Innovation in payment banking

The innovative firms that have taken the first-mover risk in this new market may not necessarily be able to transform themselves in the new mould.

The payments space is one of the few happening spaces in the economy today, with a cash-out pilot currently underway for non-bank prepaid payment instruments (PPIs) and the Nachiket Mor committee’s recommendation of payments banks.

A couple of months back, Reserve Bank of India (RBI) governor Raghuram Rajan had noted, “The key to cheap and universal payments and remittances will be if we can find a safe way to allow funds to be freely transferred between bank accounts and mobile wallets, as well as cashed out of mobile wallets, through a much larger and ubiquitous network of business correspondents.” The question is, how is all this to be operationalized?

The basic proposition as laid out by the governor using banks and non-banks for payments and remittances is crucial for the way forward for inclusion and follows well established international practices. For the non-banks currently in the payments space, operationalizing the governor’s statement under the current framework would mean:

• Recognizing that mobile wallets issued by non-banks are synonymous with having an account in the cloud, that is a digital account.

 • While currently payments through PPIs have to have a bank account at least at one end of the remittance (either remitter or recipient), allowing funds transfer across bank and mobile wallet networks would call for a transition to an interoperable network

 • Allowing cash out/cash-in at designated retail outlets for mobile wallets would help resolve the current issues that customers face in remittance; this possibility is currently being tested under RBI supervision.

What about payments banks? Globally new laws are being framed to enable specialized payments institutions, e.g. Brazil did this last year in line with the European Union Payment Systems Directive of 2009. Under the same principle, the Mor committee has accepted the basic premise of separating payments from other bank functions and has brought in the concept of differentiated banking through specialized banks, e.g. payments banks, that are allowed to provide payments and deposit services but not issue credit. This is an excellent idea designed to rejuvenate the banking space. However, two recommendations in particular may need to be re-looked at so that the objective of encouraging competition and innovation in this otherwise traditional and moribund space is facilitated.

First, the recommendation that calls for existing PPIs to either apply for a payments banks licence or become business correspondents may push out some firms that have valuable experience. The innovative firms that have taken the first-mover risk in this new market, and have consolidated network aggregation may not necessarily be able to transform themselves in the new mould.

Secondly, the recommendation that can impact the existing PPIs is the minimum capital requirement of Rs50 crore. It is important to think through the capital requirement amount carefully as a well-capitalized company brings with it many advantages of professional management, fiduciary obligations, etc.

The quantum of capital needs to be debated: if too low, it could encourage fly-by-night operators; if too high, it could encourage innovative financial engineering. Till 1 April, there were no capital requirements for PPIs; RBI has recently stipulated a Rs5 crore capital requirement for new PPIs, while specifying that existing PPIs will be intimated separately. In any case, the jump to Rs50 crore to become a payments bank could seem slightly high for some existing PPIs.

 In the absence of any explanatory details for the number Rs50 crore, many questions can arise: is there a case for a lower limit for payments banks? Can existing PPIs be given some leeway, allowed to make a stepwise time-bound increase toward a capital target?

Further, while the Mor committee recommends the same Rs50 crore capital requirement for payments banks and wholesale banks, both have essentially different models. The former will not lend, while the primary role of the latter is to lend. The former can hold a maximum balance of Rs50,000 per customer, while the latter is only to be permitted to accept deposits larger than Rs5 crore.

With such basic differences, payments banks will definitely have a relatively economical cost structure compared with wholesale banks, making the case for a lower capital limit.

Putting these thoughts together leads to the question of whether we can think of having tiers in the future that will allow for non-banks in a limited role and encourage competition and innovation:

• Non-bank PPIs with a minimum capital base of Rs5 crore (as given by RBI). 

• Payments banks with minimum capital of RsY crore (where Y < 50). 

• Wholesale banks with minimum capital of Rs50 crore. • Scheduled commercial banks with minimum capital of Rs500 crore.

The message from RBI governor is to think differently, can we rise to the challenge?

Probir Roy is co-founder of PayMate and Sumita Kale is chief economist at the Indicus Centre for Financial Inclusion.

Do we really require Banks for Financial Inclusion?

India has tried several routes towards financial inclusion - Gramin Banks, Local Area Banks, Cooperatives, Micro Finance Institutions, Regional Rural Banks, Self Help Groups and of course Scheduled Commercial Banks with their Business Correspondent networks. Yet, access to any form of formal financial services is still restricted to less than half the population, clearly these routes have run their course. There are new moves in play now. The recent Pradhan Mantri Jan Dhan Yojana (PMJDY) scheme to bank 5 crore households with at least one account, and 1.78 cr Rupay cards and concomitant freebies is yet another big step, in the same direction. Four crore accounts have been opened, showing the power of the intent, and inadequacy of previous efforts. However, this initiative has to be seen in the backdrop of Mor Committee report which called for fresh thinking and new directions “to provide ubiquitous access to banking products and services with a universal account”. Under the concept of ‘differentiated banking’, Payments Banks were identified as the instrument which will reach out to all financially excluded Indians. New banks along with other measures i.e. BC networks, Aadhar-linked accounts etc. would complement the efforts to bank the majority of the population in a short period. While this was a perfect grand plan, the PMJDY-RuPay mission was nowhere in that scheme of things! In the current scenario Payments Banks have their task more than well cut out in a manner not envisaged by the Nachiket Mor report. They will now have to a) collaborate with new and existing players by way of technology, platform, product, distribution, points of presence, merchant base, delivery channel, brand, etc to plug the crucial last mile, and b) board new customers for remittances, deposits, payments, micro financial services & DBT. Their ability to leverage cell phone technology to enable accounts mapped to Aadhar/ regular savings deposit/DBT etc. in a low cost and efficient manner will be key. One assumes that the sine qua non for Payment Banks was to bank the unbanked by bringing them into the formal financial system in some small way whether that be by small value- high frequency transactions starting with remittances and payments and moving up the value chain onto other micro financial products. It certainly is moot as to whether the PMJDY scheme has taken the wind out of the differentiated bank play. If indeed the JDY does manage to bank the unbanked and offer a few specific products from day one, then the market space for new banks is disturbed. Further if the Post office is given the first Payments or a Scheduled Banks license then the NPCI and Post office routes will more than address the market, leaving little space for other private non telco players to come in. After all the pet peeve of most analysts is how many bank accounts would a person or family want to open! Therefore, once one has decided to go down the differentiated path route, two things are important. Firstly, one can’t perforce have a ‘one size fits all’ regulation. One has to leave dispensation for encouraging innovation and flexibility whilst the new players feel the river bed one stone at a time. Secondly, the market space has to be attractive enough to allow for several players to come in and offer pan Indian services. One way the business case would be buttressed is allowing Payments Banks to become the official distributors of DBT – both Central & State. Quick back of the envelope calculations indicate that a Payments Bank with cell phone focus with 0.75 % of the DBT market share in terms of gross disbursement will have enough of a business case to make the concept viable from day one. As the program evolves and matures, it is quite possible that with larger reach and volume, this service could be delivered for even lesser ‘transaction fee’ than is envisaged i.e. 2-3 %, thus saving the exchequer a fair bit of extra budgeting requirements and reducing leakages significantly. Yet, for all this to happen, two things must change. First, a move from the traditional emphasis of a formal account in a regular bank to allow for a unique ‘virtual account’ (similar to a mobile wallet) linked to the Aadhar and mobile numbers. This virtual account, ‘Account-in-the-Cloud’, will have simplified KYC/eKYC as per RBI norms. Secondly, cash out must be allowed using established private players (FMCG, retailers, fair price shops, etc), to allow for network effects to kick in a la Tanzania with its 27000 agents for a population of 37 million. With this, direct cash transfers, payments or remittances can be done directly into anybody’s aadhar-linked account-in-the cloud, to be redeemed at merchant points for purchases or cash out, via the established private payment outlets. This is the RBI’s vision- anybody in India can transact with anybody anywhere at ease- and it can be done, but only if the policy makers use a fresh lens.