The next big thing in Indian banking is already fizzling out

Image: Reuters/Himanshu Sharma
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They were supposed to usher in the next great disruption in Indian banking.

However, three years after the Reserve Bank of India (RBI) granted in-principle payments bank licences to a bunch of entities, the sector is struggling to come into its own. While a few of those who got the central bank’s nod have completely dropped out, the remaining haven’t gone much far either.

Payments banks are organisations that accept deposits of up to Rs1 lakh ($1,456) each but are not allowed to lend.

The reasons for their limited impact till now vary from a recent ban on accepting new customers and the imposition of certain penalties to sluggish deposit collection and delayed launches. While profitability pressures were always expected, stringent know-your-customer (KYC) norms and a competitive banking ecosystem, too, have derailed growth, experts say.

The birth

In August 2015, the banking regulator cleared 11 organisations for setting up payments banks. The idea was to introduce more un-banked or under-banked Indians to formal channels.

In the following months, though, Tech Mahindra, Cholamandalam Finance, and the Dilip Shanghvi-IDFC Bank-Telenor joint venture, dropped out. Both Vodafone and Idea had secured approvals, but following their merger, it is likely that Vodafone may surrender the licence.

Paytm, Fino, Idea, and Airtel went ahead and launched operations. India Post, the government postal service, is set to kickstart its business later this month. Reliance Jio did a limited launch for its employees this April. National Securities Depository Limited, country’s oldest and largest depository, the last in the race, is expected to join the fray later this year.

The problem

Last year, Airtel Payments Bank was forbidden from adding new customers for a few months after it was revealed that it had violated certain norms by opening accounts without customers’ consent.

Now, Paytm and Fino Payments banks are also in a similar soup.

Recently, the central bank declared that the KYC done by these firms before launching their respective banks won’t be valid. This has increased operational costs. “Customer acquisition has become even more difficult now. Earlier it was easy to get customers on-board as the KYC level was really basic. But now things have changed,” said a former executive at a payments bank, requesting anonymity.

The competition has turned even more fierce, and not just from rivals.

The Narendra Modi government launched the Pradhan Mantri Jan-Dhan Yojana in 2014, a financial inclusion scheme aimed at providing bank accounts to all Indians. Since its launch, over 322 million accounts have been opened under the scheme, covering 99.7% of Indian households, government estimates show. So a large section of the unbanked population is already covered by now, narrowing payments banks’ scope.

Meanwhile, the evolving digital payments ecosystem has also thrown a spanner in their works.

The digital non-starter

Earlier, payments bank customers were expected to start off with basic digital transactions with payments banks, and graduate to more complex banking, including loans and investments, in the long run. Digital transactions were also expected to reduce their costs.

However, with the coming of the government’s Unified Payments Interface and the entry of several other payment firms, the digital edge has been lost. Even existing banks have upped the ante online. And all of them are vying for the same customer pie.

“The whole premise of differentiated banking can be questioned now,” believes Ashvin Parekh who runs an advisory services firm and had also helped select payment bank to chalk up their plans. “A lot has changed since the time these banks were first envisioned in 2013-2014.”

Certain things that were taken for granted during the planning stage have not come true, added Parekh. For instance, it was assumed that telecom players will have a ready user base which they can turn into their bank customer base. That hasn’t worked out so far.

One of the most important concerns is that these banks are not allowed to lend and, therefore, the revenue stream is limited, raising serious doubts over the model’s viability. Also, they are allowed to invest only in government securities which offer lesser returns compared to other avenues such as mutual funds.

“The offering is very niche and doesn’t cover the whole gambit of banking services. Therefore, even after a customer has opened an account at a payments banks, they may need to go to another full-service bank to meet some of their banking needs,” Kalpesh Mehta, partner at auditing firm Deloitte India, explained. “Therefore, the appeal is limited.”

The next leg of growth for payments banks may now come only by acquiring merchants, explain analysts. But this will require significant investments. Since profitability remains elusive, many may not be keen to pump in more funds at this point.

The jury is still out on whether the business is losing out. But clearly, it won’t be an easy ride.