Payments Banks: How Many More Will Call It Quits? And, Why?

Reserve Bank of India (RBI) governor Raghuram Rajan is not “overly perturbed” about payments bank licences being surrendered. This, according to him, is a reflection of companies not doing proper assessment while applying for the banking licence.

Cholamandalam Distribution Services Ltd, a Murugappa Group company, was the first to junk its plan to set up a payments bank in March. Dilip Shantilal Shanghvi, the promoter of Sun Pharmaceutical Industries Ltd, withdrew in May. The decision to abandon the plan was taken jointly by Telenor Financial Services Ltd, IDFC Bank Ltd and Shanghvi—the three partners who had been working hard for months on the proposed joint venture that would have set up the bank. The latest entity to do so is Tech Mahindra Ltd.

In August, RBI gave conditional licences to 11 among 41 applicants for setting up such banks. Three of them have opted out, leaving eight in the fray. It’s anybody’s guess who among the remaining eight will be next to call it quits.

The licensing norms clearly say that the payments banks can collect deposits of up to Rs.1 lakh, provide payments and remittance services and distribute third-party financial products. They won’t be able to give loans and issue credit cards, but can provide debit cards and Internet banking services. At least 41 firms and individuals had thought they would make money in the business by mobilizing deposits on behalf of other banks (acting as a business correspondent), taking away other banks’ fee income and exploring enormous opportunities in the remittance space.

Now it seems it won’t be that easy. There could be other reasons too behind the licence surrender. For instance, a few of them had probably followed the foot in the door policy, thinking an entry into payments bank space would give them an opportunity to claim a full-fledged banking licence later. Now they are convinced that this would not happen and hence the retreat. Also, RBI’s intention to push through on-tap banking licences for universal banks may have also played a role—business conglomerates are always willing to explore that path.

Of course, another way of looking at it could be that RBI has not crafted the licensing policy well, leaving nothing on the table for the promoters. In their over-enthusiasm to own a bank in Asia’s third-largest economy, they rushed to apply but realised later that the business model of a payments bank is not viable. There are too many restrictions on its operations and probably we don’t need a bank exclusively for payments as there are specialized payment services firms which can enhance their capability by collaboration and co-habitation and a leaner operating structure.

Besides, even though the scope of business is limited, the cost of compliance for a payments bank is not too low compared with others involved in normal banking activities.

There are other issues as well. Since these banks are not permitted to take deposits above Rs.1 lakh and term deposits, it will not be easy for them to create trust and confidence among the prospective customers. Indeed, they can accept higher deposits during the day but can’t keep more than Rs.1 lakh per depositor on their books by the end of the day. This means, if a payments bank accepts higher deposits, excess money would have to be transferred during the day. That’s a technological challenge. Where will they transfer the money? To other banks? In that case, a customer will have to maintain multiple accounts, adding to the complexity and confusion.

The high net-worth individuals and even most salaried account holders who bank with the mainstream banks may not need a separate payments services provider as they get these facilities automatically by being valued customers. For others, payments services requirement may not be that frequent which could justify the business model of close to a dozen specialized banks.

Promoting a non-cash economy by setting up payments banks is a great idea but the current system does not incentivise cashless transactions. For example, for card-based transactions at point of sales machines, the discount rate is too high for a merchant to get excited about. Now that RBI has done its bit, the government would need to step in by giving tax incentives to merchants for encouraging card-based payments. Conversely, additional tax on the merchants for cash transactions would discourage the use of cash as the tax burden will be passed on to the customers. Creating a comprehensive administrative infrastructure to bring all P2P transactions under non-cash transactions can also play a critical role in giving a leg up to the payments bank initiative.

Rajan feels that the payments bank would work well for those who already have a base of operations and many contact points. Mobile companies are probably in the best position to get the business model right because of their reach. Another entity that is expected to succeed is India Post Payments Bank (IPPB) which is being wooed by commercial banks, insurance firms and asset management firms for equity partnerships and other business alliances.

IPPB has a network of at least 150,000 branches; close to 140,000 of them are in rural India. This is its great strength but I am not sure about its business model. Theoretically, it can target financially excluded customers such as migrant workers, low-income households and small businesses but how will it make money?

In some form, it has already been operating as a payments bank, offering the facility of ‘money order’, used by migrant workers and low-income households. The commission earned on this service is far higher than what it will earn from remittances after it becomes a bank. Similarly, millions of customers now keep money in post office accounts and long-term deposit schemes such as National Savings Certificate and there is no limit on how much money one can keep with such instruments. I presume India Post will not give up these activities. This means Indian Post and IPPB will run parallel, competing operations. It will be interesting to see how that pans out.

Tamal Bandyopadhyay, consulting editor at Mint, is adviser to Bandhan Bank. He is also the author of A Bank for the Buck, Sahara: The Untold Story,and Bandhan: The Making of a Bank.

His Twitter handle is @tamalbandyo.

Comments are welcome at [email protected].

This blog first appeared in www.livemint.com

Photo courtesy: Mint