Payments banks can step ahead of traditional banks in the financial inclusion process
The past few years in India have seen a paradigm shift in the way sale and purchase of goods and services have taken place. With e-commerce players like Flipkart, Snapdeal and Amazon making the Indian shopper feeling spoilt for choice amongst a variety of offerings, the main supporting ecosystem undergoing its own mini-revolution has been the digital payments system. It is a no-brainer that one of the reasons why e-commerce industry in India has witnessed a revolution is that the payment mechanisms put in place have adequately supported transactions in e-commerce portals.
Pursuant to the enactment of the Payments and Settlement Systems Act, 2007, the Reserve Bank of India (RBI) put in place a series of measures to manage the online payment services. In 2009, RBI issued policy guidelines regulating the issuance and operations of prepaid payment instruments in India, which have been updated from time to time. According to the guidelines, there are three types of prepaid payment instruments—closed, semi-closed and open. While RBI allows only banks to operate and manage ‘open’ payments systems, the ‘semi-closed’ payments systems stream has seen an on-rush of players from across the spectrum. The ‘semi-closed’ payment instruments can be used for purchase of goods and services, including financial services at a group of clearly identified merchant locations/establishments which have a specific contract with the issuer to accept the payment instruments. The ‘open’ payment instrument systems are similar to ‘semi-closed’ payments systems with an added advantage of permitting fund transfers between bank accounts and cash withdrawals. Depending on the level of customer due diligence, a semi-closed payment instrument can be issued for up to Rs 1 lakh.
It is also important to note that RBI, as the regulator in the digital payment space, has played a key role at important junctures to support the digital payment industry. This can very well be witnessed from the significant announcement by RBI in relation to doling out ‘payments bank’ licences to eligible entities during this year. Fast forward to November 2015, a whole host of players from across industry spectrum have received payments bank licences including telecom giants such as Bharti Airtel to players like Paytm. The payments bank licences permit these banks to have balances of up to R1 lakh. Further, a payments bank can issue debit cards, undertake payment-related services at merchant portals and further distribution of mutual funds and insurance products. It is pertinent to note that a payments bank cannot undertake lending activities and cannot issue credit cards to its customers.
With the issuance of payments bank licences, the digital payments space in India looks set to grow leaps and bounds from its current position, in terms of its utility and acceptance in urban and semi-urban areas. However, what remains to be seen is how much of it will benefit the masses in rural India, where the traditional banking system operated by nationalised banks is known to be the only organised money management system in place. Further, the usage of digital payment wallets goes hand in hand with wireless internet systems infrastructure. With the penetration of wireless telecom services into the rural areas of India set to increase and improve in the near future, and with more and more Indians getting access to economical smartphones, the usage of digital payment systems looks set to grow.
However, the acceptance of digital payment systems in rural areas can have its own sets of challenges. The primary challenge to this would come from whether or not the rural masses accept digital payment systems as an alternative to the traditional banking system. Furthermore, what is also pertinent to note is that the rural population must be made ‘e-literate’ in relation to the usage of digital payment systems in order to ensure that it attains wider acceptability.
While, from the perspective of the payments bank, it is still early days and RBI is itself testing the waters of the pros and cons of the system, it remains to be seen what further steps will RBI take in this space. From the perspective of the volume of transactions, the question is whether the incumbent limit of R1 lakh is enhanced by RBI for all the players involved. Further, it remains to be seen if and when will RBI permit lending or credit-related transactions to be undertaken through payments banks. While permitting credit-/lending-related transactions in payments bank space can have its own set of challenges, especially on the books of the payments bank entity, one can never wholly rule out as to whether, with the passage of time, RBI may revisit its policy and permit credit-/lending-related transactions.
With a large section of population availing the benefit of the Jan-Dhan Yojana, the government is marching forward in its aim to make India a more financially-inclusive nation. It appears that in order to aid this aim of the government, payments banks will step ahead of traditional banks and end up becoming the ‘banker to every Bharatiya’.
CV Srikant contributed to this article
The author is a partner with J Sagar Associates, Advocates and Solicitors. Views are personal