Home Banking Why India Needs Payments Bank? Detailed Analysis

Why India Needs Payments Bank? Detailed Analysis

The banking industry in India is crowded in terms of sheer numbers – 26 public sector banks, 20 private sector banks, 43 foreign banks, 56 regional rural banks, 1,589 urban cooperative banks and 93,550 other cooperative banks, and this does not include non-banking finance companies (NBFC) and uncounted numbers of cooperative institutions.

Room for More Players?

Given these statistics, it would, prima facie, seem that there is no room for more players in the banking universe in India. But, a deeper analysis of ground level realities reveals that, notwithstanding the presence of the banking infrastructure, almost 70% of transactions in the country are performed in cash. That data leads to the impression that the banking system is, to a significant extent, operating in hot pockets, leaving large swathes of population under-banked or perhaps unbanked. Agriculture work-forces, daily wage workers, low income households, contract workers, and micro businesses are examples of exclusions from the active formal banking system. Traditional banks tend not to be overly inviting or forthcoming when it comes to dealing with these categories of customers, and reciprocally, these prospects often feel psychologically intimidated by the white collar establishments that they would have to deal with, and the procedural hassles involved in opening and operating an account. Clearly, there is a divide between the services on offer and those which specific categories of prospective customers are looking for, resulting in a space for players who offer limited services, for which there is a demand, in a user-comfortable socio-cultural milieu.

Payment banks are expected to be a game changer in the economy with their focused mandate of mobilizing small savings

The Banking Eco-System

The banking system has evolved, and presently the structure is built around three columns – the remittance infrastructure, the intermediaries and the banks themselves.

Remittance Infrastructure

Remittance services are provided by the Reserve Bank of India (RBI) and National Payments Corporation of India (NPCI) through National Electronic Funds Transfer (NEFT), Real Time Gross Settlement (RTGS) and cheque truncation system (CTS). Banks provide internet banking and mobile banking services.

Intermediaries

The intermediaries comprise players such as Visa, Master and RuPay who are the connectors that facilitate relationships between customer to business and business to business. Delving deeper, the cast of intermediaries also includes payment gateways (Bill Desk, Bill Junction, TechProcess, PayU Money, CC Avenue, etc.) that carry out the verification process and transmit funds from the payer to the merchant. And, of course, there are Automatic Teller Machines (ATM) installed by banks for facilitating deposit and withdrawal of funds.

Banks

Without the existence of bank accounts at both ends of the transaction, the presence of the first two columns becomes superfluous. And therein lies the rub. Notwithstanding all the political will and policy facilitation, while bank account numbers may have zoomed on the back of financial inclusion measures, actual operations have barely taken off. In part, this could be attributed to the fact that large segments of population – income earners and income users - are geographically separated, thereby making the opening of 2 banks accounts mandatory for remittance and withdrawal to be a workable proposition. And there is, as discussed earlier, the reluctance of the long-unbanked to deal with the formal banking sector. This has evidently become a stumbling block in what is fundamentally a laudable initiative.

Mobile Wallets

There has been an effort to transcend these obstacles by using technology. This has been largely driven by electronic wallets (MobiKwik, Idea Money, Oxigen, mRupee, etc.), that store virtual cash that can be used at designated merchants and department stores.

But with only 1.3 million Point of Sale (PoS) terminals for a population in excess of 1 billion, and the penetration of ATMs, especially in the rural areas woefully inadequate, it is no wonder that cash transactions continue to rule the economy. Mobile wallets were, for a while, expected to be a magic wand that would change the payment landscape but inherent inflexibilities such as unavailability of cash withdrawal and inability to pay interest for the funds in deposit dampened their appeal.

Payments Banks

The Nachiket Mor Committee, set up by the RBI, mooted the idea of payment banks, and that has now become a reality. Payment banks are expected to be a game changer in the economy with their focused mandate of mobilizing small savings, elimination of risk by eschewing credit hazards, flexibility for customers by issue of debit cards, interest earning potential, and the potential for use at millions of touch points. Funds deposited in a m-commerce bank account in Chennai could be withdrawn through a debit card held by a relative in Kochi in a seamless manner by approaching an authorised correspondent of the bank; the correspondent could even be the local mobile recharge shop or the neighbourhood kirana store. Account holders would also be able to transact on the infrastructure that is already used by traditional banks – NEFT, ATMs, etc. The concept of payments banks is revolutionary and predicted to close the loop in the financial inclusion space. The augury is positive and the concept of payments banks is clearly an idea whose time has come.