The first thought of a payment banks intrigues most of the people as what’s big deal about it? Why do we need a bank which shall only facilitate payment, collection that too with deposit cap of INR 100,000? Why would anyone open account with any Payment Bank if they can’t offer loan when I need it?
For the ease of understanding it will be detailed in two parts i.e. background/regulation and potential/ future outlook.
It was sometime back in 2016 when RBI gave licences for differentiated banking licences in the name of Payment Banks (PB) and Small Finance Bank (SFB). Most of the so called financial experts criticized this move citing ailing condition of some of the domestic Banks whether public or private, when country already had differentiated banks i.e. Universal Banks, Regional Rural Banks, Local Area Banks, Cooperative Banks.
If we look at finer aspects/characteristics of a payment Banks, we find that most of the regulations are similar to a Scheduled Commercial Banks i.e. capital measurements, risk management (except credit risk which is not applicable given these Banks cannot participate in risk based products/instruments), Cash Reserve Ratio, Governance etc. The fundamental difference between a payment bank or any other bank is with respect to PBs not being allowed to undertake credit risk. This means, a payment bank cannot extend loans to its customers i.e. no personal loan, credit card, home loan, business loan etc. These Banks have to open at least 25% of their access points in rural areas and should focus more on technological solutions to on-board a customer and encourage online transactions.
The guidelines also restricts the investment classification and norms for payment Banks. These Banks need to deposit 75% of their demand deposit balances (Deposits that we put in Banks with premature withdrawal option) in Government securities or treasury bills eligible for Statutory Liquidity Ratio (SLR) maturity up to 1 year.
These Banks can’t even undertake para banking activities unless specified and approved by RBI. You may read more about para banking activities on RBI site by visiting https://m.rbi.org.in/Scripts/BS_ViewMasCirculardetails.aspx?id=9837
So do you think payment Banks make any sense in today’s world as they are restricted by even activities i.e. by placing money to give returns to the customers?
While my thoughts were not very different from critics when heard about this concept kept my hopes alive from these new age Banks give they could be my future employer as well .
Fortunately being part of a core team gave me the opportunity to work on a comparison between the two new types of Banks as well as the differences with a Universal Bank and analyse it better.
While as a common man we may feel that PBs are just one more type of Bank, the investors may look at it as another business opportunity. Many of us may have observed the rise in the number of wallet service providers and the reasons are changing payment behaviour of Indian consumers and opportunity in this space. While Foreign Banks got the concept of Credit Cards, Debit Cards in India, acceptability of electronic payments was limited given, a) Cash transaction behaviour promoted by buyers and sellers to evade tax, b) Non-availability of digital collection/payment infrastructure. Hence after series of events i.e. demonetization, stringent GST norms for small & large businesses and rise of service providers for digital money collection has given boost to digital collection and payment market.
This was the well thought of plan of having Payment Banks in Indian market to fill the gap that universal banks have not been able to. Directionally RBI and Government also want to have enablers in place to grow digital economy. The regulation asking payment Bank relying on technological solutions for payment, collections, transactions, access of accounts are evidence of the same.
Is payment bank a lucrative business model and can earn revenue? The answer is probably yes and below may be brief benefits and potential business area PBs may get into:
Zero Balance Accounts:
The consumers shall have advantage of opening a zero balance accounts and ease of operating accounts on technological advanced and simple platforms i.e. mobile apps. The penetration of mobile technology and network to the remotest area shall be a true enabler for this. Also these banks can offer higher interest rates given limited infrastructural cost which can be beneficial for both consumers as well as Payment Banks
Security and Ease of Access:
Most of the Banks today are ensuring that the transactions done on their mobile app are safe and secure by way of authentication of app at the time of installation and with pin/biometric at the time of login. Banks are also using OTP options selectively depending on transaction amount. Hence the transactions are considered to be safe unless either service provider does not ensure safety while developing app or the user does not ensure safety of their phone. Most of the applications installed on phone today ask for various permission, one needs to be mindful of giving permission against usage of the app.
The ease of access of Payment Bank is the biggest advantage. A bank having large distribution network/ customer touch points shall be able to serve maximum number of customers. These banks can also make local retail stores i.e. mobile shops, kirana (grocery) stores, courier agencies etc as their touch points where one can open account, deposit/withdraw cash as well.
While for population living in posh urban area of metro cities i.e. Mumbai, Delhi, Chennai may not find ease of access is a big differentiating factor, the people living in outskirts or slums of metros, tier 2 tier 6 cities may find this as a biggest advantage.
Fee based products:
The payments Banks can become distributors of Mutual Funds, Insurance, can have tie up with e-commerce sites and negotiate offers for their clients. They may also actively engage with corporates with cash intensive business, offer cash management solutions, payment gateway services etc.
Conclusion:
In Indian context where we’ve huge scope of eliminating cash and areas to payments and collection where digital disruptions are possible, payment banks are of great importance. Given nature of business these banks can do and with the set of target customers, it presents a good investment options for the new age investors as well. While Pay TM Payment Banks as on date has strongest presence in the segment it would be interesting to see how business of Airtel Payment bank, Jio Payment Bank (SBI being one of the investor) and India Post Payment Bank tread on this path and bring disruption in the way payments/collections are managed as on date.