Payment banks for inclusion
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Ihave been in many conferences about financial inclusion that identified the lack of a geographically deep and wide, efficient, low-cost and safe payments system as the starting point of financial exclusion. And every round table, every conference would end up bashing the banking regulator after, of course, a quick look round the room to ensure that nobody from the Reserve Bank of India (RBI) was there. What do mobile operators who offer e-wallets and other prepaid payment instruments (PPIs) want? Freedom from banks has been one of the core demands. A non-bank payment entity, such as a mobile wallet or a PPI company, is forced to tie up with a bank to provide the cash-out facility. This has its own set of issues in terms of cost and lack of protocols for this part of the market.
When I read the Nachiket Mor Committee report on financial inclusion, which recommended the conversion of willing payment entities into payment banks and the mandate to set up white label business correspondents, or BCs (like white label ATMs, these BCs can cash in and out for multiple entities), I thought we were closer to the goal. So, I was frankly surprised at the lack of a reaction from PPIs and mobile wallet companies. Let me explain the payment bank concept first. And then move on to the surprise.
India has struggled with financial inclusion—just 400 million of the 1.2 billion population have bank accounts—and with getting urban-centric banks to include the urban poor and the rural population. But financial inclusion is not just about access to financial products—both savings and borrowings. It is first and foremost about safe, easy and low-cost access to a cash-flow management system, and that includes a payment system that allows you to move money around safely and at a low cost. The pre-paid instruments industry sprang up to bridge this gap of getting cash-in and cash-out access points to people whom banks find economically unviable to service, despite the incentives. But the industry has been shackled by the need to have a bank as a partner for the cash-out function. A payment system has two parts—a pay-in and a pay-out. I can load a card and give it to my driver who can go to his village and then decide to cash out his salary. Under the current model, unless he has a bank account, cash-out is difficult.
Apart from restricting the system, chaining a payment entity to a bank introduces market inefficiencies. The first is the potential of contagion or one entity’s risk spreading to another. As it happened in Kenya where the mobile payment system M-Pesa grew bigger than the banks. The same could happen in India given the lack of banking services for more than 60% people.
Today, the mobile wallets and PPIs need to put customers’ money in an escrow account with the partner bank. An escrow account earns the non-bank payment company no income but the bank has access to the float. Suppose there is a run on the bank—not only will the bank customers be at risk, the contagion could spread to the potentially much larger mobile wallet or PPI operator. The payment bank concept solves this problem by allowing the PPIs and mobile wallets to transform into a bank that puts 100% of the customers’ money in government securities and is not allowed to lend money. A payment bank will be a bank in every respect except that it cannot lend, thus removing the risk of leverage.
What is the risk of a Saradha? Very little, since there is no space for benami accounts as authentication will be the Aadhar number, possibly even the Telecom Regulatory Authority of India’s know-your-customer (KYC) verification. Will existing banks suffer? No, the unbanked will switch out of cash and gold that is currently used to store money and use a payment bank for storage and transfer. Also, nothing prevents a bank from setting up a pure payment entity.
Payment banks look like a good thing, so why the lack of obvious positivity from the non-bank payment industry? Fear! I spoke to several companies and the tone was celebratory (except one who thought that without the lending function the payment bank will not be viable) in private but cautious in public. Nobody wanted to go on record. Reason? They’re afraid of the banks. And banks are clearly unhappy about this. There is also some chatter of regulatory staff being unhappy with any such innovation in the banking industry. The core of several conversations with the non-bank payment industry is this: We’re an industry on the edge, we don’t know if these recommendations will see the light of the day—do we want to upset the people in RBI we deal with or the banks who we’ve been forced to marry? No. They should have done this quietly. The risk of the lobby destroying this is so high that we’re going to remain cautious and quiet. What do the banks lose? The float that they enjoy for doing very little work, and, of course, they face greater competition.
In the days ahead the dissent to payment banks will come in many ways. However, when we begin hearing how these banks will be harmful to national interest (that’s the last arrow in the armoury of a lobby group), we will know that these banks are about to be born! But if payment banks are stillborn, we know who killed them.
Monika Halan works in the area of financial literacy and financial intermediation policy and is a certified financial planner. She is editor, Mint Money, Yale World Fellow 2011 and on the board of FPSB India. She can be reached at firstname.lastname@example.org