The future of India’s payments banks, which were once considered game-changers for financial inclusion mission, is now shrouded in uncertainty. Success has remained elusive for several players including Vodafone’s M-Pesa, which shut shop early this month. Last week, Aditya Birla Payments Bank also announced that it will shut shop by October, indicating that the innovative banking model may not live up to its stated objective.
The payments bank model seems to have failed to achieve stated objectives with only four entities becoming operational out of the 11 players licensed in 2014, reasoned Soumya Kanti Ghosh, Group Chief Economic Adviser, State Bank of India, in a recent report.
Unlike traditional banks, payments banks aren’t allowed to lend, while deposit acceptance is capped at `1 lakh even as their capital requirement stands at a steep 15 per cent despite the business being free from credit risks. Operational payments banks showed net losses of Rs 516.5 crore in FY18, while Paytm PB declared a profit of Rs 19 crore in FY19.
Ghosh added they face stringent regulations both on the asset and the liabilities side and stricter disclosure norms mandating them to share their business plan with the regulator could prove to be “somewhat tricky”, especially when the business model of the technology-intensive companies could be the biggest source of their competitive strength.
As a result, these entities are working merely as aggregators and there is no possibility for them to become a “real competitor” to universal banks, he added. On the other hand, the model can be successful if they are given access to the Aadhaar-based know your customer (KYC) process, which is at least thrice as cheaper than manual KYC, and if the Reserve Bank allows them to tie up with third-party services to cross-sell products, said Ghosh.
Stating that there are several reasons for the model to lose steam, Ghosh said that there was a lack of proper awareness among people, besides tight regulatory restrictions. Moreover, there has been no innovation in products and services. The future of the business will be based on transactions, including cash withdrawals though their network of small stores across the hinterland. Fee income generated by selling financial products should be another revenue stream.
“However, profits are still not in sight. The initial costs of investments and limitations on business operations have limited operations, but as more and more people start availing PBs services, we expect revenue to grow. The future is uncertain, but, business will expand and evolve, with the help of regulatory and government support. Then they will able to achieve their aims,” he said.