with the re­cent phe­nom­e­nal suc­cess of the Prad­han Mantri Jan-Dhan Yo­jana in im­prov­ing ac­cess to fi­nan­cial ser­vices, us­age by low-in­come con­sumers re­mains a chal­lenge. It is here that the pay­ments banks are ex­pected to make their im­pact.

The prin­ci­ple be­hind pay­ments banks is sim­ple-ac­cel­er­at­ing the pen­e­tra­tion of fi­nan­cial ser­vices among low-in­come con­sumers by lever­ag­ing tech­nol­ogy and the large, non­bank­ing re­tail net­work with­out com­pro­mis­ing the se­cu­rity of the fi­nan­cial sec­tor. The 11 ap­pli­cants cho­sen come from dif­fer­ent back­grounds, the com­mon­al­ity be­ing that they all align to this ba­sic prin­ci­ple. Each comes with its own strengths and will have its own set of chal­lenges. For in­stance, In­dia Post-a nat­u­ral fit to be a pay­ments bank as it al­ready of­fers money trans­fers and de­posits and has un­ri­valled reach in the coun­try-will have to ramp up its dig­i­tal pay­ments in­fra­struc­ture and work cul­ture at the last mile. For each en­trant, part­ner­ships with banks will be a key fac­tor for suc­cess. Given the lack of clar­ity on the busi­ness model for pay­ments banks, suc­cess­ful part­ner­ships will be those that al­low for chang­ing re­spon­si­bil­i­ties and rev­enue-shar­ing over time as the mar­ket ma­tures.

In any dig­i­tal fi­nan­cial ser­vice, of­ten the easy pick­ings in the early phase of a part­ner­ship come through the pay­ments busi­ness and ac­cess­ing the non-bank's cus­tomer data­base, with rev­enue from bank­ing ser­vices, sav­ings, credit, etc., pick­ing up only over time. In fact, as tech­nol­ogy and mar­kets evolve, all part­ners must be ag­ile in their re­sponses and be pre­pared to move with the change. There are in­ter­est­ing ex­am­ples from other coun­tries, for in­stance Te­lenor and Tameer Mi­cro­fi­nance Bank have to­gether set up the largest branch­less bank­ing ser­vice in Pak­istan. Te­lenor has a large cus­tomer base, wide tele­com and agent dis­tri­bu­tion net­work, mar­ket­ing skills and rel­a­tively higher fi­nan­cial strength, while Tameer's ex­per­tise lies in fi­nan­cial prod­ucts, risk man­age­ment and com­pli­ance. Re­spon­si­bil­i­ties are aligned to the core strengths, rev­enues are shared in pro­por­tion to ex­penses and the rev­enue split is re-ne­go­ti­ated over time. Apart from man­ag­ing part­ner­ships with ex­ist­ing banks, another new re­la­tion­ship that will be tested will be that be­tween the reg­u­la­tor and these new "dif­fer­en­ti­ated" banks. For RBI as well as the non-banks in the sec­tor now, there will have to be close di­a­logue to en­sure that each other's con­cerns are shared and re­solved, as each charts out its course in fresh wa­ters.

Even as the new en­trants fo­cus on the busi­ness model and ful­fill­ing reg­u­la­tory re­quire­ments, they must not lose sight of the end goal: cater­ing to the fi­nan­cial needs of the low-in­come cus­tomer. While RBI will work on con­trol­ling risk of fraud and fi­nan­cial in­sta­bil­ity through its var­i­ous reg­u­la­tions, low-in­come cus­tomers have other con­cerns. A re­cent Con­sul­ta­tive Group to As­sist the Poor re­port ti­tled Do­ing Dig­i­tal Fi­nance Right, an­a­lysed re­search find­ings from 16 coun­tries to con­clude that low-in­come con­sumers are hes­i­tant to adopt dig­i­tal modes for fi­nan­cial trans­ac­tions due to:

In­abil­ity to trans­act due to net­work/ser­vice down­time, In­suf­fi­cient agent liq­uid­ity or float, which also af­fects abil­ity to trans­act, l User in­ter­faces that many find com­plex and con­fus­ing, Poor cus­tomer re­course for griev­ances and queries, Non-trans­par­ent fees and other terms Fraud that tar­gets cus­tomers, In­ad­e­quate data pri­vacy and pro­tec­tion

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