/ August 19, 2019
Payment banks are an initiative of the Reserve Bank of India (RBI) with a goal to promote digital banking in India. In this model, non-banking financial organizations are granted the authority to offer basic bank services to every Indian citizen. While the trend of payment banks is catching up, a common question that arises in the minds of many is -“Can the Payments Banks model succeed?”
Much as I would like the model to succeed over time, there are fundamental flaws:
The business model and the product suite are restrictive in nature, to an extent that it almost shackles the bank. What the banks can do for customers far outnumbers what it cannot do. In fact, the payment bank model ignores the basic premise that customers have multiple and varied needs. If savings are important to clients, so is the need for credit. They would rather go to a bank, which offers all the financial services under one roof than patronize Payments Banks
Payment Banks can accept deposits up to Rupees one lakh and out of this, a significant amount needs to be kept in Government securities. There is little room for the payment bank to think big, strategize and grow. In the end, it has to rely on volumes, and the revenue largely comes through commissions earned on payment transactions, and possibly by distributing third-party products, such as Mutual Funds and Insurance in the near future.
Payment banks need to work on wafer-thin margins. The large volume of customers and transactions can be addressed by increased use of latest technology. This also requires large-scale adoption of the banks’ technology or platform by their customers. Here is the catch! The banks invest a lot on technology, but the target market is not ready for it. The customers are not tech savvy yet. And that means a lot of customer education and training needs to be done, which again raises the costs significantly.
The banks rely a great deal on internet connection, which is painfully slow or not present at all in quite a few targeted locations, resulting in transaction failures at times. The customer experience, therefore, is less than ordinary.
RBI has recently declared that it will not charge banks for RTGS and NEFT in order to promote digital payments. Consequently, SBI has decided not to charge for these services for their online and mobile banking customers. It is a matter of time before other banks follow suit. Such a move will impact the Payments banks adversely. Because their revenues majorly come from such payments, and their income source is being eaten into. Why would a customer make a payment transaction and incur a cost when he can get it for free from scheduled commercial banks? Certainly not a good sign for the Payments Banks.
It is not without reason that some business entities had surrendered their payments bank licenses after they got them.
To sustain this model, a course correction will be required. It may be a good idea to convert these payment banks into Small Finance Banks, which can serve its clientele in a far more comprehensive and meaningful manner. And the restrictions have to go. Let the banks decide and take care of its strategy and risk management. Infrastructure and connectivity issues also need to be sorted out. Make the canvas bigger and wider for everyone to grow. Because the market certainly exists!