Primer to Payment Banks in India!!!!

Payment Banks:
A payments bank is a bank, but operating on a smaller scale without involving any credit risk. In other words, it can carry out most banking operations but customer can’t take advance loans or issue credit cards.
The Payment Banks is based on the concept of PPI that is to load cash into mobile and use it to do various transactions and offer services like ATM/debit cards, mobile banking, net banking and third-party fund transfers.
The objective is to propose measures for achieving financial inclusion and increased access to financial services.

The concept of payment banks was given by Nachiket Mor committee taking cue from Vodafone M-Pesa in Kenya, where 68 percent population don’t have bank accounts but has financial inclusion of 70 percent due to M-Pesa.

Why payments banks?
Payment banks can be conceptualized and understood as an entity similar to traditional banks but
catering to a niche area. The objectives of setting up of payments banks will be to further financial inclusion by providing:
• small savings accounts
• payments/remittance services to migrant labour workforce, low income households, small businesses, other unorganized sector entities and other users.

Features of Payment Bank:
1. Accept deposits upto Rs. 1,00,000 and pay interest just like savings bank account
2. Issue debit cards usable at ATMs of all banks
3. Transfer money and remittances through mobile phones
4. Offer third party card acceptance mechanisms like ‘Apple Pay’
5. Offer financial products like mutual funds and insurance

The payment bank is like new kind of banking in India.There are few challenges:
1. The Payment only model:
A payments-only model is an incomplete proposition and relies highly on account balances (capped at ₹1 lakh) for
profitability. It’s akin to any high volume-low margin commoditized business, driven by convenience and pricing,
with little customer stickiness. Making a payments bank viable requires a fine balance between cost of
acquisition of granular liabilities, offering competitive pricing on transaction charges and ability to quickly
reach critical mass.
2. Cross Sell fee:
The cross sell fee is called as green pasture for building profitability Like Selling of insurance and mutual
fund products is closely regulated by sectoral regulators (IRDA and SEBI), Cross-selling credit products like
loans from NBFCs or Banks is not easy.
3. Restriction on Fund Deployment:
Payments banks are required to invest 75% of their CASA balances in Statutory Liquidity Ratio (SLR) eligible
government bonds
4. No lending:
Payments banks are not permitted to lend. Their investment in stipulated government securities and bank FDs
would yield 2-4% net of cost of funds

Why payment banks will change the banking game for customers?
First, and foremost, payment banks will bridge the last mile between bank branches and the remote customer’s living in a rural hamlet. Payment banks will essentially rely on technology to reach payment services to all customers, using mobiles as the vehicle of banking. Mobiles go even where humans don’t. Physical bank branches (or bankers or ATMs) will still be needed for some functions – opening an account, depositing cash, etc – but all day-to-day payments, including peer-to-peer payments) can be done remotely. The mobile phone will become the virtual ATM and small-payments cheque-book. In less than 10 years, every Indian will have a bank account. Payment banks are the key enablers.

Second, banking costs will come down due to intense competition driven by the expected proliferation of payment banks. Currently, we pay through our noses for banking services, whether it is above-limit ATM transactions, additional cheque-books, big money transfers, maintenance of minimum balances, or draft issuance fees. These costs will come down as payment banks start offering zero-balance accounts and low-cost services.

Third, the public sector banks are sitting ducks for bankruptcy and taxpayer bailouts if they do not change. Between then, efficient payment and private sector banks will take away their lucrative businesses and prized customers, as they will be both well capitalised and efficient.

Nitin Sharma

Nitin is Senior Consultant @ Verinite. Passion to learn about Cards and Payment domain. Loves to travel and explore nature a lot.