Payments Banks – concept demystified

Imagine, you have a  mobile connection from Docomo. One fine day, you are told it’ll serve you as a bank. Cool , haina? Precisely this is what RBI is vying for. To get more people into the net of banking system, it came up with the idea of Payment Banks. So what exactly are they, and the rationale behind bringing them up. I’ll explain you all in a jiffy.

What are Payment Banks?

◘ Payment banks are entities that allow you to only open savings and current accounts. A payments bank can be a mobile service provider, supermarket chain, non-banking finance company, corporate business correspondent.

◘ A payment bank will only be allowed to accept deposits and transfer money from one account to another (undertake remittances) but will not be allowed to undertake lending activities. Their primary role is to provide payments and remittance services and demand deposit products to small businesses and low-income households.

◘ Payment banks have come up on the recommendation of Nachiket Mor Committee. They will be registered as a public limited company under the Companies Act, 2013, and licensed and governed under Banking Regulation Act, 1949.

 What are the features of a payment bank?

• Minimum entry capital for Payment banks is fixed at Rs 100 Cr.  This high amount of initial capital would mean that innovation would be slow because the risk to the payment bank model is very limited. It also has to maintain a capital adequacy ratio of 15%.
• Payment banks can accept demand deposits. The restriction therein is that the maximum balance per customer can only be Rs 100,000/-. This can be for both current and savings accounts. All deposits have to be invested in government bills and securities, which means that fee income [ income from fees on customers accounts ] for transactions would probably be the biggest revenue driver for Payment banks.
• Payment banks would provide remittance and payment services. The condition here is that the total credit into an account should not exceed Rs 1 lakh. This means that the payment banks would benefit the lower economic strata of the banked and unbanked population of India.Industry experts are saying that this cap would augur well for the migrant workers whose average ticket size of remittance is about Rs 4000/-.
• A Payments Bank may choose to become a Business Correspondent of another bank for credit and other services which it cannot offer. Commercial banks can also leverage this model by launching a payments bank subsidiary.
• The Payments Bank is expected to leverage technology like Internet banking to offer low cost banking solutions.
• Payments banks have to maintain CRR and SLR.
• Payments Bank cannot undertake lending activities.
• They can issue debit ATM card but not credit card.

Why do we need them?

◘ The primary objective of setting up of Payments Banks will be to further financial inclusion by providing  small savings accounts and payments / remittance services to migrant labour workforce, low income households, small businesses, other unorganised sector entities by enabling transactions in a technolog driven environment.

◘ The reach of mobile phones is pretty extensive. You know what our MPs are upto with their in phones :P. Jokes apart, almost 100cr subscribers are there out of which nearly 35cr are in rural areas. Payment banks make handling cash a lot simpler as well. For example, you can transfer money using your mobile phone to another bank or to another mobile phone holder and also receive through your device. Suppose a payment is to be made to somebody far away. And you do not want to tire yourself in SBI. The possibility for this model to make life easy are huge. Airtel was already offering a payment instrument service – Airtel money. And, Indian Post now too can fulfill its long lasting dream of being a bank.

◘ Payments banks will create the infrastructure which will provide access points to send and take out cash. As of now, people send money from cities to rural areas through post offices or third-party channels. Normally, this takes a lot of money and time. With payments banks, these people will get access to instance cash transfer and will be cost effective too.

◘ As payment banks would be able to invest in government bonds, this would enable the providers to offer higher interest rates on deposits that might attract inactive money parked in savings bank accounts.

What might impede its functioning?

◘ The ability of payments banks to earn higher returns is restricted as they cannot lend. The volume of transactions should be huge for these banks to make money. And if several entities enter the race, nobody gains.

◘ Subir Gokarna said :  The minimum stipulated paid-up of capital of ₹100 crore is in excess. It could deny many smaller players from entering the space and playing the role of payments bank successfully.

◘ As romantic as it sounds, hoping that all mobile users are wooed into payment banks is perceptibly unlikely.  Supermarkets , kiranas setting up their ATMs and competing with existing biggies seems unviable at the moment.

◘ Schedule commercial banks  are also permitted to run Payment banks through their subsidiaries. That defeats the whole purpose. For example, if SBI starts a payment bank then other small player’s payment banks cannot compete with an established scheduled commercial bank like SBI.

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