Payments Bank - A new era in Indian Banking

With Reserve Bank of India (RBI) giving in-principle approval to 11 entities to start Payments bank out of total 41 applications, same is being seen as a positive move by RBI towards making banking services available in unbanked areas and a big step towards Financial Inclusion in India.

Payment Banks will be able to offer their products and services at much competitive terms compared to Commercial Banks. Payment Banks will have following advantage:

1)      Competitive offerings: Payment bank can accept demand deposits from individual customers with maximum balance of INR 100,000/-. Their target segment will be people with saving accounts/salary account who do not maintain high balance in their accounts (e.g. students, small business owners, low income households, daily wage earners, migrant labors etc.). These customers can use the account with payment bank for their day to day expenses as well as payment for their various bills like utility bills, house rent etc. Since operating cost of Payment Banks will be less compared to Commercial Banks, Payment banks will be able to offer products and services at competitive rates. Also because of low operating cost, Payments Bank will have minimum or no requirement  of AQB (Average Quarterly Balance) maintenance as compared to commercial banks. They can also offer remittance services at better rates to customers like students/daily wage earners who frequently receive/send money.

2)      Innovative Digital offerings: Since most of the payments banks are starting fresh, with no legacy systems, they will be in much better positon to offer their services through digital channels. They will be able to offer more innovative digital products to their customers. In this digital era, where most of the customers own smart phone, Payments Banks would be able to increase their customer base by offering broader products and services through digital channels and allowing customer to perform most of the banking activities digitally.

3)      ATM/Debit Cards in unbanked areas: Payments banks will be able to expand their reach with new ATMs and Debit Cards in the unbanked areas. In smaller cities most of the customer do not use Credit Card and their payments is through Cash or Debit Cards. Introduction of debit card will also help in reducing cash transactions.

4)      Leverage Distribution Channel: Payments Banks based on their strong distribution network will be able to offer their products & services to unbanked population of India. They will also be able to distribute Mutual Fund and Insurance products through their distribution channel. They can tie up with Mutual Fund and Insurance companies for the same, where commercial banks are finding it tough to sell because of their limited number of branches. This will also help Payments Banks in boosting their income through commission from distribution of Mutual fund and insurance products.

5)      Convenience to Customer: Most of their customers will have choice to avail banking services from the store next to their house. It will help Payments Banks in increasing the customer base in the area of their operation, as most of the customer will like to open account with the bank which is closest to their residence/business.

Though Payments Bank will have advantages as mentioned above, they will have their own share of challenges. They cannot offer loan to their customers and this will limit their customer base only to one looking for deposits and not for loan. They are also are required to invest minimum 75 percent of its demand deposit balance in Statutory Liquidity Ratio (SLR) eligible Government securities/ treasury bills with maturity up to one year. This will limit the return on their investments.

To establish themselves in the Banking world, Payments Banks will have to arrive at the right mix of customer/geography segmentation, product offerings, sources and deployment of fund backed by right technology to start and scale up. It would be interesting to see the way they evolve over a period of time and their bigger role in financial inclusion.