It all started with a vision- one that of unleashing a digital revolution across India. The idea was to increase the penetration of financial services into places where actual banks failed to reach. And the concept, first put forward by the Nachiket Mor commission in 2014, was given the name, Payments Bank – a bank which isn’t actually a bank.
So what is a Payments Bank?
Payments bank is a registered public listed company that comes under the Companies Act, 2013. RBI has mandated that such banks have a minimum capital investment of ₹100 crore. For the first five years the stake of the promoter should be at least 40%, and 25% of its branches must be in unbanked rural areas.
A payments bank accepts deposits of up to ₹1, 00,000 and pays interest on them. The bank operates digitally and hence offers mobile payments and net banking services. It also issues debit and ATM cards. However, they are not allowed to carry out lending activities like granting loans, issuing credit cards etc. So they cannot earn from interests like the conventional banks.
Then the question comes – what is the source of their revenue?
- One way is through investment. They invest in government securities and bonds fetching an annual return of about 7%. Payment banks provide the option of micro-saving, i.e. savings as low as ₹100, thus encouraging customers to deposit more.
- Another major source of revenue can be data monetisation. It means generating economic benefits from the data available such as customer profiles, their interests and preferences, spend patterns etc…
- They can earn interest by depositing in other banks or government deposits.
- They are also involved in cross-selling to other financial institutions by providing them with insurance and loans.
So, is this a viable business model?
If we take a look at the existing payments banks in India, most of them are running a loss. But none of them expected a net profit before 5 years of operation. Airtel Payments Bank, the first payments bank in India reported a widening in the loss before tax in the financial year 2018-19, even though their total revenue increased. Paytm Payments bank launched in 2016 also has a similar performance graph. In 2017 came Fino Payments bank, with an aim to make profits within 3 years of operations. They are optimistic about doubling customer base and merchant points by December 2020.
It is too early to make speculations regarding the viability of this model since it is still at a very nascent stage. However, if the banks comes up with attractive financial offerings coupled with service quality and convenience, this model can succeed in achieving its objective, i.e. financial inclusion through digital disruption.
Taniya John (Editor, TJEF )