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Economy

Payment Banks Are An Opportunity To Change Banking in India

The RBI has released guidelines for Payment Banks. This is fantastic because it means some competition to regular banks who have become bloated, unweildy and terrible in terms of nickle-and-diming customers.

The deal is:

  • Promoters can be anyone, specifically Prepaid Instrument issuers (most prepaid wallet providers qualify), NBFCs, mobile companies, retail chains etc. Any company or individual can also be a promoter. 
  • There is one statement in there: “that are owned and controlled by residents”. It isn’t altogether clear if this means that companies taking capital from non-Indians cannot apply? We hope there is a clarification.
  • Promoters should be “fit and proper” according to SEBI. (So Jignesh Shah cannot set up a bank, but I digress)
  • Minimum paid up capital of Rs. 100 cr. 
  • The operational promoters must own at least 40% of the equity for the first five years. But when they reach a net worth of 500 cr. they have to list and diversify ownership.
  • Foreign shareholding (FDI) can be upto 74%, and upto 49% does not need approval (the next 25% does). Residents must own 26%. 
  • A single FII (institutional investor) can hold only upto 10%, and all FIIs together can own only upto 49%. NRIs can own 24%.
  • Majority of directors must be “independent”. It’s a little zany to imagine this will actually fly. 

What can they do?

  • They can raise deposits, but cannot lend. They can only lend to the government, by purchasing government bonds with a minimum 75% of deposits (maturity upto 1 year ahead). The remaining 25% can be in other banks for liquidity etc.
  • Since capital rations as a percentage of “risk weighted assets” makes no sense (the risk weight for government bonds is zero), the bank will not be able to take more than 33.33 times its capital. So if it has a capital of Rs. 100 cr. it can take deposits upto 3333 cr. 
  • A payment bank is small, so it’s expected to do business in rural and smaller areas through Business Correspondents (BCs). So it doesn’t need to set up 25% of branches in rural areas.
  • Physical access points including ATMs and BCs will have a 25% allocation to rural areas. 
  • Such banks can offer Current and Savings Accounts. Savings accounts can have any interest rate.
  • Customers are limited to Rs. 100,000 per account. But you can get a large amount of money to distribute to smaller accounts, provided that after such distribution, the 100K limit is maintained.
  • Customers can be given debit cards but not credit cards. Obviously.
  • This also means the banks have full access to NPCI’s ATM and Debit card framework. And NEFT and RTGS. This is pretty cool.
  • Internet banking is okay, but pure branchless banking is not. 
  • A payment bank can sell mutual funds, insurance, pension products etc. 
  • Bill payments can be done, for obvious reasons.
  • They can do remittances abroad (both incoming and outgoing)
  • They can issue prepaid cards or wallets.

They have to maintain CRR (4% of all deposits) which lies interest free with the RBI. 

What Worries Us

How can a retail chain have 25% of its BCs in rural areas? Very few such retail chains will exist, honestly. (But mobile companies can do this) However, this is a requirement RBI won’t ease; so it’s best a new bank attempt to at least meet the letter of the law.

The 100K limit is useless, and I’ve mentioned it the last time. This has been designed to prevent customers from shifting from larger banks, to protect the current banking system. This is wrong; we should have stable competition, and a more level playing field. But yes, there’s no choice – the incumbent banks will crib and cry and generally make a fuss. Let’s just live with it and hope that RBI upgrades such requirements within a year or two. But this is wrong thinking – we should allow unlimited deposits in such banks – I would gladly move all my savings account money there.

The Opportunity

A number of analyses on the regulations seem to show either overenthusiasm or over-cynicism on these regulations. Firstly, these are new banks, the first real new banks we are seeing. This itself should be joyous.

Now, let’s focus on what can be. Such a bank can earn serious money. How? For one, the spread between government deposits and savings account deposits is HUGE. Currently 1 year T-Bills yield 8.1% and savings accounts can offer 5%. The 3% odd spread is a very good one (and For a average bank NIMs are about that much) And such banks can get float, especially from those who want extreme safety for their savings accounts.

Why would people deposit money at 5%? Because you make their lives easier. Payment banks are supposed to use technology to do that. Open accounts faster – for individuals, take photos at the branch and a 10-second video of them holding up their PAN/Aadhaar cards (this can even be done remotely). Any address proof is okay now, and currently banks crib about such requirements. Payment banks should tie up with courier companies and logistics providers to validate addresses constantly, and monitor ATM and card geographical usage to track customers. This meets KYC needs and definitely so for those that have less than 100K with you.

And then you have payments. It’s dumb to have only an SMS based One Time Password for everything. A true two-factor auth would use multiple such mechanisms, and whichever is convenient at any time. A birthdate can be used for a card not present transaction for small amounts (say less than Rs. 1,000), the last three digits of your account number, a missed-call from a phone, a fingerprint sensor; with increasing degrees of protection as amounts get bigger. And then, a payment bank can do a pre-authorization for services like taxi-cabs, where the user authorizes the maximum fare, but the company should only deduct what is actually payable. 

And cash-ins. Do you know that most banks, especially public sector ones, charge if you deposit cash into a non-home branch? So the poor labourer working in Bangalore who has his bank account with SBI in Bihar has to pay Rs. 50 to deposit money into his account, so that his family can withdraw it. Worse, such people are treated shabbily by the banks and made to stand in long winding queues, with limited people allowed each day. I have seen this first hand.

My solution? A payment bank should say this – You don’t even need to have an account with us. Give us cash, and we’ll transfer money to your SBI account for Rs. 5 per transaction. Do it through IMPS so that the person sees cash instantly in their bank account (they can verify at your own ATM, which you don’t charge them for – you earned Rs. 5 already) Build their trust and they’ll eventually open an account with you. And this alone is a massive market.

For people who need to transact for more than Rs. 100K (I hate this limit) there’s a need to do things better. One way would be to route their money into an overnight instrument like a liquid mutual fund, with an auto-redemption and reinvestment every day (so that during the day, they have access to more than Rs. 100K, which is rolled back into the liquid fund by 2pm). 

I won’t even get started with the markets for international remittances (make it way cheaper!). They can even convert rupees to BitCoin and back (someone else has to take the exchange rate risk, I think) Or for instant payments through NFC or other contactless technology, at very low rates. Or for better mutual fund or insurance selling mechanisms. Or for organizing credit from other banks. Of for collecting subsidies. And so many things.

Technology can rapidly help complaint resolution and speedy handling of issues, and reduce currently insane burdens from banks. Banks will need core banking systems, internet banking etc. and smarter mechanisms to deal with problems than are currently used. Documentation should only be required once, for instance – having every single document self-signed is a waste of time, and most of the time not required. (A 10 second video recording at the branch/ATM or at home saying “Please use my documents” is enough!) 

Every prepaid instrument provider should go become a payment bank and stick in there, because in five years, RBI will make life much easier. This concept will not help with financial inclusion as much as it will revolutionize the payments ecosystem; but only if players behave to that effect and RBI isn’t a total pain in the wrong places. Raising capital shouldn’t be that big a problem but the promoter requirement of 40% and FII/FDI limits mean that it’ll take deep pockets to get this done. However, I refuse to believe that after all this drama and startup mega-raises, capital will be the constraint. I’m hoping this is the next big thing in Banking, even with that unfortunate Rs. 100K account limit.

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