Insights into Editorial: Cracking the payments bank puzzle
11 June 2016
The Reserve Bank of India (RBI), in 2015, gave its approval in principle for 11 entities to set up payments banks. RBI has selected entities with experience in different sectors and with different capabilities so that different models could be tried. This move has generated much excitement across the country. Universal financial inclusion is a driving motivation behind RBI’s issuance of these payments bank licences.
What are payment banks?
Payment banks are non-full service banks, whose main objective is to accelerate financial inclusion. These banks have to use the word ‘Payment Bank’ in its name which will differentiate it from other banks.
- Capital requirement: The minimum paid-up equity capital for payments banks is Rs. 100 crore.
- The payments bank should have a leverage ratio of not less than 3%, i.e., its outside liabilities should not exceed 33.33 times its net worth (paid-up capital and reserves).
- Promoter’s contribution: The promoter’s minimum initial contribution to the paid-up equity capital of such payments bank shall at least be 40% for the first five years from the commencement of its business.
- Foreign shareholding: The foreign shareholding in the payments bank would be as per the Foreign Direct Investment (FDI) policy for private sector banks as amended from time to time.
- Apart from amounts maintained as Cash Reserve Ratio (CRR) with the Reserve Bank on its outside demand and time liabilities, it will be required to invest minimum 75% of its “demand deposit balances” in Statutory Liquidity Ratio(SLR) eligible Government securities/treasury bills with maturity up to one year and hold maximum 25% in current and time/fixed deposits with other scheduled commercial banks for operational purposes and liquidity management.
What are the scopes of activities of Payment Banks?
- Payments banks will mainly deal in remittance services and accept deposits of up to Rs 1 lakh.
- They will not lend to customers and will have to deploy their funds in government papers and bank deposits.
- The promoter’s minimum initial contribution to equity capital will have to be at least 40% for the first five years.
- They can accept demand deposits.
- Payments bank will initially be restricted to holding a maximum balance of Rs. 100,000 per individual customer.
- They can issue ATM/debit cards but not credit cards.
- They can carry out payments and remittance services through various channels.
- Distribution of non-risk sharing simple financial products like mutual fund units and insurance products, etc. is allowed.
Challenges before these banks:
- The success of these new entities will depend to a great extent on their ability to go beyond serving the well-banked smartphone-carrying consumers, who have been the focus of digital payments in India so far.
- Payments banks will need to creatively reach the low-income and financially underserved—the so-called base of pyramid (BOP) consumers.
- However, developing a model that is both effective in reaching the BOP consumer and commercially profitable, is far from easy. It will require a paradigm shift.
- Income at the BOP tends to be more irregular and unpredictable, often cobbled together from various sources. Savings are limited, often taking the form of small amounts saved daily that need to be banked quickly to prevent them from being spent.
- Formal credit histories are virtually non-existent. There is heavy reliance on informal networks like friends and family for financing big-ticket needs.
- Leveraging technology to reduce cost-to-serve will of course be important, but much more will be needed.
What needs to be done to reach BOP consumers?
- The financial products currently available to BOP consumers often look suspiciously like hand-me-downs and do not match their distinct income, expenditure and savings patterns. Hence, payment banks will need to deepen their understanding of the unique needs of BOP consumers and develop products and customer experiences tailored to these needs.
- Payment Banks will need to develop new products that are better suited to the financial lives of BOP consumers, for example, daily micro-saving products and micro-loans that rely on non-traditional data.
- They will need to develop partnerships with other financial institutions to meet the full scope of customer needs. They will need to embed within their organization the ethos of providing a respectful and positive customer experience to BOP customers to earn their trust and loyalty.
- Technology is, of course, going to be key to keeping costs low. The use of Aadhaar-linked authentication, know-your-customer and e-sign and the proliferation of mobile/online payment systems hold special promise for reducing the cost of delivery.
- Since Smartphone penetration is low and digital literacy is a major challenge among the BOP, payments banks will need to rely on physical agent networks, at least in the foreseeable future, to serve this segment.
- Currently, banks largely rely on Business Correspondents (BCs) who are dedicated to the financial services business. To achieve scale and keep costs manageable, players will need to harness the potential of varied agent models—ranging from dedicated ‘wealth advisors’ at one end of the spectrum to ‘lite’ BC agents who just focus on a few simple transactions while doing core businesses at the other.
- Players will also need to harness the potential of the neighbourhood store, by making it worth their while to accept digital payments. They will need to rely heavily on small-ticket transactions for revenues, given limitations to their net interest income.
Payment banks will have to learn as they go along and adapt themselves to the eco-system inhabited by the small-income groups and small enterprises.