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Evolution of banks
In the evolution of banks there have been several stages. In the earliest stage was the pawn broker or goldsmith, who gave loans based on gold deposits. Then such persons took deposits in cash as well and arranged exchange of currencies. As business size increased, these individuals incorporated their banking activities into companies. But the business model remained more or less the same, except that they now started processing receipts and payments as well. In the nineteenth century, as nations in the West started to industrialise, a need arose for institutions which could lend on a long term basis. A new category of bank, namely the 'Industrial bank' came into being. Traditional banks were not competent enough to judge industrial prospects as to whether it would succeed or not. Industrial banks filled the gap by financing the new industries and infrastructure projects at reasonable rates of interest and on a long term basis. Traditional commercial banks carried on in the old ways, financing commerce. Later some enterprising bankers combined both models. These became the 'Universal banks', which combined long term lending with all other regular banking activities.
What are payments banks?
A 'Payments bank' is a special type of bank introduced recently in India. The RBI set a committee headed by Nachiket Mor to study reforms in the banking sector. It came up with various suggestions, the payments bank being one of them.
It is a special type of bank to facilitate payments and other banking transactions now performed by the scheduled banks. The RBI has taken this move to facilitate financial inclusion as well as to create competition in the banking space. These banks need have just Rs. 50 crores as capital base, 10% of the required capital of a regular bank. They will also be restricted to taking just up to Rs.one lakh in deposits. These banks' transactions will be limited to current accounts and savings accounts only.
Services provided
As contemplated by RBI, a payments bank may undertake the following activities.
Deposits may be accepted, restricted to a maximum of Rs, 1, 00,000 for each customer. Payments banks cannot accept NRI deposits. Customers can avail of both savings and current accounts. A payments bank can issue Debit and ATM cards. The banks can offer a variety of services including payments and remittance services via ATMs, business correspondents and mobile banking. Cash withdrawal facility may be provided at point of sale terminals. The bank cannot issue a credit card or extend loans. A payments bank can use technology to send and receive remittances from various banks via NEFT / RTGS / IMPS payment mechanisms. These banks can offer simple financial instruments like mutual funds and insurance products.
Building blocks
Many of these new banks expect to leverage mobile applications and the internet to facilitate payments. These banks are expected to use technology aggressively, from the Internet to mobile phones, to enable receipts, payments and other normal banking transactions.
Over the next few years, cash transactions to make payments are expected to reduce substantially. It will become possible to pay for even groceries and other essential items of daily living by these means. The government may also start directing its subsidies using these agencies. Mobile phone applications would be used to create a virtual wallet. Consumers would be able to use their mobile phones to make payments at points of sale.
The RBI has issued licenses to 11 entities to set up such banks. The list of licensees includes large industrial conglomerates like Reliance Industries and Aditya Birla Nuvo, large mobile phone companies like Vodafone and Airtel, the Department of Posts, NSDL, tech firms like Tech Mahindra, and the Paytm founders, among others.
These names give us a clue on what to expect from these new entrants into India's financial services landscape. India Post will be expected to make meaningful strides in financial inclusion, with its massive network of 155,000 post offices spread across the country. Mobile phone companies and tech companies will be expected to raise the bar on financial technology solutions in the country. The era of branchless banks is now upon us. Jan Dhan may have succeeded in getting millions of new accounts opened, but it is more likely that these payment banks will actually get this segment of India to actively use the banking infrastructure.
Stumbling blocks
In general, the Indian public, particularly its rural component, is still predisposed to using cash. People prefer to use cash to make payments and more importantly to receive payments. These behavioural challenges could stymie the growth of payment banks.
Payment banks will have to invest substantially in creating infrastructure, with long gestation periods. Restrictions on lending activities, on accepting interest bearing deposits and on having accounts not larger than Rs. 1 lakh, will constrain them and make them less competitive in many profitable customer segments.
A likely model is for payment banks to tie up with universal banks to enable seamless service delivery. Mutually complementary business strategies will then create win-win situations for all.
Impact of payment banks
Payments banks are expected to help financial inclusion by both lowering transaction costs, as well as by extending a range of banking services to a hitherto unreached public. While consumers are expected to benefit both from new technologies and greater competition, the same cannot be said of several existing banking players. Small banks are likely to be hit as will the weaker public sector banks. These banks may see a shift of business to the new banks. Some of the weaker public sector banks, in particular, already saddled by bad loans, may find it increasingly difficult to generate revenues and profits. The scale and reach of India's banking service will increase vastly over the next decade with the advent of payment banks. At the same time, their advent is very likely to push weak banks out of the business, as low cost deposits will become a whole lot more competitive.
The Government's thrust on reducing "black money" coupled with easy access to payment banks can over time significantly reduce "cash" in the economy, thus making a large segment of business "official". As India transits from a cash heavy economy to a cashless economy, GDP growth numbers will accelerate as a whole stream of business that was never reported, will now come within the ambit of official numbers.
Impact on fund distribution
For mutual funds and insurance companies, payment banks offer exciting prospects of reaching out to millions of new investors, with simple and convenient propositions. Expect payment banks to offer convenient solutions that cross sell term plans, ultra short term funds and a range of simple products that can be conveniently sold through mobile phones. Mutual fund distributors will have to now regard mobile phone companies like Airtel and Vodafone not just as their network providers, but as worthy competitors in the funds and insurance distribution business.
Payment banks may well finally deliver retail penetration in rural India that the fund industry always expected from PSU banks, but which has so far remained more of a promise than reality.
Fund distributors will watch keenly how NSDL rolls out its payment bank strategy and how it seeks to reassure market participants on client confidentiality. While the advent of a new breed of competition may seem worrisome for retail distributors, a likely outcome over time is a significant expansion of the overall pie, and a lot more awareness of mutual funds among retail savers, which can benefit all players - existing and new.
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