Payment banks: How they are different from normal banks?


Payment banks: How they are different from normal banks?


The World Bank conducted a survey of about 140 economies in 2014 and made a World Bank Financial Inclusion Database. According to this database, in India, only 53% of the population has bank accounts whereas the global coverage is 61%. Also, India accounted for nearly half of the dormant bank accounts (195 million out of a total of 400 million) in the world. This was because majority of the rural population still prefers to receive their wages in the traditional way rather than making electronic payments, keep their savings at home and borrow money from informal lenders rather than trusting a financial institution. It was a farfetched dream to see them having mobile accounts or use e-banking or even own a credit/debit card. To tackle this, the government launched the “Pradhan Mantri Jan Dhan Yojana” aimed at increasing financial inclusion in India.


For the same reason, the concept of Payment Banks has come into existence. Payment Banks are basically a scaled down version of banks which can accept cash deposits up to a limit of INR 1 lac only. This might seem to be a trivial amount for many people but it is quite significant for the rural population who don’t even have access to banks.


So, basically, Payment banks would be a means to reach out to the unbanked population in India. Keeping this in mind, the guidelines for setting up Payment Banks were issued on 27th November, 2014. On 19th August 2015, the Reserve Bank of India gave out licenses to 11 applicants for setting up payment banks in India. Of the 41 applicants, only 11 were selected. This“in-principle” approval was given to mobile and mobile wallet firms, e-payment firms, supermarket chains and others.


A payment bank is quite similar to any of our day-to-day banks, however there are some differences which need to be highlighted.


A payment bank can accept deposits only up to INR 1 lakh, but it can also provide interest on these deposits. However it does not accept NRI deposits. The most notable difference is that a payment bank does not have any provision for issuing loans or credit cards. Also, the deposits must be invested only in Government securities. Your savings bank account can also be integrated with a payment banks via IMPS and NEFT transfers.


On the brighter side, the limit of INR 1 lakh is welcomed by the mobile wallet firms like Paytm as it extends its earlier limit for deposits. These banks can also issue ATM and debit cards which can be used at the terminals of other banks. This is again particularly beneficial for the mobile wallet firms as it closes the path and provides a way for the wallet owners to withdraw their money conveniently. This accomplishes the goal of providing a savings, payments and remittance portal for low income households. A worker in a city can now very easily transfer his hard earned money back to his family in the village. The “easy-out way” for money is the ace for payment banks, and it will in time, foster people’s trust in these financial institutions.


The RBI believes that by diversifying the owners of these first set of payment banks, they can get a ground reality test of the strategies and models used by each of these firms and find out which one can work best for a market like India. So, now we have companies like the Paytm (Vijay Shekhar Sharma), Fino Paytech, Vodafone m-pesa, Idea (Aditya Birla Nuvo), Reliance Industries, Airtel, Sunpharma (Dilip Shantilal Shanghvi), Tech Mahindra and also others like NSDL, Department of Posts and the Cholamandalam Distribution Services which made the cut.


The Department of posts, and the Cholamandalam Distribution Services have been chosen because they already have a large network and outreach in the villages. They can effectively connect the farmers to the banks. Even Vodafone m-pesa has over 90,000 agents in India who can act as business correspondents. Similarly the mobile companies and supermarket chains have a large distribution network across India.


Many of these companies have already tied up with banks to seek their support in setting up a payments bank. For this venture, the Reliance industries have partnered with the State Bank of India and they plan to capitalize on Reliance-Jio’s pan-India network. The penetration of SBI will strongly add on to it and can be leveraged. Kotak Mahindra Bank has also picked up stake in payment banks with Bharti Airtel. ICICI Bank is a parent company of Fino Paytech having about 16% stake in it. Fino Paytech will be reducing its foreign shareholder’s stake by raising capital from private equity funds and other strategic investors. Taking a different route, Paytm’s founder Mr. Vijay Shekhar Sharma has decided to create a separate new entity of which, 60% will be owned by him and the rest by Paytm. They plan on being the first payment bank in the market.


The field for Payment Banks is set. The regulations and guidelines have been laid. It is now in the hands of these 11 chosen entities to bring into the market, this revolutionary concept of payment banks. They all have their own plans and strategies and it will be interesting to see which one of them comes out with flying colors. The key to success here will depend on increasing the volumes since the transactions are predicted to be small amounts being targeted at low-income segments. The use of technology for seamless payments, gaining trust through security and greater outreach are the pillars on which these banks will rely. People are really expectant and they want to see whether this move of RBI will be able to establish greater financial inclusion in India.


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