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Payment Banks: 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.

What is a Payment Bank?

A payment bank may be defined as a ‘nonfull-service niche bank’. It can only open demand deposits (current and savings deposit accounts) and provide remittances. It reaches customers mainly through their mobile phones rather than traditional bank branches.

In September 2013, a ‘Committee on Comprehensive Financial Services for Small Business and Low-Income Households’, headed by Nachiket Mor, was formed by the RBI. By January 2014, the committee had submitted its final report and one of its recommendations was the formation of a new category of banks called ‘payment banks’.
 

Why Payment Banks in India?

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.

 Who All Are in the Race? | List of Payment Banks approved by RBI

In furtherance of the outcome of the ‘Discussion Paper’ placed on the website of RBI, the latter gave “in principle” licence for commencement of banking business under the Banking Regulation Act, 1949 for a period of 18 months (with effect from 19th August, 2015) within which time, they were expected to comply with Paid-up Equity Capital & Promoter Equity Requirements & other conditions contained under RBI “Guidelines to Payments Banks” before approaching RBI to obtain a regular licence/approval for commencement of banking business.
 

  • Aditya Birla Nuvo Limited
  • Airtel M Commerce Services Limited
  • Cholamandalam Distribution Services Limited
  • Department of Posts
  • FINO PayTech Limited
  • National Securities Depository Limited
  • Reliance Industries Limited
  • Shri Dilip Shantilal Shanghvi (founder of Sun Pharmaceuticals)
  • Shri Vijay Shekhar Sharma, (CEO of Paytm)
  • Tech Mahindra Limited
  • Vodafone m-pesa Limited

 

How many made the final cut (started banking operations)?

RBI received 41 applications for starting Payments Banks, out of which 11 were given “in principle” sanction. Out of the chosen 11, 3 entities reportedly surrendered their “in principle” licence while there is no information on the RBI website regarding the ‘fate’ of 3 other entities, thereby leaving only 5 players which have started banking operations

Consumer VOICE compared the services of these five players to know which is the best Payment bank.
 

What are Payment Banks Guidelines?

  • Capital Requirements (PAID UP EQUITY CAPITAL) of a PAYMENTS BANK shall be Rs.100 Crores
  • Promoter(s) holding should not be less than 40% of the above for the first 5 years from the commencement of the business
  • 26% of the paid up capital will be held at all times by the residents
  • NRIs holding can be allowed up to 24% of the total paid up capital

 

 What Payment Banks Can.

  • They are authorised to accept cash and effect cash payments to customers.
  • They can accept demand deposits like current accounts and savings accounts.
  • They can extend debit card facility. - These banks can effect money transactions on electronic platforms such as ECS, NEFT and RTGS.
  • They can undertake distribution of products such as insurance and mutual funds subject to
  • RBI guidelines existing as of now.
  • They can act as business correspondents of another bank/entity subject to RBI norms on such activity
  • They are permitted to open their branches, ATMs, Internet Banking, & other non-risk sharing simple financial services activities not requiring any commitment of their own funds (such as distribution of MUTUAL FUNDS, UNITS, INSURANCE PRODUCTS, PENSION PRODUCTS, etc) subject to prior approval of the RBI & after complying with the requirements of the Sectoral Regulators for such products.

 

 What Payment Banks Cannot.

  • Presently, cash transaction is limited to Rs 100,000 per customer. (Payment banks will initially be restricted to holding a maximum balance of Rs 100,000 per individual customer, as per RBI press release dated 27.11.2014.)
  • Payment banks are not authorised to open recurring deposits and fixed deposits (as of now).
  • They cannot issue a credit card.
  • These banks cannot undertake any lending activity.
  • The provisions are silent as regards payment of interest on SB deposits.
  • No NRI deposits should be accepted                                                  

 Challenges for Payment Banks

“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.

Certainly payment banks have the potential to play an important part in bringing untouched rural areas under the banking system. They perform almost all standard banking operations – they accept demand deposits (up to Rs 1 lakh), offer remittance services, mobile payments/transfers/purchases and other banking services like ATM/debit cards, net banking and third-party fund transfers. Of course they function on a rather smaller business scale compared with other banks and also do not have the mandate
to extend loans. How things pan out will depend on how well payment banks meet the challenges that are now coming to the fore.

  • A lot will depend upon the volume of business. However, customer acquisition is not going to be a cakewalk since even other normal banks are vying for the same lot. So, yes, the competition is getting tougher.
  • Depending on volume also means that the model should focus on being cost-effective and technology-enabled. The customer acquisition and servicing cost structures of payments banks may not follow those of a traditional bank.
  • The offering is very niche and does not cover the whole gamut of banking services. An account holder at a payment bank may still need to go to another full-service bank to meet some of their banking needs.
  • The new KYC norms for payment banks are stringent – they have to now get their customers’ information verified by third parties. RBI had earlier accepted Aadhaar-based eKYC as a means for customer authentication at the time of opening accounts.
  • The old norms also allowed KYC done for mobile connections to be extended to opening bank accounts. This allowed telecom operators with payment bank licenses to provide bank accounts to all of their existing customers with minimum effort and no extra cost. Payment banks may not have the same level of manpower to collect paperbased KYC as traditional banks.
  • The maximum cap for holding one’s money in a payment bank needs to be enhanced to at least Rs 500,000 to enable traders and small businesses as well as salaried/self-employed individuals to utilize the banking services to the optimum. 
  • The deposit insurance cover, which is at present capped at Rs 100,000 per depositor, also needs to be suitably enhanced to provide additional insurance cover and enhance the credibility factor.

Consumer VOICE compared the services of five payment banks to know which is the best Payment bank.
 

Divya Patwal

VOICE

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