Home / Opinion / Payments banks: revolutionary step in Indian banking space

The Reserve Bank of India (RBI) has recently announced the first set of differentiated bank licences to 11 applicants to set up payments banks. It has been termed as a revolutionary step by many and rightly so. The banking sector in India has so far had one category of commercial bank which is the universal bank. A universal bank is licensed to carry out the complete range of banking activities, including borrowing, lending, investments, and to all categories of clients. Now, with the introduction of payments banks, the banking structure in India is being modified to include a new variety of banks with a specific mandate through differentiated bank licences. The basic premise for a move towards differentiated bank licences is that not everybody should or is capable of getting a universal bank licence. As the economy grows and its needs become more complex, a variety of participants should be permitted to facilitate growth.

The payments banks have been licensed to only offer deposits and payments services. The induction of these new banks—which include a mix of large companies, leading telecom companies and new-age technology companies—into the financial sector is an important step towards fulfilling the vision of ubiquitous access to a bank account and payments services by all. Improved access to banking should provide the much-needed impetus to increase household savings in formal financial instruments and thereby see a decline in myriad forms of suspect savings and investment schemes run by unregulated entities and individuals. It is expected that the new entities will bring in scale, technology and expertise incremental to the existing institutions in banking and therefore, the landscape would change dramatically in the future. Of course the jury is still out on how successful these banks would be and whether there is enough money in this business.

Therefore, apart from the future promise that this step by the RBI holds, it is revolutionary for what it has already successfully achieved. First, the threat of impending competition has awakened incumbent banks to look at liabilities and payments as a separate business and not just as a source of liquidity and facilitating transactions. The focus of the banks is shifting from the stock of balances in accounts to the flow and velocity of payments by customers. In the past six months many large banks have launched a slew of payments-focused apps and services. Banks are innovating to make account opening a two-minute ritual instead of an arduous process involving many documents, paper work and long interactions with unwilling bank staff. Second, with new kinds of entities in the financial sector, we are seeing active collaborations between banks. Many incumbent banks have already announced tie-ups with the new payments banks. There is much more initiative demonstrated to see how respective strengths of various institutions can be leveraged to create synergies with larger impact and better outcomes. Third, it has successfully brought the financial inclusion agenda at the center of board room and chief executive level discussions in banks and companies. Hitherto financial inclusion was a compliance requirement to fulfil government mandate and social agenda, and would typically get relegated to a stand-alone department in the bank trying its best to do what was possible. This has now changed and sustainable business strategies with latest innovations in technology are being debated, presented and implemented. Reaching out to untapped segments in rural areas and small towns, by using new business models is now considered the next big opportunity for the financial sector and are actively engaging in it.

The Committee on Comprehensive Financial Services for Small Businesses and Low Income Households first proposed the idea of payments banks in January 2014. It is a novel idea with no direct parallel even in other countries. There was therefore, not surprisingly, mixed reactions to the idea from various stakeholders. It is indeed commendable that RBI has taken this from idea to the execution stage in a short span of 20 months. The central bank is setting a new standard of speed of action. This move also represents the RBI stance of encouraging innovation and experimentation of multiple models, which is rather refreshing. Regulators everywhere often run the risk of lagging behind market developments and not being ahead of the curve. This move clearly demonstrates RBI’s ability to play market-shaper. Around the world, we are seeing new business models emerging in providing financial services without banks. The Lending Club in the US provides a sophisticated technology-backed platform that brings together lenders and borrowers of loans. Kabbage, an Atlanta-based company, is reinventing the way small business loans can be assessed and approved online in a few minutes, and neatly stepping into the void left by traditional banks. As technological developments cause disruption in banking by non-banking institutions, it is crucial to have a regulator who is on top of the developments and can balance innovation and stability. By bringing potential non-bank attackers such as technology and telecom companies formally into the banking system, RBI has managed to kill two birds with one stone.

While presently our banking system is fighting a huge drag on account of stressed assets in large project and corporate loans, green shoots are emerging with the imminent launch of two new universal banks, approval of 11 payments banks, and soon to be announced small finance banks. Each new entity being added comes with a bagful of new ideas and zero legacies. The ripple created by every new addition stirs the existing players as well, and there is a multiplier effect on the entire system. The revolution of Indian banking has begun and the common masses would be the biggest beneficiary of this.

Smita Aggarwal, senior program director, Centre for Advanced Financial Research and Learning.

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