Payment Banks 2.0: Search for growth and new income stream

Payment Banks 2.0: Search for growth and new income stream

Subject :Economy

Section: Monetary Policy

Role and Contribution:

• Have helped in extending monetary facilities to the underserved

Challenges:

• Not all are able to make sustainable profits. (The 3 profitable ones are: Airtel Payments Bank, Fino Payments Bank and Paytm Payments Bank)
• Present business model is not scalable.
• Competition from new-age fintech companies
• Out of 11 payment bank licenses given in 2014, 5 withdrew even before the start of operations, owing to fear of competition from fintech players.

Demands of Payment Banks:

• To allow them to lend to retail borrowers upto Rs. 2 Lakh (around the same as their average deposit size)

Original intention of giving licenses in 2014:

To enable cash and deposit management of small customers.

Problem with allowing payment banks into lending space:

• Lending requires strict adherence to capital adequacy norms and risk mitigation, which Commercial banks and NBFCs have to follow.
• Many payment banks are owned by Corporate houses which increases risk in allowing entry into the lending segment. (see Box below)

Way ahead:

• Profitable operations by the three (see above) payment banks shows that profits are possible.
• Huge scope of growth in less-catered non-urban and rural areas. This answers the scalability argument.
• These can replace Bank correspondents with more reliable infrastructure and transparent service.
• Present business model shows that a steady flow of fees income is good enough for profitable operations.
• With RBI granting the payment aggregator and payment gateway licenses to Fintech companies. In view of this licensing guideline of payments bank need an overhaul (only partial modifications were made in 2021)
• Instead of entry into the lending space, payment banks could be allowed to operate the end-to-end payments domain (acquirer, gateway and processor all in one). This will make the business model more sustainable apart from serving customers more efficiently.