Evolution of payments ecosystem from cheques to e-wallets. Can the new generation payments bank really make a dent in the ecosystem?
Current Payments Ecosystem
One may not be aware but there are more 100+ Scheduled commercial banks, 1600+ Urban cooperative banks, 12,000 NBFC and numerous payment /technology operators In India. These are already doing a wonderful job by introducing millions of ordinary Indians into the banking system so that they can accrue the benefits of financial inclusion. Further these institutions have made it easier for people by facilitate electronic payments and net – banking. However, 70 per cent of transactions in India are performed through cash and majority of the population is still under-banked. This is quite ironical and raises questions on the efficacy of our banking system and also their capacity to cater to those who still remain excluded.
The RBI recently announced “in-principal” approvals for Payment Bank Licenses to be issued to the private sector. Lets take a closer look on the payment space and how it can help grow the digital space.
Simplistically, the payment ecosystem can be split into the three simple segments viz. the Payment Infrastructure Providers, Intermediaries and banks/wallet providers. Infrastructure providers cater to remittances (e.g. RTGS/NEFT/IMPS/cheque); cheque clearance mechanisms and cash management systems (eg. ATM) which are put out by the Government – i.e. RBI (Reserve Bank of India) and bodies such as NPCI (National Payment council of India).
Intermediaries, on the other hand, (VISA/Master/Rupay to name a few) provide the payment network connectivity between Customer-to-Customer (C2C); Customer-to-Business (C2B) (e.g. shops); and Business-to-Business(B2B). Intermediaries also include the Payment gateway providers who assist in performing online merchant transactions. With the arrival of Aadhar, the above mechanism is being extended to include another important dimension viz. Government-to-Customer/Citizen (G2C) which is also known as direct benefit transfer.
An important point to note is that Intermediaries are constraint by Payment Infrastructure Providers, e.g. traditionally a person had to have a bank account/banking relationship to be able to use the above payment ecosystem. The lack of penetration (take for instance only 1.3 million POS terminals are present for a population of more than a billion people) and less than optimum innovation by banks in last two decades have further precipitated matters adversely. This has constrained the government in providing the financial inclusion to all as promised.
This brings us to the third segment of the payment ecosystem which has somewhat mitigated the constraints of the first two segments. These nouveau players have smartly combined technology along with innovation to herald a new era called Electronic Banking or E-Banking in which banks and wallet providers facilitate customers to store their funds.
Taking off in the late Nineties, this initially began with the introduction of net-banking (payment of goods by high end merchants) and cross border remittances and slowly evolved into a new genre with the introduction of Pre-paid instruments (PPI’s) or e-wallets. These wallets (e.g. Idea money) are devices which can store ‘cash’ and can be used at designated merchants. PPI’s at the time of inception were seen as a silver bullet to foster financial inclusion but due to some of the limitations of PPI’s (e.g. cash withdrawal, interest earning facility) financial inclusion for all still remains a dream. CRISIL index still puts the Financial inclusion index for India at 50 points.
To ameliorate the impasse, an expert committee headed by Shri Nachiket Mor came out with a recommendation to bring in a new class of banks called “Payment banks”. These banks, licenses of which have recently been approved by RBI to 11 entities, will not be allowed to give any loans to public (thus avoiding credit risk, NPA issues and insolvency) However they will be able to comprehensibly participate in the payments ecosystem which will include cashouts and earning interest to end-users. As of now, Payment banks accounts will be limited to a maximum balance of Rs. 100,000.
Experts are hailing the award of the eleven licenses, as the next revolution in the banking sphere of India. The optimism is not misplaced. India currently has 600 million debit card users and 22 million credit card users – which roughly constitutes 50 per cent of the population or we can say that the remaining 50 per cent of the population –don’t have debit/credit/netbanking or are not financially literate enough to request for them.
This is a where is the opportunity lies for the payment banks to ‘Bank the under/un banked’. To enable this change, retail touch points will be important factor (e.g. kirana shops, mobile recharge outlets etc), along with ease of use, customer education, merchant acquisition and ability to offer both online and offline mechanism (e.g. NFC) of payments. Mobile wallets/telecom companies have demonstrated the capability to deliver and should enable to dominate this space considering their huge distribution and retailer network (e.g. telecom companies claim to more than 15 lakh retail points).
Traditional banks have a cause to worry. They have shown to have low risk appetite and are slow movers. Take for instance the current electronic wallets. Estimated to be more than 125 millions wallets and counting, e-wallets are eating into bank’s savings account numbers (referred as CASA). With clever marketing, strong merchant tieups (classic case of PayTM and Uber), huge discounts (thanks to hot money from PE funds), focus on good technology and convenience (no 2 factor authentication) mobile wallets have already given the banks a run for their money. Unless they reinvent themselves and utilize their existing customer base to provide “payments” oriented services, it would be difficult for Banks to protect their turf.
Activities and strategies over the next few months and years will indicate the sign of things to come If the newly formed “payment banks” get their strategy nimble and right; then with their high risk appetite and enormous hunger for growth would stand to gain much of the market share. One such strategy is perhaps to tie up with some of the new ecommerce companies, which are hungry for growth but are struggling to penetrate Tier IV, V and VI towns. Payments banks, especially the Telco driven banks can tie up these e-commerce companies to deliver goods via the telco distribution mechanism. It will be a challenge, but possible and very doable. Another innovation could be for Payments banks to assemble a smart array of retailer distributor network in underbanked locations and ensure basic banking services (e.g. cash in, cash out) are seamlessly allowed, akin recharging a mobile connection. This would be a godsend for millions of underprivileged, especially in the villages, who have to travel for hours to the bank branch to deposit/withdraw funds .
Traditional Banks, on the other end will have either embrace the technology or may well have to yield ground and instead focus on credit and lending.
However, the net positive effect is that the competition will lead to widening and better quality of service through lower costs. Financial inclusion for all may well turn into a reality sooner than later.