India’s Payments Bank - The Tata Nano Moment ?
One of the remnants of India’s license raj, RBI is finally opening the banking sector, it has repeatedly declared to offer on-tap licensing of existing types of banks and introducing newer types of banks. Bank licenses have hitherto been as scarce as a Giant Panda birthing success rate, restricted to a pair each decade with a rare triplet, minus the last round when RBI stunned all, including the eleven payment bank licensees — a diversified brigade of all Indian telecom operators, a leading pharma major, a reliable oil & gas major, a business correspondent operations company, a non-bank finance company, a wallet company and the government owned employer of the once-in-ten-years passport only delivering postman.
The Wikipedia entry of a Bank states, it is a financial institution that creates credit by lending money to a borrower, thereby creating a corresponding deposit on the bank’s balance sheet. Payment banks do not meet this definition, they cannot create credit and can only create liabilities i.e. hold deposits on which they must pay interest. Further, they also must set up ‘some’ branches and ATMs, can issue debit cards (no credit cards), offer internet banking; can send and receive remittances and distribute mutual funds, insurance and pension products. Akin to printing a newspaper without advertisements, a payments bank cannot lend and resultant commercials are inked red.
Is this perhaps a reason, one of the eleven licensees voluntarily surrendered their license while other licensees grapple with continuous delay of launch timelines, or perhaps why most payment bank licensees have issued equity to big brother banks? Recently T-Mobile, a leading telecom operator, finally gave up on trying to be a bank.
The payment bank’s leaner and elder cousin i.e. the humble wallet (technically a non-bank prepaid instrument — the PPI) can do everything a payments bank can i.e. intermediate loans, investment, insurance products with the ditto INR 100K restriction on deposits. As a payment bank, they will need to pay interest to depositors which a wallet does not have to, actually cannot by law. Payment banks will need to park a meaty majority three fourths of deposit collected in government issued securities at standard rates, requiring them to build massive Asset-Liability management capabilities. A payment bank must comply with the one hundred and fourty seven pager, Banking Regulation Act 1949 and adhere to the continous volley of circulars issued by the banking regulator, whereas wallets need to comply with largely one single circular.
Payment bank must begin with twenty times, the capital requirement of a wallet; they are entitled to ‘Consumer Trust’ which comes affixed with the permission of of using the ‘word’ bank. Wallets will need to earn this trust. Wallets will continue to be lean FinTech companies minus the onerous regulation, focused singularly on offering a great user experience, an ever widening bouquet of products and service through deep strategic partnerships and alliances.
A payment bank has a license moat, a wallet has the opportunity to build a multi-layered moat of world class technology, best in class user experience, fire power of superior algorithmic analysis for fraud management and serving best fit products, building a great consumer brand and earning trust.
Are Payment Banks the Tata Nano moment for Indian banking?