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Payments banks: revolutionary step in Indian banking space
Author(s) Smita Aggarwal Publication(s) Live Mint Published Date 27 Aug 2015
Reserve Bank of India has recently announced the first set of differentiated bank licenses to eleven applicants to set up Payments Bank. Its been termed a revolutionary step by many and rightly so. The banking sector in India has so far had one category of commercial bank which is the universal bank. A universal bank is licensed to carry out the complete range of banking activities including borrowing, lending, investments and to all categories of clients. With the introduction of Payments Banks, the banking structure in India is being modified to include new variety of banks with a specific mandate through differentiated bank licence. The basic premise for a move towards differentiated bank licences is that not everybody should or is capable of getting a universal bank license. As the economy grows and its needs become more complex, a variety of participants should be permitted to facilitate the growth. The payments banks have been licensed to only offer deposit and payments services. The induction of these new players, which includes a mix of large corporates, leading telcos, new-age technology companies, in the financial sector is an important step towards fulfilling the vision of ubiquitous access to a bank account and payments services by all. Improved access to banking should provide the much-needed impetus to increase household savings in formal financial instruments and thereby see a decline in myriad forms of suspect savings and investment schemes run by unregulated entities and individuals. Its expected that new players will bring in scale, technology and expertise incremental to the existing players in banking and therefore the banking landscape would change dramatically in the future. Of course the jury is still out on how successful these banks would be and whether is there enough money in this business.

So apart from the future promise that this step by RBI holds, I think its revolutionary for what it has already successfully achieved. First, the threat of impending competition has awakened incumbent banks to look at liabilities and payments as a separate business and not just as a source of liquidity and facilitating transactions. The focus of the banks is shifting from the stock of balances in accounts to the flow and velocity of payments by customers. In the last six months many large banks have launched a slew of payments focused apps and services. Banks are innovating to make the account opening a two-minute ritual instead of an arduous process involving many documents, paper work and long interaction with unwilling bank staff. Second, with new kinds of players in the financial sector, we are seeing active collaborations between banks. Many incumbent banks have already announced tie-ups with the new payments bank. There is much more initiative demonstrated to see how respective strengths of various players can be leveraged to create synergies with larger impact and better outcomes. Third, it has successfully brought the financial inclusion agenda at the center of Board Room and CEO level discussions in banks and corporates. Hitherto financial inclusion was a compliance requirement to fulfill government mandate and social agenda and would typically get relegated to a standalone department in the bank trying its best to do what was possible. This has now changed and sustainable business strategies with latest innovations in technology are being debated, presented and implemented. Reaching out to the untapped unsegments in rural areas and small towns, by using new business models, is now considered the next big opportunity for the financial sector and they are actively engaging in it.

The Committee on Comprehensive Financial Services for Small Businesses and Low Income Households first proposed the idea of Payments Bank in January 2014. It is a novel idea with no direct parallel even in other countries around the world. There was therefore, not surprisingly, mixed reactions to the idea from various stakeholders. It is indeed commendable that RBI has taken this from idea to execution stage in a short span of 20 months. RBI is setting a new standard of speed of action. This move also represents the RBI stance of encouraging innovation and experimentation of multiple models, which is very refreshing. Regulators everywhere often run the risk of lagging behind the market developments and not being ahead of the curve. This move clearly demonstrates RBI’s ability to play market shaper. Around the world, we are seeing new business models emerging in providing financial services without banks. LendingClub in US provides a sophisticated technology backed platform that brings together lenders and borrowers of loans. Kabbage, an Atlanta based company, is reinventing the way small business loans can be assessed and approved online in a few minutes, and neatly stepping into the void left by traditional banks. As technology developments cause disruption in banking by non-bank players, it is crucial to have a regulator who is on top of the developments and can balance innovation and stability. By bringing potential non-bank attackers like technology and telecom companies formally into the banking system, RBI has managed to kill two birds with one stone.

While presently our banking system is fighting a huge drag on account of stressed assets in large project and corporate loans, green shoots are emerging with the imminent launch of two new universal banks, approval of eleven payments banks and soon to be announced small finance banks. Each new player being added comes with a bagful of new ideas and zero legacies. The ripple created by every new addition, stirs the existing players as well, and there is a multiplier effect on the entire system. The revolution of Indian banking has begun and the common masses would be the biggest beneficiary of this.
 
Smita Aggarwal, Senior Program Director, CAFRAL.  Views expressed are personal.

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