Payment Banks

About 40%-50% of India’s 1.25 billion population is eligible to open a bank account, but is still unbanked . In the Union Budget 2014-2015, the finance minister Arun Jaitley announced that RBI will create a framework for licensing small banks and other differentiated banks. The objective of differentiated banks was to serve the niche interests such as local area banks, payment banks etc. to meet the credit and remittance needs of small businesses, unorganized sector, low income households, farmers and migrant workforce.

On 27 November 2014, RBI finalized the guidelines for the Payments Banks. The idea behind setting up payment banks was to further the efforts of financial inclusion by providing small savings accounts payment / remittances services to the lowest strata of the economy viz. migrant labourers,  low income households, small / marginal businesses and persons engaged in unorganized sector of the economy.

Who can apply for a Payment Bank?

The telecom companies, retailers, mobile wallet providers, large business houses and several others are the main applicants for payment banks. As per the official guidelines, following are the eligible promoters for payment banks:

• Existing non-bank Pre-paid Payment Instrument (PPI) issuers
• Individuals / professionals
• Non-Banking Finance Companies
• Corporate Business Correspondents (BCs)
• Mobile telephone companies
• Super-market chains and companies
• Real sector cooperatives owned & controlled by residents
• Public sector entities

RBI has stipulated the “fit and proper” criteria for the eligible promoters that they must have sound track record of professional experience or must be running their businesses for at least a period of five years in order to be eligible to promote payments banks. A scheduled commercial bank can take equity stake in a payments bank to the extent permitted under Section 19 (2) of the Banking Regulation Act, 1949. Promoter/promoter groups should be running their businesses for at least a period of 5 years.

Scope of activities of Payment Banks

• Payment banks can accept demand deposits. This implies that customers can open savings accounts as well as current accounts; but NO time deposits (such as FDs).
• An account balance cannot exceed Rs. 1 Lakh for an individual customer.
• Payment Banks can issue ATM/debit cards but not credit cards.
• Payment Banks can NOT give loans.
• Payments and remittance services through various channels.
• A payment bank can become Banking Correspondent of another bank and offer all products / services which a BC can offer.
• Payment Banks can distribute non-risk sharing financial products like mutual fund units and insurance products, etc.
• The revenue of these banks would come mainly from the transaction fees.

Deployment of funds

• A payment bank can not undertake lending activities.
• Apart from amounts maintained as cash Reserve Ratio (CRR) with RBI on 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 max 25% in current and time deposits with other commercial banks for operational purposes and liquidity management.

Capital requirement

• The minimum paid-up equity capital for payments banks shall be 100 crore. Further, they should have a leverage ratio of not less than 3 per cent, i.e., outside liabilities should not exceed 33.33 times its net worth (paid-up capital and reserves).

Promoter’s contribution

• 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

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.

How do they work?

The current scenario is like this. We suppose that Ramesh is a migrant laborer working in some  construction company in a metro city. At the end of the month, he has to send Rs. 2000/- to his home in a remote village in Rajasthan. He has two options to send this money:

• He gives Rs. 2000/- to someone going to his village. It is possible that the person who takes up this job might pocket some part of this money.
• He can go to nearest Post office and sends money via money order. His wife and children get Rs. 1900 (5% money order charge).
• His family will go to nearest Kirana and buy whatever they can in that money using the cash.

When payment banks become people, the scenario would be like this:

• Wife of Ramesh is now a payment bank account holder. Ramesh just transfers the part of salary to her bank account using a simple sms.
• He can also transfer part of money, say Rs. 500/- to Kirana shop which itself is a payment bank for grocery. His wife just needs to collect the grocery. She can also collect grocery of Rs. 300 from this, and also withdraw Rs. 200 as cash to buy other needs.
• All these transactions would occur at a cost of around 1.5%, which is cost effective.

Who are the key aspirants to become Payment Banks?

The key aspirants to payment banking business include telecom firms, pre-paid payment instruments / payment solution providers, retail chains, large business correspondents and business conglomerates. Out of them, Telecom firms have an advantage over others mainly because they already have a distribution network in rural areas.  Most of the pre-paid payment instruments / payment solution providers are tech savvy and already working in the field of mobile payments.  Retail chains look into the indirect benefits in the form of longer customer loyalty and higher wallet share. since they do high volume business, they look at payment banks as new window to transactions.

Analysis of the Business Model of Payment Banks

Payment banks is a novel concept inspired by many other such models which have been successful. One such example is M-Pesa (‘M’ for mobile and ‘pesa’ is Swahili for money), the mobile payment service which was first launched by Vodafone in 2007. An estimated amount of USD 1 billion gets transferred every month in Kenya.  In our country, we have around 937 million mobile subscribers. This number simply outnumbers the bank accounts. Thus, financial inclusion is the most likely outcome of such banks.

Further, the large number of mobile subscribers bring an excellent business opportunity, which has lured large telecom companies such as  Bharti Airtel, Reliance, Aditya Birla Group as well as large scale retailer such as Future Group to apply for payment banks.

However, there are some caveats. First is that they can be successful only if the business is viable and scalable. It is clear from the above discussion that payment banks cannot give loans and cannot accept time deposits. This would simply mean that they can not earn the interest spread between loans and deposits and their revenue model is mainly on transaction charges. Since they would work on thin margins and volumes would be key to their survival ; some have expressed doubts on their viability and scalability.

However these doubts seem to be overemphasized. This is because:

• A payment bank can also work as business correspondents for scheduled commercial banks and offer loans, credit cards and earn commission on any insurance and mutual fund products they sell.
• These banks need to input 75% of their deposits as SLR (statutory liquidity ratio). Since SLR earns some interest, it can neutralize against the interest they would need to pay on customer deposits.

Also, knowledge of local economy is another key to succeed in the Payment Banks business. For this, the payment banks will need to identify the correct regions and expand networks in those areas.