The Future of Payments Banks

Navi Mumbai based FINO PayTech Ltd. recently launched the FINO Payments Bank, which is the newest entrant in the space after Airtel, India Post and Paytm. FINO was one of the original 11 applicants which were issued an in-principle approval by the RBI for setting up a payments bank back in 2015. Paytm has also launched its Payments Bank in May 2017 offering an interest rate of 4%.

What are Payments Banks?

Payments banks - a new banking model proposed by the RBI, are similar to traditional banks but operate on a smaller scale without involving credit risk. The main objective of payments bank is to widen the spread of financial services to small businesses, low-income households, migrant labour workforce in a technology-driven environment. Payment banks will make use of mobile wallets and digital technology to bring about greater financial inclusion. Following are some of the guidelines that have been set up by the RBI to ensure that payments banks work within the prescribed agenda:

1)      Payments banks will deal in deposits of only up to INR 1 Lakh

2)      Cannot indulge in lending activities

3)      Cannot issue credit cards

4)      For the first 5 years, promoter’s shareholding should at least be 40%

The RBI gave in-principle approval to 11 entities to set up a payments bank - Aditya Birla Nuvo, Airtel, Cholamandalam Distribution Services, Department of Posts, FINO PayTech, National Securities Depository, Reliance Industries, Sun Pharmaceuticals, Paytm, Tech Mahindra and Vodafone M-Pesa. Out of these Cholamandalam Distribution Services, Sun Pharmaceuticals and Tech Mahindra have surrendered their licenses.

Challenges

1)      Profitability

One of the major challenges faced by payments banks is that they are not allowed to indulge in any lending activity. Instead, payments banks have to rely on fee based income and investment in Government Securities as their main source of income. Government bonds yield approximately 7 to 7.5%. The fee based income also will be largely dependent on the number of transactions.

2)      Costs incurred

The main aim of payments banks is financial inclusion and getting the unbanked rural areas into the banking zone. Rural areas have very limited infrastructure and the costs incurred to get these areas into banking would be very high. Payments bank entity like ‘India Post’ would do well in this area as they have a wider presence in rural areas.

3)      Limited digital infrastructure

Most payment banks are relying on a digital platform for their banking transactions. The digital infrastructure in India is still in a growth phase. Although, government schemes such as Digital India have been created, but most of their plans are yet to materialize.

Opportunities

1)      Size of the market

Volume of transactions is a key factor to the success of Payments banks. India still has a very large unbanked population. Also, the spread of digital literacy will help increase the overall volume of transactions.

2)      Ability to utilize existing infrastructure

Some of the entities like Airtel, Vodafone and India Post already have a huge distribution network in place. They have a ready infrastructure and client base to start their operations with. The ability to make use of this existing infrastructure will be crucial.

Payments banks in operation

Apart from the recently launched FINO Payments Bank, there are three other payments banks that are already in operation.

1)      Airtel Payments Bank

2)      India Post Payments Bank

3)      Paytm Payments Bank

Airtel was the first to launch its payments bank operation followed by India Post and then Paytm. To compare the interest rates offered by each of these 3 players – Airtel payments bank offers the highest interest rate at 7.25%, India Post at 5.5% and Paytm payments bank offers the lowest interest rate at 4%. All of the 3 banks charge a cash withdrawal charge. Paytm is the only one among the 3 to allow free online fund transfer.

Future of Payments banks

For payments banks to work, there needs to be a sustainable business model with respect to profitability. Their approach to banking should be transaction centric as their growth depends on the volume of transactions. The challenges in the system are evident as 3 players have already pulled out. RBI should bring in policy changes to offer greater flexibility to payments banks and the banks also need to capitalize on their strengths and fully utilize the existing infrastructure to evolve into more sustainable entities.

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