With the new financial model of Payments Banks recently launched in India by the RBI, there are doubts about there being threats to the traditional banks in rural areas. In September 2017, it was announced that 1.55 lakh post offices will provide payments banks services, thereby increasing the involvement of such banks in rural areas. In April 2018, the 170 million account holders of the Post Office Payment Bank will be able to access RTGS, NEFT and other bill payments. Hence, these accounts will have little incentive to shift to other conventional banking systems. This inclusive scenario which provides financial services to sectors in the economy which have no access to banking, however requires a reality check about the inclusiveness in rural areas. In this article, I will be focusing on the impact of payments banks operations in rural areas and on their competition with traditional banks.
A payments bank is a financial model which only accepts deposits but does not lend out loans or credit cards. The account holders can have access to ATM, mobile banking, debit card and net banking. Hence, the account holders have no credit risk. The payments banks however have a drawback currently, they only accept deposits of Rs 1,00,000 per customer. Hence, customers which have a higher need for deposits, have to access traditional banks in rural areas as well.
However, the higher interest rates offered by payments banks (7.25% by Airtel Payments Banks, 4% on savings account and 7% on Fixed deposits by Paytm’s Payments Bank, 4.5 – 5.5% by India Post Payments banks) compared to the 3.5 – 6% offered by traditional banks (there may be higher interest rates of upto 7% for depending on the deposit) allures customers to opt for payments banks over traditional banks.
An added benefit of payments banks is that there are lower transaction costs associated with payments banks where there are no transaction costs associated but there may be transfer costs (0.5% which is very small). NEFT, UPI online transactions and IMPS are free of cost. The transaction costs may lure people with accounts in traditional banks to maintain some finances in payments banks for small transactions. Payments banks also have no requirement for a minimum balance in the bank accounts. Traditional banks levy a penalty on the customers who fail to meet the minimum balance requirements, however the minimum balance for a payments account is zero. Hence, customers need not fear penalty charges. All these benefits that come along with payments banks are making them increasingly competitive.
Despite these benefits of Payments Banks, RBI ex-governor, Raghuram Rajan commented that the payments banks do not pose a large threat to the big banks. Payments banks may act as feeder banks and make larger banks more competitive. Big banks have already made investments in technology and the big banks which lack competitive technology resources: Kotak Mahindra Bank Ltd, Yes Bank Ltd and ICICI Bank Ltd have got approval for setting up payments banks. The impact of payments banks on medium and low size banks is however certain. There may be increased competition to such banks in semi-rural and rural areas, and small size banks may see a drop in their market share. Also, the reach of India Post payments banks is high with approximately 1,39,000 branches in rural areas which far exceeds the 44,700 traditional banks.
Until recently payments banks had easy KYC values, which was an added benefit because it reduced costs compared to traditional banks where a lot of documentation is required. First, telecom payments banks like Airtel could use the telecom customer KYC to start a payments bank, hence they had no costs for KYC for new customers who previously used Airtel telecom facilities. However, Airtel payments banks was recently scrutinized and fined Rs 5 crore for contravening the “operating guidelines for payments banks” and for violating KYC norms. According to reports, more than 23 lakh customers had received over Rs 47 crore in their Airtel bank accounts which they did not know had been opened. First, telecom companies had an edge in Payments banking system because they could use the KYC of the telecom users. However, according to the new RBI mandate issued after, fresh KYC has to be mandated for every account holder and telecom companies cannot use the KYC of their telecom users. This has increased costs by Rs 1-Rs 2 for every account to be opened by telecom payments banks, hence the edge that the telecom payments banks had over other payments banks is now erased.
Though payments banks come with numerous benefits, there is uncertainty about the impact of payments banks in the rural sector. A recent report shows that there are still problems with the reach of payments banks to the illiterate, low-income, rural households. There is low demand for payments banks from these households because they are unaware of payments banks and their operations. Payments banks have low incentives to spread awareness about their operations in these areas because the transaction costs are low and the effort required to spread awareness will be too high. There is a need for marketing in rural areas to make people aware about the financial model and to spread awareness about the method of operations, and walk them through the process. Without this, payments banks will not penetrate in the low-income and unaware rural sector.
Payments banks have a lot of added benefits over traditional banks in rural areas because of their accessibility and reach but marketing efforts still need to be pursued to make people more aware.