Innovation in payment banking
The innovative firms that have taken the first-mover risk in this new market may not necessarily be able to transform themselves in the new mould
The payments space is one of the few happening spaces in the economy today, with a cash-out pilot currently underway for non-bank prepaid payment instruments (PPIs) and the Nachiket Mor committee’s recommendation of payments banks.
A couple of months back, Reserve Bank of India (RBI) governor Raghuram Rajan had noted, “The key to cheap and universal payments and remittances will be if we can find a safe way to allow funds to be freely transferred between bank accounts and mobile wallets, as well as cashed out of mobile wallets, through a much larger and ubiquitous network of business correspondents.” The question is, how is all this to be operationalized?
The basic proposition as laid out by the governor using banks and non-banks for payments and remittances is crucial for the way forward for inclusion and follows well established international practices. For the non-banks currently in the payments space, operationalizing the governor’s statement under the current framework would mean:
• Recognizing that mobile wallets issued by non-banks are synonymous with having an account in the cloud, that is a digital account.
• While currently payments through PPIs have to have a bank account at least at one end of the remittance (either remitter or recipient), allowing funds transfer across bank and mobile wallet networks would call for a transition to an interoperable network.
• Allowing cash out/cash-in at designated retail outlets for mobile wallets would help resolve the current issues that customers face in remittance; this possibility is currently being tested under RBI supervision.
What about payments banks? Globally new laws are being framed to enable specialized payments institutions, e.g. Brazil did this last year in line with the European Union Payment Systems Directive of 2009. Under the same principle, the Mor committee has accepted the basic premise of separating payments from other bank functions and has brought in the concept of differentiated banking through specialized banks, e.g. payments banks, that are allowed to provide payments and deposit services but not issue credit. This is an excellent idea designed to rejuvenate the banking space. However, two recommendations in particular may need to be re-looked at so that the objective of encouraging competition and innovation in this otherwise traditional and moribund space is facilitated.
First, the recommendation that calls for existing PPIs to either apply for a payments banks licence or become business correspondents may push out some firms that have valuable experience. The innovative firms that have taken the first-mover risk in this new market, and have consolidated network aggregation may not necessarily be able to transform themselves in the new mould.
Secondly, the recommendation that can impact the existing PPIs is the minimum capital requirement of Rs50 crore. It is important to think through the capital requirement amount carefully as a well-capitalized company brings with it many advantages of professional management, fiduciary obligations, etc.
The quantum of capital needs to be debated: if too low, it could encourage fly-by-night operators; if too high, it could encourage innovative financial engineering. Till 1 April, there were no capital requirements for PPIs; RBI has recently stipulated a Rs5 crore capital requirement for new PPIs, while specifying that existing PPIs will be intimated separately. In any case, the jump to Rs50 crore to become a payments bank could seem slightly high for some existing PPIs.
In the absence of any explanatory details for the number Rs50 crore, many questions can arise: is there a case for a lower limit for payments banks? Can existing PPIs be given some leeway, allowed to make a stepwise time-bound increase toward a capital target?
Further, while the Mor committee recommends the same Rs50 crore capital requirement for payments banks and wholesale banks, both have essentially different models. The former will not lend, while the primary role of the latter is to lend. The former can hold a maximum balance of Rs50,000 per customer, while the latter is only to be permitted to accept deposits larger than Rs5 crore.
With such basic differences, payments banks will definitely have a relatively economical cost structure compared with wholesale banks, making the case for a lower capital limit.
Putting these thoughts together leads to the question of whether we can think of having tiers in the future that will allow for non-banks in a limited role and encourage competition and innovation:
• Non-bank PPIs with a minimum capital base of Rs5 crore (as given by RBI).
• Payments banks with minimum capital of RsY crore (where Y < 50).
• Wholesale banks with minimum capital of Rs50 crore.
• Scheduled commercial banks with minimum capital of Rs500 crore.
The message from RBI governor is to think differently, can we rise to the challenge?
Probir Roy is co-founder of PayMate and Sumita Kale is chief economist at the Indicus Centre for Financial Inclusion.
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