Need for New Business Models for Payments Banks 

Syllabus :GS 3/Economy 

In Context

The RBI’s recent supervisory action on Paytm Payments Bank has sent ripples across fintechs

•  The latest move was after an audit report had revealed “persistent non-compliances  with regulatory guidelines and continued material supervisory concerns in the bank”.

About Payments banks

• Payments banks as a category of banks were introduced in 2015 by RBI, to bridge the gap between traditional banking services and the unbanked population, particularly in rural areas.  
• These banks were envisioned to leverage technology to offer basic banking services, focusing on financial inclusion and digital transactions.  
• According to the rules of the payment banks, these cannot lend any money and can accept deposits only up to Rs 2,00,000.

Scenario In India 

• India has been having a fantastic journey on mobile payments over the last decade.
•  It started off with IMPS (Instant Mobile Payment System) by NPCI during 2010.
• Launch of UPI in 2015 took mobile payments to a global scale. 

Importance 

• Payment Banks would play an important role in bringing the unbanked masses into the realm of general banking.
  • Because it is not feasible or economical for banks to open branches in many areas.
• Payment banks can also play a crucial role in implementing the government’s direct benefit transfer scheme, where subsidies on healthcare, education and gas are paid directly to beneficiaries’ accounts.
• The payment banks through the mobile phones will be promising a low cost platform for providing basic banking transactions, particularly; payment for services and subsidies.
• It accelerates formalisation of the informal economy besides deepening financial inclusion for credit and insurance. 

Challenges faced by Payments Banks

• Operational : Payment banks are not allowed to lend and they may only distribute and collect loans online in partnership with other regulated lenders.
  • They just cannot generate enough revenues and prosper merely on the revenues from payment services .
  • Most of the payment banks are struggling to be profitable.
• Competition with existing players :  As banks already have infrastructure for mobile banking in place with low cost remittance alternatives, payment banks on the other hand find it difficult as they would have to start establishing everything from scratch.
  • The success of UPI and launch of AEPS (Aadhaar Enabled Payment systems) had disrupted the payment ecosystem .
• Awareness issues: Most of the population in India vastly resides in rural and semi- urban areas who are mostly less educated with limited knowledge of using technology and literacy constraints for availing services.
• The other issue relates to its governance structure and related party-transactions
• There is irregularity in digital infrastructure.

Conclusion and Way Forward 

• India is an emerging growing market where the usage of smartphones is rapidly increasing and here Payment Banks can play an important role in emphasizing the growth of financial inclusion and tapping all the corners of the country progressively. 
• It is also expected to accelerate India’s journey into a cashless economy.
•  People should be encouraged to join the digital economy by migrating cash-based customers into digital networks .
• The Reserve Bank expects payment banks to target India’s migrant labourers, low-income households and small businesses, offering savings accounts and remittance services with a low transaction cost.
  • It hopes payments banks will enable poorer citizens who transact only in cash to take their first step into formal banking.  
• The RBI needs to design a new framework for payment banks and there is also a need to look at issues and challenges of payments banks in general and explore the way forward.