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Home >Opinion >Views >Opinion | The survival struggle of payments banks

Since at least 1969, financial inclusion has been a core goal of Indian policy. Among the relatively recent efforts in that direction, letting payments banks operate has been a decidedly bold move. Unlike classic banks that borrow cheaply from depositors to lend at higher rates of interest to businesses and others, these banks are not advancers of loans. Instead, they were conceptualized as new-age entities that would leverage information and communication technologies to grant transactional ease to people in far-flung parts of the country, especially those who have never visited a bank before. However, the nascent industry stares at a bleak future, with competition snapping at everyone’s heels, targets hard to achieve, and virtually all space for manoeuvre blocked. Aditya Birla Idea Payments Bank said as much when it announced it was folding up barely 18 months after it began operations. The decision, the bank recently stated, was taken “due to unanticipated developments in the business landscape that have made the economic model unviable".

It was on 19 August 2015 that the Reserve Bank of India gave in-principle approval to 11 entities to set up payments banks in the country. Four of them, including Sun Pharmaceuticals and Tech Mahindra, dropped out within months, but others were hopeful that millions of people—particularly the poor—would open small savings accounts with them and use a variety of remittance services via their mobile phones. Airtel’s bank was first off the block, its launch coinciding with demonetization in November 2016, and the concept seemed well-suited for a telecom network of its size and reach. Apart from it, Fino, India Post, Jio and Paytm are among the brands of payments banks still in operation. As a pre-existent online payment device, Paytm had already stolen a march on the rest by getting its app onto handset screens and establishing a consumer interface—the first challenge for any online business. It also made the most of the cash scarcity caused by demonetization, its user base doubling from 140 million in October 2016 to 270 million in November 2017. Most of the rest, though, have found it tough signing customers up. They had pinned their hopes on a cheap Aadhaar-based verification process, but this got a jolt once the Supreme Court ruled that this number was not mandatory for bank accounts or phone connections. Too few sign-ups, coupled with the regulatory limit of 1 lakh per account on deposits they’re allowed to accept, leave payments banks with little money for asset creation. In any case, under the rules, 75% of deposits have to be invested in low-yield government bonds. As they pay depositors higher rates than regular banks, they need to cover their costs on far thinner spreads. It’s a wafer-margin business that requires high-volume money transfers to justify. For most, that’s a tall order.

Like with other network-based concepts, it can be argued, payments banks are a winner-takes-all business. This suggests that only one or two will survive. Even so, the very model looks like getting crushed between that of regular lenders and simple payment devices. Perhaps they need to be converted into either full banks or transaction enablers. This would kill the original idea. But then, reaching payment services to the last woman in the farthest village was never their sole responsibility. State-run banks could also fan out across the countryside to hardsell Jan Dhan accounts and get their apps onto millions of phones.

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