Will conventional banking take a back step with the emergence of Payment Banks in India?

Subhasis Bandyopadhyay & Malhar Katneshwarkar

Financial inclusion has been the focus for RBI for quite some time now. After the success of the 'Pradhan Mantri Jan Dhan Yojana', under which almost 6 crore new bank accounts were opened and the push for digitization through demonetization route that the current government adopted, the emergence of Payment Banks flared up in India. The Reserve Bank of India (RBI) has started giving approvals for launching Payments Banks in India and has actually given licences to 11 entities to start Payment Banks. Some of the big names include Aditya Birla Nuvo, Airtel, Reliance Industries, Paytm and Vodafone.

Most of us might not be aware that the number of people without bank accounts in India stand at 233 million. As per census, 900 + million people stay in rural areas who have little awareness of new-age banking services, even if they hold bank accounts. Moreover, India has very low participation of women in the financial system, because of which it requires effective geo and demographic segmentation to have tailor-made products for women and unbanked populations. To encash this opportunity of Payment Banks is an attempt to make sure that all sections of society, including people living in remote and rural areas, have access to banking facilities.

Payments banks are likely to increase the number of people in the banking system and in turn will focus on fulfilling the financial vacuum felt by small business owners and people from low-income groups. RBI is working on specific guidelines for Payment Banks that will make it mandatory for them to meet cash reserve requirements. They will be able to invest in only highly liquid and safe investments such as debt securities. Payment Banks can accept deposits up to Rs. 1 lakh, offer remittance services, mobile payments, transfers and provide net banking facilities. For all accounts held by the payments banks, the banks will have to pay an annual interest to the account holder.

Impact on the Indian conventional banking system

Entry of Payment Banks will have a huge impact in the banking system. First and foremost it will add competition to the industry. Not that there is a lack of competition in the banking industry, but it is more about players from different sectors setting up these Payment Banks bringing their own marketing ideas on board. Also, the more the competition, the better the services and products that will be offered to the end users. Since Payment Banks are set up by players from different industries, they can bring in their own customers to the banking sector. Also, payments banks will focus on having a widespread network with easy access points in rural areas and the country’s hinterland. So, their reach is expected to be better than commercial banks which follow the branch banking system. So, Payments Banks will certainly help bring more people into the banking system. Secondly, consumers would be free to open both savings bank accounts and current bank accounts with payment banks. With this, Payment Banks are likely to attract both retail as well as business customers. Consider the case of India Post Payments Bank wherein it is looking to offer door-step banking. The bank will charge a nominal fee of up to Rs. 35 for transactions that are less than Rs. 10,000. Such facilities are likely to help financial inclusion to a large extent. Moreover, Payment Banks are positioning themselves as “Bank as a Platform” to cater to consumers who are looking to interact with other bank-like platforms.

The banking ecosystem is evolving and expanding at the same time. The constant evolution is a result of changing consumer needs and consumer behavior.  The consumer wants more value and more benefits and that too instantly. Mobile adoption and access to better and bigger services at low costs through Fintech innovation is driving Banks to compete for customers’ attention. In order to transform the customer’s digital and physical experience, the bank has to ensure that it engages with its customers through Innovation, Real time transactions, and lower processing costs, and at the same time engage with external ecosystem efficiently and effectively. The transformation has to be continuous, iterative and incremental.

To conclude, past iterations of digital initiatives within the BFS industry have mostly focused on digital channel enablement and multi-channel delivery. Attempts have been made to reduce costs through self-service and gain market share by serving existing capabilities over digital channels in vogue at the time. By and large, the impact of emerging digital channels on overall customer experience (CX) has gone unexplored. To top it off, client service capabilities around digital offerings have ranged from sub-optimal to non-existent. Not surprisingly, most banks have not been able to achieve measurable ROI from their digital investments. When new channels have been created, they have cannibalized traffic from other channels and seldom created net new business. In most cases, anticipated savings have also not materialized. Our belief is that Payment Banks will address this problem statement by leveraging digital innovation to provide superb customer experience across all channels — physical and digital. They will also focus on product innovation, leveraging all available internal/external capabilities which will enables the financial ecosystem to plug into the digital economy and co-create products and services with increasingly innovative revenue models.

(Subhasis Bandyopadhyay is General Manager – BFS Practice and Package Head, Mindtree
Malhar Katneshwarkar is Sr Consultant - BFS, Mindtree)