All you need to know about Payments Bank

Nachiket Mor

The guidelines for licensing of payments banks were announced in November 2014 and on 19 August 2015, the Reserve Bank of India gave "in-principle" licences to 11 entities. The "in-principle" licence is valid for 18 months within which the entities must fulfill the requirements. They are not allowed to engage in banking activities within the period. The RBI will consider grant full licences under Section 22 of the Banking Regulation Act, 1949, after it is satisfied that the conditions have been fulfilled.

What is it? 
A payments bank is a type of non-full service niche bank, which is expected to reach customers mainly through mobile phones rather than traditional bank branches.

Who can open an account in a Payments Bank?
Anyone can open an account in a payments bank, even people who have salary accounts in regular banks. This is because there is no restriction on the income levels of anyone who wishes to open an account in payments bank.

How are Payments Banks different from regular banks?
Unlike regular banks, the only activity that payment banks will be unable to perform is to offer people loans or credit cards. They can only lend to the government, which evidently makes them the safest of banks as they only has the government as a borrower, who would not default in payments. However, what it can offer are debit cards and ATM cards, which will work in all banks' machines.

What it can and can’t do?

• It can’t offer loans but can raise deposits of upto Rs. 1 lakh, and pay interest on these balances just like a savings bank account does. 
• It can enable transfers and remittances through a mobile phone.
• It can offer services such as automatic payments of bills, and purchases in cashless, chequeless transactions through a phone.
• It can issue debit cards and ATM cards usable on ATM networks of all banks. 
• It can transfer money directly to bank accounts at nearly no cost being a part of the gateway that connects banks.  
• It can provide forex cards to travellers, usable again as a debit or ATM card all over India. 
• It can offer forex services at charges lower than banks.  
• It can also offer card acceptance mechanisms to third parties such as the ‘Apple Pay.’

Who can set up a Payments Bank?
The minimum capital needed to set up a payment bank is set at Rs 100 crore, so anyone with that much capital, who adheres to the guidelines laid down by the RBI qualifies to get a license in order to set up payments banks. The payments bank will however need to invest 75% of its fund in government securities.

Who has Reserve Bank granted in-principle approval to be a Payments Bank?

1. Aditya Birla Nuvo
2. Airtel M Commerce Services
3. Cholamandalam Distribution Services
4. Department of Posts
5. FINO PayTech
6. National Securities Depository
7. Reliance Industries
8. Dilip Shanghvi, founder of Sun Pharmaceuticals
9. Vijay Shekhar Sharma, CEO of Paytm
10. Tech Mahindra
11. Vodafone M-Pesa.

What are the advantages of Payments Bank?
Payments banks are not being considered revolutionary for the banking sector for no reason. It does have its set of advantages intended to make life very much simpler.

1. The medium of payments banks provide easy access of banking facilities to consumers. Costs for payments banks could be lower and through mobile banking , it can reach unbanked rural areas.

2. Payments banks can also play a crucial role in implementing the government’s direct benefit transfer scheme, where subsidies on healthcare, education and gas are paid directly to beneficiaries’ accounts.

3. The customer can efficiently utilize various facilities and has various choices. Customer can easily transfer the amount to their relatives and family members.

4. Mobiles will substitute ATMs and also act as a cheque-book for small payments. The physical presence of an ATM branch will be not considered necessary to a great extent due to these banks.

Thus, the initiative of payments banks would ensure that financial inclusion agenda must be increased with new technology and better cost structures . It can enhance and expand banking facilities to backward rural areas and encourage customers to utilize the platform.



What are the anti-arguments about it?
Bankers have criticized this idea of “Payments banks” because:

1. Nothing new under the sun

• M-Pesa model you saw above- it is nothing “radically new”- SBI, ICICI and all other big banks already offering such services via mobile banking platform.
• So instead of opening new Payments banks, better just let those existing banks to give these banking-investment-insurance services through their branches, mobile banking, internet-kiosks, business correspondents and bancasurrance model.
• OR Mr.Nachiket could have simply recommended “all PPIs like Airtel money should pay interest on the money held in digital wallets.” instead of coming with a new type of “payments banks”

2. Not 100% financial inclusion

• Financial inclusion is a bigger thing than mere “payment/money transfer”- Financial inclusion means access to complete bouquet of financial services —banking, investment, insurance, pension – everything.
• But that’s very difficult to achieve through Payments bank system. (Because Nachi himself said, bank cannot assume “Credit risk”.)

3. Price wars

• Schedule commercial banks also permitted to run Payment banks through their subsidiaries. That defeats the whole purpose because SBI is a giant elephant with large resources and manpower. If it starts a payment bank then other small player’s payment banks cannot compete, and they’ll bleed in price wars.
• in the previous article on White label ATM, we saw how ATM operation costs are hurting the entire banking sector.
• So instead of allowing NBFCs and private companies to open “Payments banks” and compete with regular (commercial) banks, Nachiket should better suggest a model where they all can work in synergy to achieve 100% financial inclusion.

What will be  the effect on other banks?
1. The payments banks can deprive regular banks of the fee income they earn from customers, Example- cash transfers, remittances, cash withdrawal through cheques and ATM transaction fees.

2. In long term, regular banks having large customer base can adopt many practices and technologies adopted by payment banks.

3. Competition would increase and regular banks have to ensure fast and smooth functioning of banking facilities to customers.

What has the experience been in other countries?

Payment technologies have proved hugely popular in other developing countries. In Kenya, the most cited success story, Vodafone’s M-Pesa is used by two in three of adults to store money, make purchases and transfer funds to friends and relatives.