Monday, December 1, 2014

Payment Banks - Will they make money ?

There has been a huge hype about payment banks. Some in the business media have said that these banks will be a boost to financial inclusion...look at telecom companies offering mobile wallets and white label ATMs they said.

I am very skeptical about this story of financial inclusion ...I don't think it will happen with Jan Dhan scheme ( I hear that 75% of the accounts opened have no balance and no operations ), or with payments banks or what ever... Financial inclusion can happen only with economic inclusion. But somehow, policy makers don't seem to be talking about it....

Lets us assume that these banks would help in financial inclusion, as policy makers would want us to be believe....the question that begs an answer is - will these entities make money and be sustainable as stand alone entities ? 

What these banks can do : 
i) Accept demand deposits ( current and savings bank deposits) upto Rs 1 lakh per customer 
ii) Payments and remittance services through various channels including branches, business correspondents and mobile banking
iii) Issuance of pre-paid instruments.
iv) Function as Business correspondents 
v) Apart from CRR,  all monies have to be held in SLR securities as investments. The capital adequacy ratio has to be 15% , which is not very difficult, considering that the risk weights in their exposure is negligible - but they the overall leverage ratio should not be below 5. The bank should also have a minimum capital of Rs 100 Crores at all times. 

But these banks cannot lend. And that means, they don't make any spread . The most important way that banks make money is hence gone. And that means, they will have to rely entirely on their ability to charge customers for using their payment systems to make money. While that is possible, will they be able to actually generate enough business volumes to remain profitable is a big question....particularly, since all banks currently offer all that the payments bank can offer. 

First , I don't think people are going to just queue up to open accounts in a payments bank ? Why would they ? As these banks cannot lend, their ability to pay interest on savings accounts is going to be why will somebody shift ? 

Second, the expectation that POS terminals in Kirana will start functioning as ATMs ( the payments bank can offer cash-out at POS terminals) is a wildly optimistic one - at least in the forseeable future. 

Third, I also don't know what additional benefits would be available for an existing telecom companies offering mobile wallets or the white label ATMs by becoming a payments bank. In-fact, RBI has prohibited telecom majors from using their existing channels for the payments business - and  so, even if there were players interested, they would now have a contend with the cost of setting up a new channel for this business....

Fourth, while the payment of subsidies and benefits may move to banks, it is unlikely that ALL cash transactions between individuals will move into banks. In-fact the recent move limit free transactions over the ATM and to charge for it, will only increase the use of cash....I am already hearing of people drawing out a big chunk of their salary as soon as it is credited !

I don't think stand alone payment banks will be sustainable. I will be surprised if commercial entities will evince interest in this - with the current guidelines. If at all there is any entity that may be interested, it can be India Post. But, although there will be a large HR policy rework that will be required, I think India Post should work on a becoming a full fledged bank - not just a payments bank. 

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