While RBI’s plan to issue payment bank licenses was well known, the actual handing out of licences on Thursday seems to have sparked a debate on whether these could disrupt the banking system. One reason lies in the number of in-principle approvals awarded – at 11, there was a big surprise element in the announcement. The RBI Governor’s reasoning that the board didn’t know what would succeed, and therefore decided to give licences to a variety of players is sound. More important is the Governor’s conviction that these banks would complement rather than compete; as he pointed out, universal banks can do everything that a payments bank can, but the reverse is not true. However, many believe payments banks could be potential disruptors since it’s evident now that technology – mobile technology in particular – can be a game changer, especially since an increasingly large chunk of customers is going to be below 30 years old. It helps that, between Airtel, Vodafone and Idea – all have payment bank licenses – have 580 million potential customers already. Also, with no legacy issues, the new players can be more nimble and, for instance, introduced mobile wallets before most conventional banks did – Paytm, which is one of the payment bank licensees, claims to have 100 mn users on its mobile wallet already.
So, the argument goes, technology will help bridge the last mile as it were, allowing payments banks to access millions of customers currently not within the fold of the formal financial system. This would result in large volumes of transactions fetching the payments banks fees; a charge of even 1 or 2 per cent on a large volume can be lucrative on normal cash transfers, and add to this the potential size of the government’s direct benefits transfer programme. Moreover, since payments banks can earn 7.5% on GSecs, they can afford to pay more than the 4% interest savings banks pay right now, and therefore hit the ability of conventional banks to raise low-cost deposits – they have no legacy costs and no NPAs and, in the case of telcos, this will also increase the stickiness of subscribers. On a large float, even a spread of a couple of percentage points is a lot of money.
Over time, these customers may want other banking services and this is where their partners – banks in most cases or NBFCs perhaps – come in. Indeed, banks have gone on record to say they are looking to leverage the customer base of telcos – banks have little reach in the hinterland – and lend to them. How profitable such ventures will be is hard to tell partly because it is difficult to estimate the cost of doing business or how the business will take off. But like e-retail which has a minuscule share of the market right now, payment banks have the potential to disrupt traditional banking. How disruptive will depend on how innovative they are, how customers take to their services and, above all, how quick conventional banks are to respond to the challenge. Right now, most banks are rushing to offer mobile wallets while some have even tied up with payment banks to be able to leverage technology and reach.