Gates Foundation to help payments banks with tech, innovation

It expects India to become a global showcase for digital payment systems in the next three to five years

The Bill & Melinda Gates Foundation will help newly licensed payment banks in technology sharing and innovation as it expects India to become a global showcase for digital payment systems in the next three to five years, Daniel Radcliffe, senior officer at the financial services for the poor (FSP) programme at the foundation, said in an interview on Friday.

The Gates Foundation, which is the largest private philanthropic organization in the world, is not looking to take equity stakes in these new banks but is open to grant money for product and technology innovations to help reach financial services to the poor, Radcliffe said in a telephone interview.

“These banks have deep enough pockets for investing capital. I don’t think they will need money," he said, adding that he expects to help these new banks in learning the lessons in payment systems around the world and accelerating innovations around payments.

Last month, the Reserve Bank of India (RBI) granted in-principle approvals to 11 entities to start a new category of banks, which will provide basic savings, deposit, payment and remittance services to people without access to the formal banking system. These banks will target financially excluded customers such as migrant workers, low-income households and tiny businesses. They will not be in the business of lending.

Radcliffe said the 11 companies selected are some of India’s biggest, with deep pockets and strong expertise in building distribution networks across India.

“The question mark is how many of these players translate their licences in making serious investments in rolling out payment services in India. The minimum threshold for applying for a licence is not that high and now the real test begins as Bharti Airtel Ltd, Reliance Industries Ltd, Idea Cellular Ltd, Tech Mahindra Ltd put down $30 million to $50 million in trying to roll out their services," he said.

The minimum paid-up equity capital for these banks is 100 crore, while the promoter contribution has been set at a minimum of 40% initially.

Radcliffe said RBI has done the right thing by not restricting the licences to only two companies like in the Philippines or disallowing mobile operators as was done in Nigeria.

“By granting 11 licences, it does light a fire under each of these institutions in India. If they don’t make an effort in the first year or first few years they are at a serious risk that one of the other players could acquire a lot of customers and then it becomes difficult to change banking relationships because we are used to using certain accounts," he said, adding that it is hoped that the new banks are pressured to make serious efforts towards financial inclusion.

Shinjini Kumar, leader, banking and capital markets at consultancy firm PricewaterhouseCoopers, said there is no doubt that the new payments banks will need to burn cash to acquire customers in the first few years.

“It is good news for customers. But for me the biggest challenge will be how the regulator will look at use of agents by these companies, to acquire customers, for example, and how will they make agents behave; because right now, banking regulations do not allow customer to be lured," Kumar said.

Radcliffe said he prefers these new banks do not worry about monetizing transactions or maximizing profits in the first few years and instead focus on acquiring maximum customers.

“So in India, for example, Reliance can consider a model where they do not worry about charging for every person-to-person transfer or cash out or charge very little for it and work to acquire customers, and that then allows Reliance to modify into a range of different services like for e-commerce, government institutions, credit providers or insurance companies," he said, adding that it is the model used by Alipay in China to allow people to move money for free which helped them become a successful at e-commerce.

The Gates Foundation is in touch with “nearly all" the new payments bank for technology sharing and innovation, but “we are trying to see who is serious only then will we start engaging", Radcliffe said.

“Our job is not to find the players that need money give money, it’s to stimulate expansion on market. There are people who are already doing that. That said, we are open to funding relationships where we can help trigger new innovative products, not about granting funds to roll out but to experiment new delivery models," he added.

The in-principle approval for these entities is valid for 18 months, after which the entities will be given formal licences, provided they fulfil conditions stipulated by RBI.

Funding financial technology for the poor is not new to the Gates Foundation. Last year it invested $10 million in Bangladesh-based payment service provider bKash Ltd. Radcliffe said the foundation spends about $100 million per year globally to further financial inclusion, though health is the main focus of the foundation, with more than half of annual donations—$2.5-3 billion—is spent on research and issues linked to health.

A survey of 45,087 people commissioned by the foundation last year and released earlier this year showed 55% of Indian adults have a bank account (up from 47% a year ago) and 29% have an active account (up from 25%).

Radcliffe said he expects India to not only be a showcase in digital finance but also to reinvent service delivery using payment systems such as direct benefit transfers and payment digitization in the next three to five years.

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