Payment Banks stirring worries for Traditional Banks

The new era of payment banks is all set to take off and the Indian markets are already witnessing the tremors of the upcoming change. The rise of “mobile economy” driven by these payment banks are expected to impact the traditional banking system in a big way.

Now, let us first understand why the separate “Payment Banks” were required?

According to Reserve Bank of India (RBI), “there is a need for transactions and savings accounts for the under-served in the population (migrants, people below poverty line, daily wagers, socially backward class etc.) with lower transaction cost enabling high volume-low value transactions in deposits and payments / remittance services in a secured technology-driven environment & to achieve this goal, “Payment Banks” were required”.

On the first phase, RBI has issued payment bank licenses to 11 companies out of total 41 applications. Licenses were given to companies like Paytm, Airtel, Vodafone, Reliance & others based on the fulfillment of certain pre-requisites & guidelines.

As per the recent estimates of Bank of America Merrill Lynch, the share of Indian mobile banking is poised to raise upto 10% from current 0.1% in the payment market with a value of approx. $3.5 trillion thus impacting core revenue area of traditional banks like commission on RTGS / NEFT / Cheques

As per RBI guidelines, a payment bank can offer

1. ATM / Debit Cards

2. Issue Cheques / Drafts

3. Take Deposits

4. Payment / Remittance Services

5. Financial Products like Mutual Funds / Insurance

The only thing that a payment bank cannot do for now is to lend the money to anyone but only to the Government, hence being Government the only borrower, payment bank can be considered as a safe haven for deposits.

With such a transformation in the banking ecosystem, the traditional banks are bound to change their pedagogy. The new entrants are not just technically equipped but also adding value for a commoner like 24×7 accessibility, faster services, integration with others services and many other benefits. Even banks like State Bank of India (SBI) has joined the payment bank league by partnering with Reliance Industries. SBI Chairperson Arundhati Bhattacharya, were recently seen saying “If you can’t beat them, join them”, clearly indicating the upcoming competition.

Let’s see if the big banking conglomerates amend their processes to fit into this new era of banking or payment banks will get more freedom to enhance their service offerings.