Payment Bank License – What it means for the Indian Banking Sector:

MKP August 23, 2023

5 people are having a discussion on the given topic (Santosh, Karthik, Prateek, Alekhya and Navya).

Group Discussion Starts

Prateek: Hello all, the topic given to us is Payment bank License and what it means to Indian banking sector. To Start with, a payment bank is a differentiated bank from regular banks, which undertakes only few functions of a bank as per the “Banking Regulation Act, 1949”. This is a new category of bank that is suggested to RBI by Nachiket Mor committee to promote banking in Rural and low income households.

Santosh: That’s right. Basic functions of a payment bank include acceptance of deposits, payments and remittance services from customers. They can issue ATM/debit cards, facilitate internet banking, money transfers etc. But, they cannot involve in lending activities or providing credit cards. This is the major difference between a normal bank and a payment bank.

Alekhya: Yes. That is why they coined the term payment bank which signifies that it can only involve in payment activities but not lending activities. In February 2015, during the budget presentation it was announced for the first time that “Indian Postal Services” will become a payment bank and use its network to penetrate banking services to the rural and untapped banking regions.

Navya: Absolutely. I think later in the year in August 2015, RBI has announced that it would give “in-principle” licenses to 11 entities to setup payment banks. Few of the big names include Paytm, Vodafone m-pesa, Aditya Birla Nuvo limited, Airtel M-commerce services limited etc. This in-principle license is for 18 months period and these payment banks would be monitored by RBI in terms of its adherence to its functions and limitations.

Santosh: That’s right. Speaking of limitations, these banks has to operate 25% of its operations in unbanked rural areas. They also cannot form subsidiaries to perform any non-banking financial services activities. 25% operations in unbanked rural areas can be easily managed as many of them have their own network or tied up with other companies to spread into unbanked rural areas.

Karthik: I agree. Now to talk about what this means to the Indian banking sector, I think this helps in financial inclusion and pushes more money from people into the banking system. This can also help the bigger banks like SBI, ICICI, and HDFC etc. to have an increased penetration into more rural households as payment banks can work in collaboration with other banks to provide its services.

Prateek: I think this increases unnecessary competition for the bigger banks and hampers their profits. They can actually expand into rural households by themselves. I don’t think they would be willing to collaborate with these banks as once these payment banks get banking license they could become sizeable competitors to these big banks.

Navya: I disagree. I don’t think these payment banks are big enough to really compete with the big banks like SBI, ICICI bank etc. even if they are given banking license. They could grow well with the collaboration of these banks but they can’t be a threat to these banks. So it is pessimistic to think that they could hamper their profits and I think it’s rather better to collaborate and make banking system stronger and broader.

Santosh: Well said Navya. I think the purpose of bringing in payment banks is to help India reach its financial inclusion targets. There are many unorganised sectors, small businesses which are not part of the banking system as yet. Banks like SBI are trying to capture these customers but are not able to sustainably invest in them. So I think payment banks can help in this aspect, as they need to operate 25% of their operations in these unbanked rural areas.

Alekhya: Yes. These banks can work as a savings account for them. Adding to that, these payment banks can accept Utility bills. That helps in getting more unbanked customers who have not been associated with the banks like SBI, etc.

Prateek: I agree. But, the players who were given banking licenses are the companies like Airtel, Vodafone and Idea etc. who are very dominant in their mobile customer segments. They can use their mobile platforms and technology to spread their banking services and become sizeable competitors like I was mentioning before.

Karthik: Yes. They can gain a lot of customers and increase their banking operations but these payment banks are tapping those customers who have limited funds unlike the high earning customers of the big banks. So they can complement rather really compete with the big banks. I think, to access the customers earned by these payment banks it’s better to collaborate with them and provide lending services to these customers as payment banks are not allowed to lend. This way both the types of banks are benefitted.

Navya: But, these banks will be provided full banking license possibly after 18 months or later. Then they can lend to their customers which would prove to be a cause of concern for the collaboration with the big banks. On a whole I think payment banks have very good scope to attain good customer base before becoming full time banks and compete with the banks in the long run.

Alekhya: Yes. I think with the huge increase in mobile technology users in the recent years, it is more feasible to provide money transfer and deposit applications. This should help these payment banks grow very quickly and also help Indian banking system to have a stronger customer and deposit base for the future. I think Paytm was quite successful in 2015 in getting customers use its wallet and money transfer services. It also attracted many customers by rolling out many offers in collaboration with other services companies.

Santosh: That’s true. They also linked it to shopping and entertainment options to generate other forms of revenues. This could be little off from its expected functions. But, I think as long as it is dealing with money transfer and deposit services it is acceptable. Other payment banks like Vodafone m-pesa also rolled out many options but it is quite successful in other countries like Kenya, etc. But, not in India. Let us see how RBI would allow these payment banks to evolve after its in-principle license period of 18 months. I’m sure these payment banks will be a huge success given its scope for growth and the evolution of mobile technology and usage.