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New Payment Bank Licenses are Finally Here. Here's What They Can Do.

Yay! RBI has finally granted in-principle approval to 11 payment banks:

  1. Aditya Birla Nuvo Limited

  2. Airtel M Commerce Services Limited

  3. Cholamandalam Distribution Services Limited

  4. Department of Posts

  5. Fino PayTech Limited

  6. National Securities Depository Limited

  7. Reliance Industries Limited

  8. Shri Dilip Shantilal Shanghvi

  9. Shri Vijay Shekhar Sharma

  10. Tech Mahindra Limited

  11. Vodafone m-pesa Limited

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This is great news, because they will provide some level of competition to the “CASA” part of the banking system, which is a fairly good part of it apparently. Banks get money for as close to “free” as possible, and they don’t try to compete for funds – the new banks will hopefully break that hegemony

But No Lower Lending Rates

The first thing you might wonder is: Will I get loans at lower rates?

The answer is: No.

Because payment banks are not allowed to lend any money.

Any money you give them has to be compulsorily deposited into government bonds. It’s the safest avenue for your money. But you’re limited to Rs. one lakh only. I hope this is a temporary restriction.

Who Benefits and What will they do?

What a payment bank can do:

  • Take money from you (upto Rs. 1 lakh) and pay you interest on your balances
  • Potentially: Can take a standing instruction to transfer balances above Rs. 1 lakh into a liquid mutual fund and back when you need it.
  • Provide Debit cards and ATM cards
  • Access the ATM network of all banks
  • Provide transfers directly to bank accounts at nearly no cost since they are part of the NCPI gateway that connects banks. IMPS and NEFT easily.
  • Provide forex cards to incoming and outgoing travellers; a customer can simply get a card by buying currency into a card they can use as a debit or ATM card all over India
  • Break down the obscene charges that current banks charge for forex services. Oh there’s so much that can be done here.
  • Provide card acceptance mechanisms to vendors beyond the standard “swipe card” – so a concept like Apple Pay will be possible.
  • Interbank cash transfers: SBI charges – and you might not know this – Rs. 25 for people to deposit cash in a non-home branch. And then people – typically labourers – have to stand in long lines to put money into their own accounts, and bank staff love to play really dirty with them, sending them back to the line if they didn’t get a line right in the form etc. Any payment bank can accept that cash, and do an instant IMPS from that account. It could even be done from Kirana stores, using a debit card, for a much lower fee and no lines.

So who benefits?

Reliance, Airtel and Vodafone are likely to use the license for their telecom businesses. The idea of a payment bank is that you can put your money with them and they will offer you interest on that money (as a savings bank account). If it’s a telco, you can automatically pay your bills, and even purchase products through the same account, and even withdraw cash by using your phone as an ATM card! (with passwords and all that). So you could technically have seamless payment of anything through your mobile phone, and the payment bank system will allow them to use IMPS or NEFT to transfer money directly to the end user, and even between users in the telco; and while your money is with them, they can even pay you interest.

For Vijay Shekhar Sharma, the deal would be PayTM, which is a company he is a founder of (and it’s parent company, One97). Disclosure: I started the commercial operations of Capital Mind Premium from the PayTM Office in Bangalore, so I’m biased. Paytm has a wallet to store cash (but no interest is paid), owns an ecommerce marketplace and also offers its wallet to users such as Uber where you can make on-demand payments.

Fino Paytech is in that space as well.

PayTM and FinoTech will benefit in that they can offer interest on balances, create easier payment mechanisms for businesses in India to offer as a payment gateway, and not lose any of that money if the merchant and buyer are both their own customers. PayTM can offer debit cards, forex cards and all the jhing-bang that we should be demanding of a payment mechanism including easy person-to-person transfers.

The Department of Posts can absolutely kill the cash transfer market, or the banking market in extreme rural areas.

Aditya Birla Nuvo is a massive retail operation, and might venture into faster and better payments at their retail operations. But they’ll have to go much beyond in order to really take advantage of the opportunity.

Cholamandalam distributes financial products, and this licence might be a new venture to tap potential banking opportunities.

I have no idea how Tech Mahindra, NSDL and Dilip Shanghvi (of Sun Pharma) will benefit but they will probably build a new system to tap the above concepts.

Will this be good?

Any thought of introducing new banks is good. Our lazy fattened up banking system needs competition. Your loans may not get cheaper but I hope these banks move large amounts of “CASA” from the large banks away to payment banks. I will personally open accounts everywhere that it’s feasible, and reduce my balances in the larger banks, if they bring in better technology and keep my money safe.

There’s no immediate fear, though, for current banks. It will be at least two years before the threat to stupid banks emerges, and even then RBI is likely to be this major mollycoddling mother figure that refuses to let any of its banks suffer due to the advances in technology of the new banks, so expect that they will attempt to stifle major challenges via arbitrary restrictions. Having said that, it’s the same RBI that allowed these new banks to come up, so let’s hope they are more open to better banking and more competition. Bring it on!

Update: From Medianama and a few other sources, a few more things have emerged:

  • Shanghvi is partnering with IDFC and Telenor. So it’s also a telecom play like Reliance Jio, Airtel and Vodafone. (Why IDFC? It’s got about 20% stake it seems. But why? They have a full fledged bank licence and can do everything above and more)
  • Aditya Birla Nuvo is about Idea, another telecom player. 
  • Tech Mahindra apparently has a wallet license and is doing something around NFC payments. (But it’s a bit of a leap to go become a bank!)
  • Cholamandalam Finance is a listed NBFC. That will do the lending, the payment bank gives it access to the payment ecosystems.