Payment Banks: The 'unprivileged' banking lounge

Payment Banks: The 'unprivileged' banking lounge

These payment banks can accept demand deposits up to Rs 1 lakh, issue debit card, distribute third party financial products like Mutual Fund and Insurance. However, they are prohibited from lending or issuing credit cards.

NBFC Group's Hari Hara Mishra
The Reserve Bank of India has given in principle approval to 11 entities to set up Payment Bank. The objectives of these banks are:
  1. To further financial inclusion by providing small savings account
  2. Payment/remittance services to migrant labour force, low income households, small business, other organised sectors

These payment banks can accept demand deposits up to Rs 1 lakh, issue debit card, distribute third party financial products like Mutual Fund and Insurance. However, they are prohibited from lending or issuing credit cards. The underlying objective is to push for greater financial inclusion and move towards a less cash society.

The previous efforts in road to  universal financial inclusion manifest in measures like Bank Nationalisation (1969 & 1980), creation of Regional Rural Banks(1975) or experiment  of Local Area Banks  (1996) have had limited success as branch based banking model had its physical limitations to reach the last mile.

In the last decade or so, telecom sector has been growing exponentially reaching nooks and corners of the country, because of this digital banking platforms including wallets have been making rapid strides. The telecom operators have been making deep inroads into rural hinterland outpacing the reach of the banking system, which explains the preponderance of service providers of mobile/mobile money in the list of selected 11 applicants to start payment banks.

"The Committee of Central Board (RBI) did ensure that selected applicants have the reach and technological and financial strength to service hitherto customers across the country" as per RBI Statement while issuing the approvals.

These payment banks have unenviable challenge before them to deliver the banking products through their reach and open accounts for those who have not yet access to formal banking channel, and even if they have a bank account recently, thanks to the massive Jan Dhan Yojana which has seen opening of massive 18.86 crore accounts, to ensure that they transact in the accounts ( as much as 40% of these accounts are reported inactive). For this they need to deploy cost effective efficient technology with a user interface that is not rocket science for the lowest common denominator. Payment banks have thankfully been permitted to be business correspondents of other banks so that they can service accounts of other banks too.   

Various studies in the past have brought out that traditional banking initiatives for financial inclusion has been unremunerative. The biggest challenge for payment banks is to substantially lower transaction cost by technological innovation and provide user friendly interface across channels to the end user at the bottom of the pyramid. However, banking is not only about products, it is also about the trust. This is where existing banks, many of them with history over 100 years enjoy a huge advantage. It will be a while for the new entrants to enjoy that level of trust, which brings in walk in customers..

The new entrants to the banking have to come out with out of box thinking in the following areas to make a distinct mark.

  • Customer acquisition process  and on boarding experience
  • Innovative product design to cater to the underprivileged segments
  • Last mile distribution network
  • Transaction security
  • Governance and compliance standards
  • Efforts at brand building and gaining trust of customers

One veteran in the field mentioned recently on a lighter note, the financial inclusion drive has made a hole in pockets of Public Sector Banks (PSB) to the tune of thousands of crores. They have given up. And so RBI has brought another set of 11 players, some of them with deep pockets with net worth greater than the PSBs, who can continue the drive and absorb the losses without any murmur.

Sure, the new players will prove the cynic wrong. For that to happen, one thing is certain. commercial banks have lounge for their privilege banking customers where they have single point delivery of all services. New payment banks have to replicate that spirit of service- lounge for unprivileged banking- at their Customer Service Points (CSP).

A pleasant experience at CSP by an unprivileged customer will hold the key to a successful business model in financial inclusion.

The author is an ex-banker from SBI and is presently working with Mumbai-based NBFC Group.