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Payment Banks: An Interesting Experiment

The genesis of the RBI’s notification for payment bank lies in the financial inclusion report that was published by a RBI appointed committee chaired by Dr. Nochiketa Mor. It is well recognized that despite multiple push & norms set up by GOI & RBI, the priority sector coverage by the banks and the success around it was far from satisfactory. While for banks, the sector was non- profitable and needed cross subsidization from other profitable line of business, for rural people the value derived from such banking services were not that appreciated either because of literacy challenges, social issues or simply the logistics of it did not work out for them as desired. Even the BC model had limited success (it was introduced from lessons we took from Brazil). At end it was either the MFIs or the village money lender which plugged the gap to some extent while most of the financing was under unorganized and outside the formal financial system. With this as background, the context was set for niche banks to address this long standing gap. It was understood that the established large banks were not either agile/ focused enough to address the needs of this sector

The niche banking in itself may not be as niche in India as we may be led to believe. We had concepts of RRB (Regional Rural Bank, introduced in 1975), LAB (Local Area bank, 1996) but they had very limited success. The major difference that today RBI has, is the proliferation of technology and technology led innovation that has opened up huge opportunities to address the last mile challenge much more effectively than it has been till date. The more successful concepts of non banking payment systems (Telco led) and digital wallets (paytm, mobikwik etc) gave a basis for RBI to finally arrive at the payment bank model. In its own words, RBI says “….the primary objective …….to further financial inclusion by providing (i) small savings accounts and (ii) payments / remittance services to migrant labour workforce, low income households, small businesses, other unorganised sector entities and other users, by enabling high volume-low value transactions in deposits and payments / remittance services in a secured technology-driven environment. Moreover studies also indicated a positive correlation between innovative payment instrument & improvement in financial inclusion parameters. Quoting from World bank global payment survey 2010 & RBI BANCON 2012, “…it was observed that innovative payment instruments & methods were drivers of financial inclusion in nearly 14 per cent of the countries surveyed

The payment market potential that one can see in different newspapers & analyst’s reports is truly humongous. Starting from GOI DBT (Direct Benefit transfer), to POS led retail market, remittance and growing e-commerce, there are multiple opportunities which can add up to more than ‘000s of INR billions. Hence that’s why we probably saw 41 applicants ranging from individuals to conglomerates, digital wallets to Telcos lining for the licensee and at end we had 11 who were given in-principle license by RBI.

So far so good, but what happened that led to a few licensee to give up their licenses within a few months? Probably the answer lies in the business model and how each of the players would have looked at it. Payment banks are not allowed any credit business and are also capped on the CASA deposit. This would surely severely limit them on any possible float income or net interest income. Their primary revenue driver is expected to be the fee income from the payment transactions. And here the volume will be key! To achieve a threshold volume, one has to acquire customer and merchants very fast and put in a robust model where this growth can be scaled very fast without significant addition to cost. This is probably where a few would have realized late that the business model may require a significant long term outlook, a little longer than what would be comfortable to them. Primarily for Telcos or existing payment players, it made lot more sense as they have a head start in terms of customer base and experience of how to run a lean model for such a business.

A significant change was also happening in the banking ecosystem that has changed/ impacted a few parameters. When RBI did the study or around that time, most of the banks were not agile enough or were slow in adopting technology, especially digital. In the last couple of years, quite a few of these banks, especially in the private sector, have invested heavily in adopting digital including banking apps, payment apps, tying up with e-commerce etc. Hence making an existing customer switch his payment transaction provider would not be equally as easy as it would have looked a few years back. Moreover this would also mean a significant dent in the potential customer base, especially the customer base which looks more profitable.

The success of the payment banks will largely depend on how they are able to create new frontiers:

  1. Digitally reach out to unbanked population more effectively to be able to serve that population profitably. Established banks will still have challenges and won’t have focus as well.
  2. Innovation to make such payments process easy enough for it to get adopted rapidly even for small scale transactions generally seen at kirana stores, utility payments, transport charges etc

Environment around me makes me feel that we are already seeing the shift. Competing over the same pie will hurt, how much of the currently cash economy moves to the formal mechanism will play a decisive role. Recently, one also observes that the various discount being provided on payment charges by multiple payment providers. This I get to understand is to get more customers, more transactions and get noticed but somewhere this makes me wary of the impact we have seen in the e-commerce market where such deep discounts has hurt the players significantly. Currently there is lots of funding that are coming in the way of fintech companies, digital wallet players but once it settles down & time for return comes in (2 years or so), the picture will be a lot clearer. Customers, merchants etc though have only reasons to enjoy going by the choices he has and the impact of competitiveness that reduces his cost & speed of transaction.

To summarize, the move by RBI has created significant positive noises and has led to many innovations on how technology can be leveraged to ease the payment infrastructure. The business model will need some perseverance as well. There may be a few consolidations that may also take place. But overall it will be interesting to watch out for this sector.

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