Payment banks: A threat or ally to regular banks?

With digitization at the heart of our economy, the financial technology revolution is transforming the country’s financial services sector. Over a period of time, India has transitioned into a dynamic ecosystem offering a platform to the FinTech startups of the country to grow into billion dollar unicorns. These FinTech startups are pursuing multiple aspirations by exploiting the potential in a traditionally cash driven economy. From lending to wallets to insurance, FinTech has redefined the way in consumers carry out routine transactions and how businesses work. One of these transitions is the mobile wallet or e-wallet. E-wallets are actually becoming a mainstream concept with the best banks in the country building on it. This transition of mobile wallets from a tech and startup play to the mainstream play will be beneficial for the consumers because of the availability of choice, thus proving to be an advantageous move in the age of digitization.

On 19th August 2016,  RBI opened doors for 11 applicants for the establishment of Payment Banks in India. Some big names like Reliance Industries, India Post, Bharti Airtel, Vodafone, Paytm, Sun Pharma founder Dilip Shanghvi, Aditya Birla Nuvo, Fino PayTech, Tech Mahindra, National Securities Depository and Cholamandalam Finance got a license for the same (Indiainfoline.com, 2017).

As per RBI guidelines, a payment bank is a new concept that can only take deposits  upto ₹1 lakh per customer but cannot issue loans or credit cards. These banks can issue ATM cards, debit cards as well as offer net-banking and mobile-banking.

After Airtel and  India Post Payments Bank, Paytm, has now joined the league. May 24, 2017 marks the opening of its first physical branch in Noida, with another rollout expected after three months. It plans to have a five-member board and a physical presence with 31 branches and 3,000 customer service points in the first year. The aim is to build a strong banking network across the nation with an investment of approximately Rs400 crore over the next two years. The distinguishing factor of this bank will be the zero balance-zero digital transaction charge accounts. Another main highlight of the company is the interest rate on savings account, which will be 4% per annum, much lower than competitor Airtel Payment Bank’s 7.2%. Paytm, the largest mobile wallet app, has been one of the biggest contributors towards the digitization of traditional banking (The Economic Times, 2017). 

 Are payment banks threat or allies to regular banks?

With India being at the cusp of a Financial Technology revolution, the question is about the threat posed to the existing banks in the nation. Raghuram Rajan, the former RBI governor, said that they could be allies in helping the nation to reach out the banking infrastructure to remote areas where there can be no branches.

There have been a lot of contradictory reviews on this issue. The SBI chief Arundhati Bhattacharya spoke about how these payment banks can intensify competition and eat into the margins of regular banks. The HDFC Bank chief Aditya Puri who held different views said that, “I think wallets have no future. There is not enough margin in the payment business for the wallets to have a future,”, the rivalry between e-wallets and banks is expected to continue for long and the validity of wallets as an economic proposition is doubtful (Businesstoday.in, 2017).

I believe, the increasing market share of these payment banks should not be underestimated. I think the intention of the new payment banks is not only to serve inaccessible rural customers through mobile banking. They are bound to use their perks of having a provision for low-cost deposits in urban areas as well. As far as the urban customers are concerned, there is real competitive threat.

Also, the baseline of these payment banks is technology, hence they will maximise their customer reach through technology, minimising the need for branches, therefore leading to lower cost structure in comparison to universal banks. Hence, I think public sector banks are bound to have excessive manpower and a kitty of bad loans, burdening them with excessive costs as compared to payment banks. Thus, the possibility of a direct threat to nationalised banks should not be ignored.

On the contrary, I feel the issue of payment bank licensing aligns with RBI’s mandate to waive off the unified banking licenses. With more than half the nation being unbanked even after more than 68 years of independence,the success of these payment banks will definitely revolutionise the Indian banking system and therefore, augment the overall growth of our nation.