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Payment Banks: A step closer to Financial Inclusion

Payment Banks: A step closer to Financial Inclusion

The financial intermediaries in India are broadly categorized under Banks and Non Banking Financial Institutions, wherein banks are mainly divided as:

  • Commercial Banks
  • Co-operative Banks

Commercial Banks are categorized in Public Banks, Private Banks, Foreign Banks and Differentiated Banks like Regional Rural Banks, Local Area Banks. The latest entrants to Differentiated model of banking are Payment Banks and Small Finance banks.

Herein, we are analysing the Payment banks in detail.

History

Indian Banking sector has been in a phase of constant evolution in the last two decades. Increasing the reach and efficiency of banking and related services has been a top priority for the regulators, for which various initiatives are being implemented time and again.

In January 2014, the Nachiket Mor committee submitted its report on “Comprehensive Financial Services for Small Businesses and Low Income Household”. Formation of Payment Banks was one of its recommendations of the report, post which RBI issued guidelines for Payment Banks in November 2014.

In August 2015, Reserve Bank of India gave "in-principle" licences to eleven entities to launch payments banks.

What can they offer

A payment bank can accept deposit up to 1 lakh per customer, can facilitate payments, issue services like ATM cards, net banking, mobile banking and can also sell third party products like insurance.

How they are different from other commercial banks

Apart from basic regulatory and statutory differences, the major difference in terms of operations for Payment banks is restriction to offer loans to customers.

Why we need Payment Bank

Including a vast population within ambit of structured and monitored financial environment requires multi-fold strategies and means. Governments over time have taken many initiatives to increase penetration of financial services like opening regional rural banks, local area banks, rural branches of commercials banks, beginning business correspondent models and launching schemes like Jan Dhan Yojana.

Payment Banks are also a step closer towards the target of financial inclusion. Mainly conceptualized as a niche category for high volume- low value transactions, they can act as a major facilitator for low income households and unorganized sectors, by providing them small savings account and payment/ remittances services. Their technology based low cost driven model is the

Market Players

Among the 11 players initially granted license, below mentioned 4 players have started operations (As of Nov. 24, 2017):

  • Airtel M Commerce Services
  • Department of Posts
  • FINO PayTech
  • Paytm

While Cholamandalam Distribution Services, Tech Mahindra and  Sun Pharmaceuticals have already withdrawn, following players are in the process of launching their services, within stipulated time-frame:

  • Aditya Birla Nuvo
  • National Securities Depository
  • Reliance Industries
  • Vodafone M-Pesa

Advantages

Listed below are some of the advantages of this differentiated model of banking:

  • Low Cost of operations, as no compulsion of brick and mortar based structure
  • Safe for the customers due to the structured regulations in terms of investment of customer’s money
  • Technology based, thus making financial services less cumbersome for the masses

Challenges

The primary income source for banks is their lending activities. Since payments banks can’t offer loans, they are dependent on different income avenues like large scale of operations for generating income through transaction related services, third party product selling etc.

Along with commercial banks, other fintech players are also a competition for these banks due to their financial transaction related services.

Difference with Small Finance bank

While a payment bank and Small Finance bank share certain similarities in terms of objective of financial inclusion and target population, they have some basic differences.

  • Small Finance Bank (SFB) can accept all types of deposits (current, saving, fixed etc. while a payment bank can accept only demand deposits
  • Payment Banks can’t offer loans while SFBs can

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