With three of the 11 payments banks licencees dropping their plans to start the banks recently, the fundamental premise and economics of payments banks have been questioned. While these decisions are understandably based on sound specific reasoning, they should not be read as a doomsday omen for the idea and rationale of payments banks. It is too early to write off a well-intentioned idea that puts change and innovation before incumbency. Rather, these withdrawals should be seen as signalling the need for introspection and course-correction to adapt to the fast-changing, competitive landscape of India’s banking and payments sector.

Payments banks came into being thanks to the Reserve Bank of India’s (RBI) push to ensure that the banking sector deliver a comprehensive set of financial services to the poor and the unbanked. With full-service banks clearly finding it uneconomical to deliver to low-income and rural India, the Nachiket Mor committee conceptualized new models under a differentiated banking system.

Unlike small finance banks, payments banks are an untested model. The RBI’s intention was clear from day one—focus on purely payments and deposits, targeting the bottom of the pyramid and underserved segments. The RBI has also clearly made the point that lean and mean business models are the way forward. In opening a new narrow bank model, it has told its biggest constituency—the incumbent scheduled commercial banks—that they are not protected when it comes to future spoils, and will need to get their retail footprint together on competitive terms.

With the RBI looking for models based on innovation, customer service and economies of scale, approvals were not restricted to existing banks and other payments providers. The RBI, therefore, gave a fair chance to others who demonstrated financial capability and had wide distribution networks in rural India. Payments banks were designed with low-value, high-volume transaction profiles befitting the bottom of the pyramid. And thus, payments bank money trees are not going to sprout leaves too soon, not until they have sunk their roots in unbanked land.

There is another factor at play here. At the core of the payments banks concept lies the RBI’s clear intent that the payment services must have a bank interface and be under its direct regulatory overview. That is in keeping with the RBI’s tradition of calibrated liberalization, which has helped India weather some nasty international financial storms. But this pragmatism might impose a regulatory load on the new players that some of them find difficult to deal with; thus, the early churn is only to be expected.

That only leaves the long-haulers in the fray. Those remaining in the game such as India Post and Paytm have lots to bring to the table when it comes to serving the payments and deposit needs of small businesses and low-income customers.

The big picture is indisputable: digital transactions have seen a huge surge from mid-2014 since the payments banks guidelines came in. The United Payments Interface from the National Payments Corporation of India (NPCI) is set to be another game-changer in payments. Access through mobile phones is becoming cheaper, rural connectivity is improving under Digital India and the Pradhan Mantri Jan Dhan Yojana has been immensely successful in strengthening access to banking and other financial services across the country through an agent network and expanding the direct benefit transfer programmes.

Ironically, those who have argued against the concept’s viability may have only strengthened the case for the remnant licencees, who can push for further liberalization of norms and operational guidelines. This will only work to the advantage of the few hands still stuck in what some see as the ‘cookie jar’.

We would argue differently. If the payments market is to be seen as a cookie jar, then widen its mouth! Instead of doing away with payments banks or liberalizing the rules just to retain the current licencees, perhaps this is a great opportunity for the RBI to rectify the one flaw in the payments banking licensing model: throw the floor open to smaller players with a proven technology and business model, and lower the entry threshold of 100 crore to something more reasonable and within the reach of small but solid players.

It is too early to write a well-intentioned idea off and to question the wisdom of the central banker who is trying to resolve the inherent complexities of financial inclusion.

Churn is a good thing. We are amidst one, and shall emerge from it better off, for the sake of those whose needs must be served now.

The authors Sumita Kale and S.V. Divvaakar are with the Indicus Centre for Financial Inclusion.

Comments are welcome at theirview@livemint.com

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