Karpe Kumar

Payments Banks – Convenience Weds Technology

Blog Post created by Karpe Kumar on Apr 19, 2016
On August 19 last year, India took a revolutionary step in the arena of banking – the RBI kicked off the long-awaited differentiated banking regime by issuing in-principle approvals to 11 entities to set up payments banks. This was followed by the issuance of 10 more licences for small finance banks in September.  From all accounts, this will be a game-changer in India’s banking landscape and could well usher an even bigger storm than the one triggered in the early years of the decade of 1990 when private banks were given licences.  So, what are payment banks all about?  In order to gauge the importance of this move, it is essential to understand what payments banks can and cannot do. Simply put, a payments bank can do everything a full service bank or a universal bank can do -- take deposits, pay bills, issue cheques and drafts, and so forth. The only thing it cannot do is lend money, other than to the government. These banks will not offer any loans and credit cards, unlike the regular banks. Their scope is limited to small-ticket customers, and by kick-starting this kind of niche banking, the RBI has thrown open banking services to the un-banked population of the country, which is as high as 40 percent.  Payments banks are going to become an important tool for enabling financial inclusion as they cater to small savings accounts. The payments banks model is high-volume-low value transactions in order to facilitate access and ease of usage. These banks are expected to transform social welfare and subsidy schemes, and cater to the huge number of accounts created as per the Pradhan Mantri Jan Dhan Yojana. Government subsidies for the poor -- LPG, kerosene, food, fertilisers -- can now be routed through payments banks. Last mile connectivity and other advantages Another advantage of payments banks is that they will provide last mile connectivity between bank branches and the remote customer living in a rural hamlet. These banks will rely on technology in a big way to reach all customers, using mobile phones as the vehicle of banking. Physical bank branches and ATMs would still be needed for opening an account, depositing cash, etc, but all day-to-day payments, including peer-to-peer payments, can be done remotely. The mobile phone is expected to become the virtual ATM and a small payments cheque-book as well, which will also promote the concept of cash-less banking. This means, over time, the mobile will perform the same role as credit and debit cards, obviating the need for too many cash payments.  Besides, as payments banks proliferate, banking costs are set to come down due to intense competition between the payments banks themselves, as well as competition between payments banks and universal banks. In fact, payment banks will start offering zero-balance accounts and other services. Additionally, depositors can expect higher short-terms deposit rates, which could take away a chunk of customers from regular banks. Technology and payments banks go hand in hand As mentioned earlier, payments banks will have to rely substantially on technology. A greater collaboration between the banks and fintech companies is on the cards, as the latter can provide a number of low-cost models, products and services to the former. For instance, payments banks and financial technology companies can come together to create a solution that facilitates transactions on a comprehensive and secure multi-mode payment platform. This would also entail enabling a mobile device to accept and deposit money easily; in other words, transforming the mobile phone into a digital wallet.  While there are a number of digital wallets going around, storing money in multiple wallets is not of much use when they can be utilized only for specific purposes. A major issue with wallets is forfeiture of unutilised balance at the end of the validity period, which varies between six months to a year. Besides, the money stored in a digital wallet sits idle and does not earn any interest. And since wallets for small value do not require any Know-Your-Customer checks, there is always a possibility of fraud and money laundering.  To meet these challenges, fintech companies have already introduced white – label cloud solutions, more like super wallets that offer a more innovative and inclusive proposition. With such white label solutions fintech companies will play a key role with their Cloud-based applications and platforms to enable the Payment Banks with a Quick Go To Market Solution. This will be a crucial factor to establish a first mover advantage over other Payment Banks and capture the market before other players.  A super wallet makes use of the existing banking credentials to facilitate payments in a safe, secure and convenient manner. Super wallets can pool in all existing credit cards, debit cards and bank accounts and gives you a ready network of more than 170 payment options including Net-banking, NACH, NEFT/RTGS, IMPS, e-wallets and the like due to its interoperability which is a key factor to widen the scope of transactions.  In fact, payments banks and super wallets together can enable a push towards financial inclusion.

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