Photo: Sneha Srivastava/Mint
Photo: Sneha Srivastava/Mint

The payments banks revolution

Small, no-frills banks have the potential to provide access to financial services for all Indians

With the Reserve Bank of India (RBI)’s in-principle approval to 11 payments banks, India has taken one big step forward on the road laid out seven years ago. In “A Hundred Small Steps", the Raghuram Rajan Committee on Financial Sector Reforms had made strong recommendations to change the interface between the financial sector and the poor, stating, “the most important shift in paradigm is to alter the emphasis somewhat from the large-bank-led, public-sector-dominated, mandate-ridden, branch-expansion-focused strategy for inclusion". Among other proposals, the report had recommended entry of more private deposit-taking small banks and use of technology, particularly mobile phones, to reduce costs. While the paradigm shift might have sounded quite revolutionary when it was set out, quite a few of its recommendations have materialized, changing the inclusion landscape. However, even with the recent phenomenal success of the Pradhan Mantri Jan-Dhan Yojana in improving access to financial services, usage by low-income consumers remains a challenge. It is here that the payments banks are expected to make their impact.

The principle behind payments banks is simple—accelerating the penetration of financial services among low-income consumers by leveraging technology and the large, non-banking retail network without compromising the security of the financial sector. The 11 applicants chosen come from different backgrounds, the commonality being that they all align to this basic principle. Each comes with its own strengths and will have its own set of challenges. For instance, India Post—a natural fit to be a payments bank as it already offers money transfers and deposits and has unrivalled reach in the country—will have to ramp up its digital payments infrastructure and work culture at the last mile.

For each entrant, partnerships with banks will be a key factor for success. Given the lack of clarity on the business model for payments banks, successful partnerships will be those that allow for changing responsibilities and revenue-sharing over time as the market matures.

In any digital financial service, often the easy pickings in the early phase of a partnership come through the payments business and accessing the non-bank’s customer database, with revenue from banking services, savings, credit, etc., picking up only over time. In fact, as technology and markets evolve, all partners must be agile in their responses and be prepared to move with the change. There are interesting examples from other countries, for instance Telenor and Tameer Microfinance Bank have together set up the largest branchless banking service in Pakistan. Telenor has a large customer base, wide telecom and agent distribution network, marketing skills and relatively higher financial strength, while Tameer’s expertise lies in financial products, risk management and compliance. Responsibilities are aligned to the core strengths, revenues are shared in proportion to expenses and the revenue split is re-negotiated over time.

Apart from managing partnerships with existing banks, another new relationship that will be tested will be that between the regulator and these new “differentiated" banks. For RBI as well as the non-banks in the sector now, there will have to be close dialogue to ensure that each other’s concerns are shared and resolved, as each charts out its course in fresh waters.

Even as the new entrants focus on the business model and fulfilling regulatory requirements, they must not lose sight of the end goal: catering to the financial needs of the low-income customer. While RBI will work on controlling risk of fraud and financial instability through its various regulations, low-income customers have other concerns. A recent Consultative Group to Assist the Poor report titled Doing Digital Finance Right, analysed research findings from 16 countries to conclude that low-income consumers are hesitant to adopt digital modes for financial transactions due to:

l Inability to transact due to network/service downtime

l Insufficient agent liquidity or float, which also affects ability to transact

l User interfaces that many find complex and confusing

l Poor customer recourse for grievances and queries

l Non-transparent fees and other terms

l Fraud that targets customers

l Inadequate data privacy and protection

All these issues have not been sufficiently appreciated in India; consumer grievance redressal, consumer support systems, simple transaction interfaces, managing the agent network, transparency, etc., should, in fact, be addressed by all financial service providers, while connectivity issues must be resolved by the telecom sector. With India’s largest private sector telecom firms now more closely associated with financial inclusion, seamless connectivity for digital transactions should no longer be a constraint.

Over the last year, there has been a sea change in the way Indians transact, with digital transactions rising sharply: m-wallets, pre-paid cards, m-banking and e-commerce are all gaining popularity. Payments banks are here to expand the space, not limit it, to bring these benefits to low-income consumers. From the concepts of differentiated banking being fleshed out in December 2013 till the in-principle approvals for the first set of payments banks now, Rajan and Nachiket Mor have delivered on their promises of a well diversified, differentiated banking structure for India. More is to follow and it is for the industry to come through now and bring about a significant impact on financial inclusion.

Sumita Kale is with the Indicus Centre for Financial Inclusion.

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