Reserve Bank of India (RBI) has cancelled the licence of Paytm Payments Bank, culminating a series of supervisory actions that began with a halt on new customer onboarding in March 2022 and subsequent stringent business restrictions.
While the action may appear rooted in regulatory non-compliance, it has reignited a broader debate over the viability of payments banks. Conceived to serve the unbanked, their relevance is now being questioned amid near-universal account ownership driven by Jan Dhan Yojana and intensifying competition from fintech platforms, most notably UPI.
With a key player exiting, concerns are mounting over the sustainability of India’s differentiated banking model.
Weak wicket
Payments banks were set up to advance financial inclusion by offering small savings accounts and digital payment services to migrant workers, small businesses and low-income households in the unorganized sector. They were initially permitted to accept deposits of up to ₹1 lakh per customer in 2014; this limit was later raised to ₹2 lakh in 2021.
However, they are barred from lending, issuing credit cards or accepting deposits from non-resident Indians, sharply constraining their operating scope.
Though initially hailed as the poster child of India’s differentiated banking experiment, enthusiasm faded early. The RBI granted in-principle approvals to 11 entities in 2015, but several withdrew, citing high compliance costs, lending restrictions and thin margins. Eventually, seven licences were issued, with Airtel Payments Bank the first to begin operations.
The constrained business model and high upfront costs meant a long road to profitability. Payments banks turned profitable only in 2022-23, aided by rising interest income. While they have remained in the black since, including in 2024-25, the recovery appears fragile, with a marginal dip in profits reflecting higher provisions and contingencies.
Margin limits
The core challenge lies in a structurally weak revenue model. While conventional banks generate the bulk of their income from lending, payments banks are not permitted to lend.
Instead, they rely on fee-based activities such as transaction charges on utility payments and small transfers, banking correspondent services, micro-ATM operations, cash management, commissions on PoS transactions, and other para-banking services such as insurance distribution and facilitating mutual fund investments.
These services are inherently low-margin. They involve small ticket sizes, are highly price-sensitive, and operate in a crowded market with multiple competing platforms. Pricing power, therefore, remains limited.
In 2024-25, about 76% of payments banks’ income came from non-interest sources, unlike traditional banks, where 80-85% of income is interest-based and driven by lending spreads.
The margin contrast is stark. Commercial banks typically borrow at around 4% and lend at 10-12%, generating healthy spreads. Payments banks, in comparison, pay 3-4% on deposits and earn only 6-7% on safe investments such as government securities—resulting in thin spreads and structurally constrained profitability.
Deposit dominance
Deposits in the segment are sharply concentrated, with India Post Payments Bank (IPPB) commanding about 73% of total deposits.
Backed by a nationwide postal network of over 0.15 million post offices and supported by nearly 0.19 million postmen and gramin dak sevaks, IPPB has onboarded customers rapidly, especially in rural and remote areas. The bank had around 117 million customers in 2024-25, reflecting the advantage of leveraging the familiarity and physical reach of the postal system. Integration with Post Office savings accounts has further enabled seamless and interoperable banking.
The next-largest player, Airtel Payments Bank, holds about 13% of deposits and has built its position by tapping into its large mobile subscriber base, extensive prepaid recharge network and retailer footprint.
Beyond these two, the market thins out quickly. Fino and Paytm payments banks hold relatively modest shares, while others remain marginal. There is limited room for smaller players to scale meaningfully, as the model favours institutions with strong distribution networks, large existing customer bases and the ability to operate at scale in a low-margin, highly competitive market.
Fintech fight
Payments banks began operations just as UPI was entering the mainstream, with both aimed at enabling low-value digital transactions. The overlap quickly turned into direct competition.
UPI enabled seamless bank-to-bank transfers, removing the need for users to park funds in payments bank wallets or accounts. In doing so, it undercut the core value proposition of payments banks, which relied on facilitating small-value transactions through stored balances.
Aided by demonetization, ease of use, interoperability and zero transaction charges, UPI usage has surged from just 20 million transactions in 2016-17 to over 240 billion in 2025-26—an almost 12,000-fold increase. Transaction value rose from ₹0.07 trillion to about ₹314 trillion over the same period, a more than 4,000-fold jump.
Crucially, UPI has penetrated the grassroots economy, including small merchants and street vendors, who form the core customer base for payments banks.
With zero-cost transactions and near-universal acceptance, UPI has made specialized payments banks increasingly redundant in everyday digital payments. Payments banks have also faced stiff competition from platforms such as PhonePe and Google Pay, which offer integrated payment ecosystems layered on top of UPI.
Market misfit
Payments banks in India were modelled on the success of mobile money platforms in Sub-Saharan Africa, where services such as M-Pesa and Orange Money transformed finance for largely unbanked populations.
Telecom operators led that shift, leveraging vast customer bases, deep distribution reach and ease of onboarding. Over time, these platforms expanded beyond simple transfers to offer targeted services such as mobile-enabled credit, wealth management and microinsurance, drawing on rich customer data to tailor offerings.
The scale of adoption has been significant. In 2025, Sub-Saharan Africa accounted for nearly half of global mobile money accounts and processed 92 billion transactions out of a worldwide total of 125 billion.
India attempted a similar telecom-led model, but outcomes diverged sharply. M-Pesa Payments Bank shut down in July 2019, within a few years of launch, amid regulatory constraints and growing competition.
While companies in Sub-Saharan Africa can charge for basic services—since mobile money often serves as the primary account for many users—India’s hyper-competitive fintech landscape, high bank account penetration and the rise of UPI, a free and ubiquitous payments rail, have made it difficult for payments banks to monetize transactions sustainably.
Puneet Kumar Arora is an assistant professor of economics at Delhi Technological University. Jaydeep Mukherjee is a professor of economics at Great Lakes Institute of Management, Chennai.