Friday, August 21, 2015

Payment banks and the opportunity at the bottom of pyramid

The Reserve Bank of India yesterday announced it was granting 11 licences for setting up of payment banks.

The central bank last year had mooted the idea of a payment bank, an entity that would serve functions such as allowing customers to open small savings accounts (up to Rs 1 lakh deposit limit), have debit cards issued against them, make transfers and carry out internet banking transactions.

The RBI yesterday granted licences to a clutch of companies and individuals of various backgrounds: ranging from telecom firms (Airtel, Vodafone, AB Nuvo, which runs Idea Cellular, and Reliance Industries, which is to launch Reliance Jio this year) to financial services companies (Chola, micro lender Fino Paytech, depository NSDL) and tech startups (Paytm) to the Indian postal service.

Calling it "one of the most exciting spaces" for the banking system, RBI Governor Raghuram Rajan today said payments bank would complement the core banking sector by improving last-mile connectivity services and help push financial inclusion.

(Payment banks will differ from traditional banks in three ways: they cannot lend or issue credit cards and customer deposits will have to be necessarily kept in safe SLR securities.)

But very clearly, the most exciting part of the development is no one knows how business models of payment banks will evolve. Governor Rajan was the first one to admit that and it shows in the central bank's thinking when it gave away licences to companies and individuals belong to diverse fields.

For instance, stats available till before the Pradhan Mantri Jan Dhan Yojana rollout showed more than half the country's residents did not have access to formal banking services, but nearly everyone today has a mobile phone.

The reason for the above situation is simple: wieldy banks found it unprofitable to foray into the hinterland in a big way (imagine the cost of putting up even a small bank branch) butnimbler telecom companies -- through their mom-and-pop retail channel -- did.

That's exactly where payment banks come in: a cross between technology and financial services. The tens of millions of telecom customers in the country, with their KYC requirements already cleared, may automatically qualify to become an account owner.

Telecom companies have already expressed a desire of tying with traditional banks in order to expedite rollout of services.

Paytm, which started off as a payment service before rolling out an ecommerce service, has about 100 million registered users, with many turning into a potential payment bank customer.

The joker in the pack is India Post, with its 1.5 lakh branches almost entirely spread across rural India, which could adopt technology in a big way and make a financial services foray into areas where banks have feared to tread.

But one thing is clear: the idea of a payment bank will have to be led primarily by a technology push rather than a banking push. (Since payment banks cannot lend, their profit margins will also be low, making it even more necessary for the need to use greater technology.)

"I believe technology companies find it easier to learn other about other business than other business can learn about technology," Paytm co-founder and CEO Vijay Shekhar Sharma told CNBC-TV18, adding that such companies will help make a resolute push towards reaching out to the unbanked.

Sharma also said traditional banks had been slow to adopt to changing customer preferences.

His argument is borne out by the fact that banks have shied away from rolling out services to those at the bottom of the pyramid.

It shows in the fact that almost all staple savings account services, especially from private banks, have hefty balance maintenance requirements. The KYC process, too, remains cumbersome with only a handful opting for use of greatertechnology.

"Consumers are readily adopting mobile as a way to transact. So consumers are changing. Maybe it is the banks that need to catch up," he said.

Perhaps it will be innovations such as payment banks that will force them to change.
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