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Payment Banks: Future Roadmap to Strengthen Financial Inclusion

Our resident writers outline the roadmap for how we make financial inclusion a reality around the world

In a major move, RBI earlier in the year granted licenses for a new banking category called Payment Banks, and this has been a source of excitement and speculation amongst industry experts and analysts on how this could impact the Banking industry in India.

So, what are Payment Banks?

The idea behind Payments Banks was to make it simpler for people to make payments of all kinds, and less as a driver of savings. Their appeal could be universal across the middle and upper classes of people at one end where the attraction could be convenience and ease of use for frequent/routine transactions, to low-wage earners and tiny businesses at the other end where the drivers could be less stringent and easier access to essential payment services. With a maximum allowed limit of Rs.1 lakh in the savings accounts, the focus will be on digitization of routine/daily low value transactions and moving India closer towards a cashless economy. While the account features are similar to those offered by commercial banks, payment banks are expected to disincentivize add-ons such as cheque books, and branch walk-ins that make it expensive for banks to operate. Payment Banks cannot extend credit and cannot also offer Credit Cards to their customers, but can distribute a variety of partner products such as Investments, Insurance and even Loans and Deposits of other conventional banks.

Why do we need payment banks?

To the significant 50 percentage of Indian population that is not part of the banking system, and transacts only by cash, payments banks are a blessing. At the center of this revolutionary change is the mobile phone. In the next seven years, mobile payments are expected to increase from 0.1% to 10%. This trend not only reduces the necessity for a customer to walk in to a branch, but also reduces costs for banks in setting up physical branches.

Distribution infrastructure geared to uplift unbanked areas

So far, RBI has granted license to 11 companies to operate as payment banks; including the Department of Posts and telecom operators who can sustain this model and include financial inclusion as a primary goal.

Given their wide and well-connected distribution channel, telecom operators and the postal service seem well positioned, to serve unbanked areas of the country. In particular, the postal service has 90% rural presence with 2.6 lakh postmen, who can potentially act as banking intermediaries.

bunch of bananas
A shelf full of bananas

Next steps for payment banks – the way ahead

The rest of the banking industry is watching closely on how the payment banks will provide unconventional, advanced functionalities for their users.

Innovative products will determine the roadmap of this segment in the coming years. For instance, to cater to the rural areas, applications with multi-lingual options will be needed. Also, the banks can become an intermediary in the implementation of government schemes, facilitating mobile remittances to the payment bank accounts. They can also explore revenue streams from fee based activities by distributing under-penetrated, non-banking products such as mutual funds and insurance. Finally, Banking as an experience could become seamless and integrated into the retail ecosystem with points of purchase becoming service points for banking services.

Here are a few focus areas that can help the banks create meaningful impact.

  1. Better customer engagement: At the heart of payment banks is the customer who has to be engaged to enable inclusion. Hence, there has to be a genuine effort to understand the needs of this new customer group. An evaluation of the unbanked sector could be a significant challenge due to non-availability of data. But, the goal is to develop technical systems that would gradually build insights into customer profiles, backgrounds, and credit capacity.
  2. Focus on complete digitization: Automating just a few banking transactions would not suffice; instead an end-to-end holistic digitization strategy is needed. However, there may be a need for an assisted model where physical branches and distribution partners (e.g. postmen or Business Correspondents) supplement the digital presence.
  3. Provision of secure platforms: The reliance on mobile wallets and increasing number of online transactions demands the setup of a secure payment platform. Trust will be key for the payment banks’
  4. Customer incentivization: In the ramp-up phase, it is essential to have the right incentive systems in place to get customers to open an account. Additionally, tools such as cashbacks, discounts, and loyalty programs can also be utilized.
  5. Leveraging analytics: The vast amount of customer data available online now should help the payment banks use better analytics to predict behavior patterns and to design products to serve the new profile of customers.
  6. Intuitive interfaces: Banks need to design simple and intuitive interfaces given the expected low level of exposure of people from rural areas to technology. It is important to conceptualize a simple value proposition similar to the mobile phone, which penetrated even remote areas quickly due to the simplicity of its usage.

Industry analysts question how the banking landscape would evolve with both mainstream and payment banks in the market. The difference in objectives and the customer base of the two segments could ensure the functional co-existence of both categories. They can also leverage each other with the payment banks offering their wide distribution channels for mainstreams, which are limited in their operations by their physical branches. On the other hand, the mainstreams can add value by attracting new customers to engage with payment banks, and to offer these customers well-structured products.  It will be interesting to watch the banking space in the coming years, as new trends and products continue to emerge.

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