Pay­ment Banks

Consumer Voice - - Contents -

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.

The Ra­tio­nale

-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.

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