The banking sector is expanding in India. Payments Bank is a new banking concept that is being introduced by Reserve Bank of India. India plans on digitizing different sectors. This is one of their baby steps towards a digital India.
The idea of payments bank is to provide banking services in regions where banks are not available. These services are provided by non-banking sectors that work in coordination with partner banks to fulfill the services. This particular idea allows access of financial services in areas where conventional banks are hard to operate.
Payments Bank: What are they?
Payments bank are a new addition to current banks. They operate at a smaller scale than a bank and eliminate credit risk. They have been brought to life by the Reserve Bank of India. These banks have all the workings of a conventional bank, except for they cannot hand out loans or issue credit cards to its customers.
Payments bank do not have physical branches, they depend on virtual presence (through mobile app and website).
How do these banks function?
Payments bank is not a commercial bank. Instead, they are registered public companies established under Companies Act, 2013. Moreover, a license needs to be received under Section 22 of the Banking Regulation Act, 1949. Lastly, payments bank need a special permit from Reserve Bank of India so that they can start operations.
These banks can provide these services to its customers:
- Payments bank are allowed to accept deposits up to 1 lakh Indian Rupees. The banks pay interest on the money that is deposited by consumers
- They can provide remittance services
- Make mobile payments
- Transfer funds to different accounts and banks
- ATM and debit cards can be issued to its customers
- Forex cards can also be issued to travelling customers
- Net-banking services
- They can also sell insurance and mutual funds to their customers
However, they have some limitations as well.
- They cannot issue loans to their customers
- They cannot issue credit cards
How did the idea of payments bank come about?
The government of India wants to digitize the workings of the whole country. Digital banking is the first step towards a digital India. Digital banks help to reach areas which do not have the services of a conventional bank. The payments bank defeat the need of a physical branch and provide almost all the services of a conventional bank.
The idea flourished because it allowed to render financial services to low-income areas, laborers, small-scale businesses and other individuals. The physical limit of a usual bank is overcome with a payments bank.
About 41 private companies applied to obtain a license to operate a payments bank. The Reserve Bank of India gave approved only 11 permits. The reason for such a low approval rate is because the Reserve Bank of India was looking for companies that had a decent network and had great reach. Hence, the Reserve Bank of India handed out the licenses to mobile telecommunication companies, supermarkets, and prepaid eWallets etc.
This was done so that the individuals who do not have access to financial services can use payment banks. Before the license could be approved by RBI, these conditions had to be met by the private companies. These companies had to:
- Invest at least more than 100 crore Indian Rupees in the bank
- At least 25% of the branches must be in rural areas where there are no conventional bank branches
- The stake of the promoter must be at least 40% during the first 5 years
How does the business model make money for payments bank?
Payments bank cannot lend money to companies and customers. Hence, they cannot make money by lending money either. However, there are different channels that help to generate revenue.
Arbitrage of Interest
Payments bank usually give an interest rate lower than conventional government and private banks. The money deposited to payments bank is then invested to get better interest rates from other financial services. This difference in interest rates help payments bank to make profit over the money that is deposited in the escrow accounts of partner banks.
For example, a payments bank may offer 8% interest on the deposited amount to its customers. A conventional bank may give an interest rate of 10%. The 2% difference in interest rate is the profit for the payment banks.
Fees on Transactions
Different payments bank charge different fees on processing transactions. This fees is usually a percentage of the total withdrawal amount. The customers bear the fees when they transact money. Moreover, other similar services have different charges associated to them as well.
Selling products of other companies
While they cannot directly lend money to its consumers, they can sell loan offers of other banks instead. Moreover, they sell other things such as insurance, investment plan, and mutual funds etc. to make money.
Payment banks get commission for selling these products.
More commissions for payment banks
They get commissions from transactions that are made at different point of sale booths and resultant merchant discount rate (MDR).
Are Payments Bank different than eWallets?
In simpler words, yes. Payment banks are nothing like eWallets. They are the whole deal and offer many banking services. Most important of all, they provide you interest on the money that you have deposited.
eWallets only help you to ease the process of completing transactions. They help you to go card-less and cashless. The money is deposited into escrow accounts until it is used by the customer.
An Example of Payment Bank
Paytm is one of the many payment banks that are operating in India currently. Paytm has an eWallet for its customers as well.
Payments Bank are the way forward for a digital India. India is a big country and the physical limitations stop commercial banks to operate in far way lands. Reserve Bank of India handed out permits to companies with great networks and reach to set up payments bank in the country.
Moreover, they provide all the services of a commercial bank except for loans and issuance of credit cards. Furthermore, they generate revenue by arbitrage of interest, commissions and charges on different transactions.
Payment banks and eWallets are different. Paytm is an example of a payment banks in India.