Payment Bank: A differentiator or an extension of Business Correspondent Banking

RBI (Reserve Bank of India) formally introduced the Financial Inclusion policy during 2005-06 with the main objective of connecting underbanked/unbanked people with the banking system.

Approximately, 50-60 INR is per transaction cost at branch level and at ATM its 15-20 INR. Penetration of both branch and ATM is not good enough considering varied demography (concept of white-label ATMs was not successful).To support concept of financial Inclusion across mainland, technology was perceived as the backbone in conjunction with the idea of Branchless banking (Business Correspondent model) to lessen per transaction value of financial transaction.

Again, high-end technology enablement (low value high volume transactions) itself costs much and maintenance also comes with a price.

As noted in “Committee on Comprehensive Financial Services for Small Businesses and Low Income Households” chaired by Dr. Nachiket Mor, a clear vision and a set of design principles is required to flourish the concept of financial inclusion and one of the four design principle is being customer centric.

Financial inclusion was more a regulatory push in a top-down approach rather a profit making business area and customer centricity was also missing. Due to numerous reasons end customers missed the actual benefits of banking; accounts were opened but transactions weren’t happening, habit of saving was not inculcated, transfer of subsidies is still not at par, insurance coverage etc. was not happening as it should be.

Next came the big announcement by RBI in the form of “payment bank”. As per RBI guidelines regarding payment banks, “The objectives of setting up of payments banks will be to further financial inclusion by providing (i) small savings accounts and (ii) payments/remittance services...”

Payment bank will be a specialized commercial financial institution depending heavily on technology to serve customers.

Business Model: India witnessed multiple business ideas related with Financial Inclusion and it has been proven again and again that it’s a non-profitable (less) business unless supported by strong technology enable backend supporting multi-channel interfaces especially mobile based interfacing.

Domestic remittance is the huge US$11 Billion – US$14 Billion market and large part of it is unregulated. It’s a big market which can be tapped using payment bank scenario. International remittance inflow is approx. US$50 Billion.

If above market can be tapped and converted towards business profitability then it will be a game changer.

Besides remittance, commissions generating out of cross selling of other financial products, VAS services, DBT can be income generator.

Technological Model: Payment bank can’t rely on established branch model (it involves lot of cost). Technology has to be used to provide services and relying on various customer authentication mechanisms starting from biometric authentication, cards, OTPs etc.

Technology should enough layered and structured so that with minimum investment, more and more business services can be deployed without reworking the system from scratch. Mobile is penetration is huge, even in rural and semi-urban areas, enough consideration should be given on mobile as access platform and technologies related with tokenization, 2-way factor authentications should be given due consideration.

Being banking system, security and compliances is of paramount importance. A lot of consideration should be placed on PCI, secure data centers, various authentication and authorization criteria.

Who should fear: Big Indian banks on cannibalization of CASA accounts. They should start focusing on BC model and partner with payment bank for cross-selling of non-payment products.

References:

:”Banking Structure in India – The Way Forward”, RBI     

:Draft Guidelines for Licensing of “Payments Banks”, RBI

:”Committee on Comprehensive Financial Services for Small Businesses and Low Income Households”, chaired by Dr. Nachiket Mor

:"Report of the Committee on Medium-term Path on Financial Inclusion”, RBI

:”The Remittance market in India”, world bank