It comes as no surprise that after Cholamandalam, Dilip Sanghvi along with IDFC Bank and Telenor Financial Services have decided to give up their interest to start a payment bank. The entities that were granted an in-principle approval for starting a payments bank were given a year to launch the bank and in turn gain a payment bank license. After eight months, a JV between a group with deep pockets, a bank, and a telecom player decided that it made no economic sense to start and operate a payments bank. Considering the stringent regulations and restrictions on operations, it seems very likely that more players will drop out of starting small and payments banks in the near future. The RBI had engineered a similar fiasco with the Local Area Banks in 1997. Of the 10 licensees, only 4 are in existence at present. The LABs were similarly constrained by regulations requiring them to remain in unprofitable rural markets and allowed to open only 1 branch in an urban area per district (maximum of 3).
The basis for the payment bank model has been envisaged based on the success of m-pesa in Sub Saharan Africa. A study by the Bill and Melinda Gates Foundation identified four reasons why m-pesa was able to reach a level of penetration that banks did not in Kenya. One, the cost of transferring cash to the villages from the cities was extremely high (sometimes 20%). There was also a lack of safety in sending cash. Two, Safaricom, a telecom company, is a highly trusted brand, more so than Kenyan banks. Three, Kenyan banks were restricted from utilizing banking correspondents beyond a certain distance, thereby limiting their scope of reach. Four, for nearly five years, Safaricom enjoyed a monopoly because banks did not have branches in remote areas due to high costs and because Safaricom made m-pesa easily available by strategically tying up with those vendors who provided mobile phone services and recharge.
The extent of similarity between India and Kenya ends is limited to lack of bank branch networks in remote areas. India banks too find it unprofitable to have branches in rural areas. Cost of transferring money in India is very low. Once bank accounts are opened under the current push under Pradhan Mantri Jan Dhan Yojna, operating bank accounts via mobile or through banking correspondents which include payments, savings and in limited cases credit services is not very hard or expensive. One wonders if a mobile money system would not be tantamount to a platform which already exists in the banking sector viz. National Payments Corporation of India and Universal Payments Interface.
Under the current regulatory framework, payment banks are not allowed to lend so their classification as banks in itself incorrect. Their only purpose is to make payment services ubiquitous, which means, they may be more appropriately governed under the Payments and Settlements Act 2007. Payments banks have been mandated to hold 75% of their liabilities in SLR securities (yielding ~7.3%) and the remaining 25% as deposits with other banks (yielding ~8%). This means that payment banks have no risk on the asset side of the balance sheet. Assuming that the cost of funds for these payments banks will be comparable to current scheduled commercial banks, (we are stretching our imagination here), that leaves absolutely no net interest margin for these banks to cover their costs.
The cost of funds for payment banks (and even small banks) will definitely be higher than full service banks which have better credit as well as access to inter-bank and RBI for overnight liquidity requirements. To counter this, the balances held with payment banks will give lower returns than the balances held with scheduled commercial banks. There will thus be no incentive for customers to hold deposits in these payment banks. This leaves charging for payments as the only possible source of revenue for payments banks. This begs the question why would anyone keep any float in a payments or small bank account which presumably would not pay any interest (paytm wallet, m-pesa or airtel money earn no interest currently). Almost all banks in India have implemented a core banking solution and are able to provide payment services via internet banking at almost negligible cost. There is a near zero transaction cost for a consumer (on most platforms) on transfer of money to anyone else in the country be it a business or another individual via NEFT or RTGS. Debit cards and ATM machines are also available widely but with an urban bias for now. The assumption seems to have been that payments banks will leverage technology and have minimal operating costs. Payments business is different from banking. It enables the transfer of funds from a payer to a beneficiary. Banks, payments networks like Visa, Mastercard and cash were the only mode of payments for a very long time. In the last decade with the advent of technology, banks have faced a challenge to their monopoly on payments by a clutch of technology and telecom companies, most notably; m-pesa, apple pay, google wallet and the like. India has been at the forefront of the payments revolution with systems like NEFT, RTGS and ECS which were promoted by the RBI and led to massive improvement in performance and customer services by banks. In the second version of this revolution companies like paytm and other digital wallets have garnered a lot of traction with technology savvy consumers. Payment services like m-pesa or airtel money however have not taken off like they did in sub-Saharan Africa.
What the RBI needs to consider is that there are not many telecom or financial companies more trusted that some of the big PSU banks in India. They have a reach and presence that is unmatched by anyone else anyone else apart from India Post. A mobile wallet is a depreciating currency in the sense that every transaction incurs a transaction fee. Would the poor not prefer to transact via normal banks and not mobile money if a similar payment and banking services are provided by banks? It was obvious that because of the restrictions imposed by the RBI, payment banks have no business model. Of all the payment banks licensed, only telecom companies, IT players and retail chains have a different cost structure and technology platform than regular banks. These players were already in the payments business via wallets and mobile money applications. If only these companies had to remain in the fray, the RBI need not have gone through the whole licensing charade, instead the RBI could have taken marginal yet effective measures to legitimize and rationalize the operations of existing players in the field.
This article first appeared on Financial Express.