Banking for a New Era

The Reserve Bank of India (RBI), in its attempt to give impetus to financial inclusion in the country, has announced a new category of ‘differentiated’ banks. Payment banks are among the primary of these differentiated banks.

 

payment_bank_money_transfer
(Source: IndianMoney)

 

What are Payment Banks?

They are the new stripped out type of banks, which are expected to reach customers mainly through their mobile phones rather than traditional bank branches. Payment banks will have a greater accessibility, especially in the rural areas. Financial inclusion not only assists a nation’s growth but also increases employment opportunities and empowers the poor. Thus, the licensing of payment banks is a welcome step.

 

How do Payment Banks work?

Their main focus is on the rural areas where people still make all the transactions in cash.  A virtual account will be opened on the basis of unique mobile no. Customer can make a transaction through web based mobile application or through IVR/USSD gateway to registered user. Payment Banks user can withdraw cash or top up their accounts from points (Vendor, ATM, Agent, etc.) recognized by their payment bank service provider.

 

Who can apply for becoming a Payment Bank?

  • Existing non-bank Pre-paid Payment Instrument (PPI) issuers
  • Individuals / professionals
  • Non-Banking Finance Companies Corporate Business Correspondents
  • Mobile telephone companies
  • Super-market chains and companies
  • Real sector cooperatives owned & controlled by residents
  • Public sector entities

 

How exactly does this work in the real life scenario?

Let us consider a situation where Surya a migrant laborer is working in some construction company in a metro city. Every month end he has to send Rs. 4000 to his home in a remote village. He got two options: Either he can send it through someone or he can go to the nearest post office and send the money through money order.

In the first case the man carrying out the job of delivering the money might pocket some amount and in the second case he has to pay 5% money order charge. Now when we consider the situation when the payment bank becomes the people then we see that Suryas wife will be a payment bank account holder and he will simply transfer the money to her through a simple SMS. All the transaction would cost around 1.5% which is cost effective. These banks are allowed to issue automated teller machines (ATM) or debit cards but are not allowed to issue credit cards. It can also distribute financial products like mutual fund units and insurance products.

The documentation required for account opening in these banks remains same as that of conventional banks. Payment banks will bring the ‘one-size-fits-all’ approach in commercial banking to an end. These banks will cater to the need of the lower income groups by introducing simple policies especially designed to help them.

The guidelines for licensing of payment banks were announced in November 2014 and the Reserve Bank of India (RBI) gave an “in-principle” approval to 11 of the 41 applicants. Some of which are:

 

  • Reliance industries
  • Vodafone
  • Aditya Birla Nuvo Ltd

 

The ‘in-principle’ approval granted will be valid for a period of 18 months. The goal behind creating these payment banks is to bring about financial inclusion, by making it easier for anyone to get a bank account. That’s also why the cash limit in the accounts is set to just Rs. 1 lakh – it might seem like a very low limit to most people reading this, but if you’re typically outside the banking system, then it is a fairly comfortable amount. The real effect will come to remittances within the country, as it will become easier for people to send money home to smaller towns and villages while working in the city.

 

Why is it important?

Payment banks can accept deposits restricted to Rs. 1 lakh per customer, and are allowed to pay customers interest on the money that is being deposited. The payment banks are only allowed to invest the money customers deposit into government securities. They can issue ATM and debit cards.

 

So why these 11 companies?

The RBI guidelines say that payment bank licenses would be granted to mobile firms, supermarket chains, and others, to cater to individuals and small businesses. The goal is to provide small savings accounts and payments to a migrant labor workforce, low income households and small businesses. The companies that have been selected right now seem to largely fit the bill. The phone companies in particular have large distribution networks throughout India, even in rural locations, and this will help as people will be able to easily convert cash into virtual money and vice versa. The Reserve Bank expects payment banks to target India’s migrant laborers, low-income households and small businesses, offering savings accounts and remittance services with a low transaction cost. It hopes payments banks will enable poorer citizens who transact only in cash to take their first step into formal banking.

 

The KYC Norm

The recent KYC norm started creating a lot of pressure for the payment banks.  Firms are concerned that the preference for “paper-based” KYC will be a cost-intensive and time-consuming exercise. Reserve Bank of India (RBI) asking all entities to adhere to the centralized KYC system instead of just relying on the Aadhaar-based eKYC for payment banks.  Payment banks don’t have the same manpower to collect paper-based KYC like traditional banks and given that they are capped at a balance Rs 1, 00, 000, they don’t share the same amount of risk. The idea is to streamline the KYC process and avoid duplication of KYC for customers at multiple agencies. But, for payment banks to be cast under the same net, it means that instead of just relying on the biometric based eKYC they will have to collect more details of their customers and upload them to the central registry. Digital KYC will help ease the “entry barrier” for such people along with being a more authentic means of KYC than a physical KYC.

 

This article was written by Paulami Paul (PGDM, Batch 22, XIME-B)

 

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