Payments Bank - New wine in an old bottle?

Not many policy pundits expected India's Central Bank, known for its cautious stance in issuing Banking licenses, to propagate differentiated banking licenses itself. Payments and Small Banks reflect a new line of thinking from the Reserve Bank with an objective of reformatting India's financial inclusion space.

What a Payments Bank seeks to do is to open banking to non-banking players - a 24X7 super market store, a high reach telco and align their strengths with the comfort and security of a Bank. With a clear focus on technology driven operations, simplified KYC & eKYC, Aadhar enabled customer onboarding and transaction execution ; the Payments Bank account can be the 'virtual mobile linked account' to every unbanked Indian.

A perusal of the draft guidelines gives an indication of what the eagerly awaited final guidelines may hold. Cash Outs and Interest bearing accounts, absent in the current pre-paid Instrument (PPI) model, are expected to be the central piece of the guidelines. Regulatory norms are expected to be less stringent in light of the reduced risk these Banks would assume in comparison to full service commercial Banks. Last but not the least, insistence on rural access points than brick & mortar branches should help evolve a viable Business case for prospective players watching this space.

Market need notwithstanding, getting the profit arithmetic right would be a challenge. Given the expected ceiling of 1 lac per account, float income would not be high. This can be further constrained by the low and cyclical earnings of the target segment. Margins are expected to be under pressure with deposit costs of 4%, associated intermediation costs and defined investment options of Government Securities and Treasury Bills. With limited mark up on remittance and payment services, the revenue vs cost of servicing the account along with the very real possibility of dormant accounts are red flags that entrants have to brace themselves for.

An additional factor is that both Government and RBI seem to be on parallel tracks to take the financial inclusion bandwagon forward. The PM Jan Dhan Yojana (PMJDY) offers the advantage of an embedded insurance product and a RuPay Debit Card. Forty million bank accounts have already been opened under the drive. PMJDY along with a well penetrated small deposit facilities from India Post are likely to disturb the market potential for Payments Bank. Innovative use cases like cardless withdrawl being introduced by commercial banks can bring the raison d'etre of Payments Bank under further strain.

While guidelines are awaited on finer aspects like transaction limits, passbook issuance, etc.; success of Payments Bank would be dependent upon intelligent incentivising of these accounts for savings and day to day transactions along with mobile payment technology and a well-entrenched Banking correspondent network. Understanding customer payment needs, transaction history and local payment patterns would be central to ensuring these Banks achieve the purpose for which they are being conceived.

With final guidelines round the corner, prospective entrants are keenly watching this space.